UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      DC 20549





FORM
      10-KSB


(Mark
      One)





S
            Annual
                report under Section 13 or 15(d) of the Securities Exchange Act of
                1934
                for the fiscal year ended December 31,
                2006





£
            Transition
                report under Section 13 or 15(d) of the Securities Exchange Act of
                1934
                for the transition period from ______ to
                ______





Commission
      file number 0-16206





NEW
      WORLD BRANDS, INC.


(Name
      of
      small business issuer in its charter)





Delaware
              
              02-0401674State
                  or other jurisdiction of incorporation or organization
              
              (I.R.S.
                  Employer Identification No.)





340
                  W. 5th
                  Avenue, Eugene, OR 97401(Address,
                  including zip code, of principal executive offices)




(541)
                  868-2900(Issuer’s
                  telephone number)




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





Securities
      registered under Section 12(g) of the Exchange Act:  Common Stock, par
      value $0.01 per share.





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


Yes
£    No
      S





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
S    No
      £












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


Yes
£    No
      S





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


Yes
£    No
      S





Issuer’s
      revenues for its most recent fiscal year: $20,130,471.





The
      aggregate market value of the voting and non-voting Common Stock held by
      non-affiliates (20,403,939 shares as of March 21, 2007) computed by reference
      to
      the closing price of the Common Stock as of March 21, 2007 ($0.06):
      $1,224,236.





State
      the
      number of shares outstanding of each of the issuer’s classes of common equity,
      as of the latest practicable date: 44,303,939 shares of Common Stock outstanding
      as of March 21, 2007.





Transitional
      Small Business Disclosure Format (check one):  Yes £    No  S











**TABLE
      OF CONTENTS**








**Part
                    I**Item
                    1.
                Description
                    of BusinessItem
                    2.
                Description
                    of PropertyItem
                    3.
                Legal
                    ProceedingsItem
                    4.
                Submission
                    of Matters to a Vote of Security
                    Holders**Part
                    II**Item
                    5.
                Market
                    for Common Equity and Related Stockholder Matters and
                    Small Business Issuer Purchases of Equity SecuritiesItem
                    6.
                Management’s
                    Discussion and Analysis or Plan of
                    OperationItem
                    7.
                Financial
                    StatementsItem
                    8.
                Changes
                    in and Disagreements With Accountants on Accounting and
                    Financial DisclosureItem
                    8A.
                Controls
                    and ProceduresItem
                    8B.
                Other
                    Information**Part
                    III**Item
                    9.
                Directors,
                    Executive Officers, Promoters and Control Persons
                    and Corporate Governance; Compliance with Section 16(a) of the
                    Exchange
                    ActItem
                    10.
                Executive
                    CompensationItem
                    11.
                Security
                    Ownership of Certain Beneficial Owners and Management
                    and Related Stockholder MattersItem
                    12.
                Certain
                    Relationships and Related Transactions, and Director
                    IndependenceItem
                    13.
                ExhibitsItem
                    14.
                Principal
                    Accountant Fees and ServicesSignatures





*Table
            of Contents*





**PART
      I**





**General**





References
      in this Annual Report on Form 10-KSB (the “***Report***”) to
      the “***Company***,” “we,” “us,” “our” and similar words are
      to New World Brands, Inc., and its subsidiary IP Gear, Ltd. (“***IP
      Gear, Ltd.***”), commencing with the acquisition of Qualmax, Inc., a
      Delaware corporation (“***Qualmax***”), and, with
      respect to
      prior historical financial information, to Qualmax.





The
      following discussion and analysis provides information that management believes
      is relevant to an assessment and understanding of our results of operations
      and
      financial operations.  This discussion should be read in conjunction
      with the condensed consolidated financial statements and notes thereto appearing
      elsewhere herein, and with our prior filings with the Securities Exchange
      Commission (the “***SEC***”).





We
      entered into a transaction with Qualmax on September 15, 2006, discussed in
      more
      detail below, that constituted a substantial change in our business, from wine
      and spirits distribution to telecommunications technology development, sales
      and
      services.  We therefore recommend that you review with particular
      attention our filings with the Securities Exchange Commission from June 2006
      forward, to the extent they describe the change in our business and related
      recent activities.





**Disclosure
      Regarding Forward-Looking Statements**





We
      caution readers that this Report contains “forward-looking statements” within
      the meaning of the Private Securities Litigation Reform Act of
      1995.  Forward-looking statements, written, oral or otherwise, are
      based on the Company’s current expectations or beliefs rather than historical
      facts concerning future events, and they are indicated by words or phrases
      such
      as (but not limited to) “anticipate,” “could,” “may,” “might,” “potential,”
“predict,” “should,” “estimate,” “expect,” “project,” “believe,” “think,”
“intend,” “plan,” “envision,” “continue,” “intend,” “target,” “contemplate,” or
“will” and similar words or phrases or comparable
      terminology.  Forward-looking statements involve risks and
      uncertainties.  The Company cautions that these statements are further
      qualified by important economic, competitive, governmental and technological
      factors that could cause the Company’s business, strategy or actual results or
      events to differ materially, or otherwise, from those in the forward-looking
      statements.  We have based such forward-looking statements on our
      current expectations, assumptions, estimates and projections, and therefore
      there can be no assurance that any forward-looking statement contained herein,
      or otherwise made by the Company, will prove to be accurate.  The
      Company assumes no obligation to update the forward-looking
      statements.





The
      Company has a short operating history and is operating in a rapidly changing
      industry environment, and its ability to predict results or the actual effect
      of
      future plans or strategies, based on historical results or trends or otherwise,
      is inherently uncertain.  While we believe that these forward-looking
      statements are reasonable, they are merely predictions or illustrations of
      potential outcomes, and they involve known and unknown risks and uncertainties,
      many beyond our control, that are likely to cause actual results, performance
      or
      achievements to be materially different from those expressed or implied by
      such
      forward-looking statements.  Factors that could have a material
      adverse affect on the operations and future prospects of the Company on a
      condensed basis include those factors discussed under Item 1, “Description of
      Business - Certain Risk Factors” and Item 6, “Management’s Discussion and
      Analysis or Plan of Operation” in this report, and include, but are not limited
      to, the following:





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            4 of 61
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            of Contents*




·
            general
                economic conditions;


·
            a
                significant decrease in business from, or loss of, any of our major
                customers, or loss in supply from any of our major
                vendors;


·
            the
                effectiveness of our planned advertising, marketing and promotional
                campaigns;


·
            our
                ability to contain costs, including the costs of operating a public
                company;


·
            our
                future capital needs and our ability to obtain financing on acceptable
                terms;


·
            our
                ability to effectively manage growth
                strategies;


·
            our
                ability to compete, and to anticipate changing supply and demand
                conditions;


·
            our
                ability to adapt to future legislative/regulatory changes;
                and


·
            other
                factors set forth in this Report, including under Item 1, “Description of
                Business - Certain Risk Factors” below, and in our other SEC
                filings.





You
      are
      cautioned not to place undue reliance on these forward-looking statements,
      which
      are valid only as of the date they were made.  Actual results may
      differ materially from those included in the forward-looking
      statements.  We undertake no obligation to update or revise any
      forward looking statements to reflect new information or the occurrence of
      unanticipated events or otherwise.





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





**Introduction**





We
      are a
      telecommunications research and development
      (“***R&D***”), sales, and service company, focusing on
      products and services utilizing Voice over Internet Protocol
      (“***VoIP***”) technology.  We were founded in
      2002 as a reseller of VoIP-related telecommunications equipment, primarily
      selling products from companies such as Cisco Systems and Quintum, and as a
      reseller of international VoIP telephony service, primarily selling to telecom
      service providers.  Since that time we have expanded beyond our
      reseller businesses, and as a result of the acquisition in December, 2005 of
      a
      VoIP technology R&D division based in Israel, which we have re-branded under
      the name IP Gear, Ltd., we now develop, manufacture, and sell our own line
      of
      VoIP technology products, as well as resell other select products and
      services.





Prior
      to
      the Reverse Acquisition described below under “Reverse Acquisition of Qualmax,
      Inc.” we were a distributor of wine and other alcoholic beverages. We are no
      longer engaged in that business.





The
      following are certain key industry or technical terms used throughout this
      Report in describing the Company’s current business and in discussing its
      prospects in the VoIP equipment and services market:





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            5 of 61
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            of Contents*




“***VoIP***,”
        or Voice over Internet Protocol, also called IP Telephony, Internet telephony,
        Broadband telephony, Broadband Phone, Voice over Broadband or voice over
        packet
        networks, is the routing of voice conversations over the Internet or through
        any
        other internet protocol (“***IP***”) based
        network.  “***GSM***” is short for Global System
        for Mobile Communications, a leading digital cellular system using narrowband
        TDMA (time division multiple access) that has become a cellular standard
        in
        Europe and Asia.





***“IP
        networks”*** are telecommunication systems (consisting of
        transmission lines or devices, and components including gateways, routers,
        switches, and servers) by which a number of computers are connected together
        for
        the purpose of communicating and sharing data and/or software applications.
        The
        fundamental equipment components of IP networks, and the products we sell,
        include: ***gateways***, enabling access to IP networks as a
        translation unit between disparate telecommunications networks;
***routers****and****switches***, to direct
        data traffic on, to and from
        IP networks; and ***servers***, computers that operate IP
        communications software applications, process and store data traversing IP
        networks, and provide computing functions to other computers.





“***IP
        Telephony***” uses an IP network to perform voice communications that
        have traditionally been conducted by conventional private branch exchange
        (***PBX***) telephone systems, or “key systems” primarily
        used in smaller systems, used by enterprises and by the public switched
        telephone network (the
***PSTN***).  IP telephony uses IP network
        infrastructure, such as a local area network (***LAN***) or
        a wide area network (***WAN***), to replace the telephony
        functions performed by an organization’s PBX telephone
        system.  “***IP communications***” is a term
        generally used to describe data, voice and video communications using an
        IP
        network. “***Convergence***” is a term generally used to
        describe the manner in which voice and video communications technology is
        converging with data communications technology onto the IP
        network.





**Brief
      Company History**





New
      World
      Brands, Inc. (the “***Company***,”
“***we***,” “***us***,”
      “***our***”) was incorporated in Delaware in May 1986 under
      the name Oak Tree Construction Computers, Inc.  From 1986 through
      1990, we were engaged in the sale of computer systems for the construction
      industry.  For a number of years thereafter, we were
      inactive.  In August 1994, the Company changed its name to Oak Tree
      Medical Systems, Inc.  From January 1995 through May 2000, we were
      engaged in the business of operating and managing physical care centers and
      related medical practices.  In October 2001, the Company and its
      subsidiary, Oak Tree Spirits, Inc., entered into a merger agreement with
      International Importers, Inc. (“***Importers***”) and its
      stockholders whereby Importers merged with and into the Company, and the
      Company’s business changed direction to wine and spirits
      distribution.  In conjunction with this change in business direction,
      in December 2001, we changed our name to New World Brands, Inc.





On
      September 15, 2006, we sold our subsidiary Importers and acquired, by way of
      reverse acquisition, all of the assets and assumed all of the liabilities of
      Qualmax.  The reverse acquisition marked a change in direction for our
      business to the VoIP technology industry.





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            6 of 61
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            of Contents*




**Background
      and Recent Developments, Change in Business from Wine Distribution to VoIP
      Technology**





*Our
        former business: wine and spirits distribution*.





From
        October 16, 2001 until the consummation on September 15, 2006 of the
        transactions described below, the Company was engaged in the business of
        importing wine and spirits for distribution in the United
        States.  During that period, the Company was unable to achieve a level
        of sales sufficient to fund its costs of operations and accordingly, the
        Company
        relied principally on equity investments and loans made by Dr. Selvin Passen,
        the Company’s former Chairman of the Company’s Board of Directors (the
“***Board***”) and principal stockholder of the Company,
        together with affiliates of Dr. Passen, to fund its ongoing
        operations.





*Need
        for change in business plan*.





Due
        to
        the Company’s inability to achieve a level of sales sufficient to fund the costs
        of operations, beginning in late 2005, the Board started evaluating the
        financial condition of the Company and its prospects as a wine importer and
        distributor.  Following its evaluation, the Board concluded that in
        light of the Company’s inability to achieve sufficient sales to fund operations
        in the near future, coupled with the significant costs associated with the
        Company’s operations, including those associated with being a public company,
        Dr. Passen’s reluctance to fund our operations under the current public company
        structure, and the Company’s inability to obtain other sources of funding, it
        would be in the best interests of the Company and its stockholders to engage
        in
        a restructuring of the Company or a change in its business plan. In early
        2006,
        the Company’s management met with management of Qualmax, a specialized IP
        communications solutions provider, manufacturer, VoIP R&D company, equipment
        reseller, and VoIP service provider.  Following discussions and
        meetings with management of Qualmax, the Board determined that it would be
        in
        the best interests of the Company and its stockholders to dispose of its
        wine
        and spirits distribution business and acquire the business of Qualmax by
        means
        of a purchase of Qualmax’s assets and an assumption of Qualmax’s
        liabilities.  The decision of the Board to acquire the Qualmax
        business was predicated on several factors, including, among others: (1)
        the
        belief that the future potential of Qualmax’s business exceeded the Company’s
        wine and spirits importation business; (2) the belief that the IP communications
        industry is a growing industry with significant potential for growth; and
        (3) a
        capital infusion of $2,000,000 in the aggregate resulting from the sale of
        Importers and the purchase of shares of common stock by an affiliated entity
        of
        Dr. Passen (each as described below under “Reverse Acquisition of Qualmax, Inc.”
and “P&S Spirit Subscription Agreement,” respectively), both of which were
        conditions precedent to the acquisition of Qualmax’s
        business.





*Reverse
      Acquisition of Qualmax, Inc.*





As
      discussed in our Current Reports on Forms 8-K and 8-K/A, filed November 27,
      November 15, September 21, September 8, August 29, and June 23, 2006, and in
      our
      Quarterly Reports on Form 10-QSB, filed October 16, 2006 and November 21, 2006,
      in June 2006 we decided to change our business plan by selling Importers (our
      wine and spirits business) for the sum of $500,000 (the “***Sale
      Transaction***”), selling 7,500,000 shares of our common stock
      (“***Common Stock***”) for $1,500,000 (the
“***Private Equity Investment***”), and acquiring
      substantially all of the assets of Qualmax in exchange for shares of the
      Company’s preferred stock (the “***Reverse
      Acquisition***”).  The Private Equity Investment was
      consummated on September 14, 2006, and the Sale Transaction and Reverse
      Acquisition were consummated on September 14 and 15, 2006,
      respectively.  The Company and Qualmax have agreed to merge as part of
      the Reverse Acquisition, and are currently in the process of seeking final
      shareholder consent to complete the merger.  The Reverse Acquisition
      was accounted for as a reverse acquisition, with Qualmax being the accounting
      acquiring party.  The accounting rules for reverse acquisitions
      require that beginning with the date of the transaction, September 15, 2006,
      our
      balance sheet had to include the assets and liabilities of Qualmax and our
      equity accounts had to be recapitalized to reflect the net equity of New World
      Brands, Inc.  Our historical operating results will be the operating
      results of Qualmax.





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As
      a
      result of the Reverse Acquisition the Company is no longer in the wine and
      spirits business, and the business formerly operated by Qualmax is now operated
      by the Company and is the Company’s sole business, meaning that New World
      Brands, Inc. is now a specialized IP communications solutions provider, VoIP
      R&D and manufacturing company, IP telephony equipment reseller, and VoIP
      service provider.





*Series
        A Preferred Convertible Stock*.





In
        connection with the transactions contemplated by the Reverse Acquisition,
        the
        Board authorized the creation and issuance of shares of voting preferred
        stock
        designated as “Series A Convertible Preferred Stock” (the “***Preferred
        Stock***”).  The terms, rights, preferences and privileges
        of the Preferred Stock are set forth in a Certificate of Designation, filed
        with
        the Secretary of State of the State of Delaware on August 30, 2006, as amended
        on January 8, 2007 (the “***Certificate of Designation***”)
        to increase the authorized number of shares of Preferred Stock from 100 to
        200.  Pursuant to the Reverse Acquisition, the Company issued 100
        shares of Preferred Stock to Qualmax, which shares of Preferred Stock are
        convertible into 298,673,634 shares of Common Stock and which represent more
        than a majority of the voting power of the Company’s issued and outstanding
        shares of capital stock (on an as-converted basis).  Pursuant to the
        Certificate of Designation, the shares of Preferred Stock will be automatically
        converted into shares of Common Stock upon the filing of the Charter Amendments,
        which are described below under “Charter Amendments.”





*Charter
        Amendments.*





Pursuant
      to a written consent of the Board dated January 31, 2007, and the Written
      Consent of the Company’s stockholders, the Board and the requisite vote of each
      class of the Company’s stockholders approved an amendment and restatement of the
      Certificate of Incorporation of the Company (the Certificate of Incorporation,
      as amended and restated, the “***New Charter***”), a copy of
      which has been included with the Company’s Information Statement on Preliminary
      Schedule 14C filed with the SEC on February 1, 2007 (the “***February
      1, 2007 Information Statement***”), which February 1, 2007
      Information Statement and copy of the New Charter are hereby incorporated by
      reference, to: (i) increase our authorized number of shares of Common Stock
      by
      five hundred fifty million (550,000,000) shares; (ii) implement a staggered
      board of directors with three (3) classes; and (iii) make such other changes
      to
      the Certificate of Incorporation as are necessary and incidental to the
      foregoing (collectively the “***Charter
      Amendments***”).  The following descriptions of the Charter
      Amendments are qualified in their entirety by reference to the full text of
      the
      New Charter, as set forth in the February 1, 2007 Information
      Statement.





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*Voting
        Agreement and Proxy*.





Pursuant
        to the terms of the Reverse Merger, the holders of an aggregate of 22,225,000
        shares of Common Stock, which shares currently represent approximately 50.2%
        of
        the issued and outstanding shares of Common Stock, executed a Voting Agreement
        and Proxy dated as of September 15, 2006, pursuant to which each such holder
        agreed to vote his, her or its shares of Common Stock in favor of the Charter
        Amendments.





*P&S
      Spirit Subscription Agreement.*





Effective
      December 29, 2006, the Company entered into an Amended and Restated Stock
      Subscription and Share Transfer Agreement (the “***Subscription
      Agreement***”), as well as various other agreements, with P&S
      Spirit, LLC, a Nevada limited liability company (“***P&S
      Spirit***”), as well as M. David Kamrat and Noah Kamrat, pursuant to
      which, among other things, P&S Spirit purchased from the Company a total of
      11.160454 shares of Preferred Stock (which shares of Preferred Stock are
      convertible into 33,333,333 shares of the Common Stock) for an aggregate
      purchase price of $3,000,000, and P&S Spirit agreed to purchase up to an
      additional 7.440303 shares of Preferred Stock (which shares of Preferred Stock
      are convertible into 22,222,222 shares of the Common Stock) upon the
      satisfaction of certain conditions precedent for an aggregate purchase price
      of
      $2,000,000.  Reference is made to the Company’s Current Report on Form
      8-K, filed with the SEC on January 8, 2007, for additional information
      concerning the Subscription Agreement and the transactions entered into in
      connection therewith.





*BOS
      debt conversion*.





Effective
      as of December 31, 2006, the Company, IP Gear, Ltd., an Israeli corporation
      and
      wholly-owned subsidiary of the Company, P&S Spirit and B.O.S. Better Online
      Solutions Ltd. (*“****BOS****”*) entered into
      an agreement (the “***BOS Agreement***”), pursuant to which,
      among other things, the parties agreed to convert approximately $1.48 million
      in
      the aggregate of amounts due and payable to BOS under certain agreements between
      the Company, IP Gear, Ltd., and BOS into 5.50652 shares of Preferred Stock
      (which shares of Preferred Stock are convertible into 16,446,544 shares of
      Common Stock).   Reference is made to the Company’s Current
      Report on Form 8-K, filed with the SEC on January 9, 2007, for additional
      information concerning the BOS Agreement and the transactions entered into
      in
      connection therewith.




The
        BOS
        Agreement and Subscription Agreement are discussed herein in more detail
        in Item
        5, “Market for Common Equity and Related Stockholder Matters and Small Business
        Issuer Purchases of Equity Securities – Recent Sales of Unregistered
        Securities.”





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*Lock-Up
        Agreement.*


In
        connection with the Subscription Agreement and the BOS Agreement a number
        of
        substantial shareholders of the Company, including Dr. Selvin Passen (and
        related entities), P&S Spirit, David Kamrat and Noah Kamrat, and BOS, agreed
        not to sell their shares of the Company’s stock during the term of an Amended
        and Restated Lock-Up Agreement dated December 29, 2006 (the “***Lock-Up
        Agreement***”), as discussed herein in more detail in Item 11,
“Security Ownership of Certain Beneficial Owners and Management
        and Related
        Stockholder Matters – Lock-Up Agreement Among Principal
        Shareholders.”


*Bank
      of America Loan Repayment.*





Qualmax
      entered into a loan agreement with Bank of America, N.A.,
      (“***BoA***”) on April 20, 2005 in the original principal
      amount of $2,000,000 (the “***BoA
      Loan***”).  Effective September 15, 2006, the BoA Loan
      agreement was modified for an adjusted principal amount of $984,323 and an
      extended maturity date of March 31, 2007, with interest on the principal amount
      at 3% over BoA’s Prime Rate.  The BoA Loan was in the name of Qualmax,
      guaranteed by the Company and personally by M. David Kamrat, and it was secured
      by a pledge of all the Company’s stock owned by Qualmax.  BoA declined
      to extend the BoA Loan maturity date beyond March 31, 2007, and therefore,
      the
      Company secured substitute financing in the form of the P&S Loan Agreement
      discussed below under “P&S Spirit Loan,” and it repaid all outstanding BoA
      Loan principal, interest and fees on March 30, 2007.  Reference is
      made to the Company’s Current Report on Form 8-K, filed with the SEC on April 5,
      2007, for additional information concerning repayment of the BoA Loan and the
      transactions entered into in connection therewith.





*P&S
      Spirit Loan.*





On
      and
      effective March 30, 2007, New World Brands, Inc., a Delaware corporation (the
      “***Company***”), entered into a Term Loan and Security
      Agreement (the “***P&S Loan Agreement***” and the debt
      obligation pursuant thereto, the “***P&S Loan***”) with
      P&S Spirit.  The principal amount of the P&S Loan is
      $1,000,000; the interest rate is 2% over the Prime Rate (as reported in The
      Wall
      Street Journal); consecutive monthly payments of interest only (payable in
      arrears) are required commencing May 1, 2007; and all unpaid principal, interest
      and charges are due upon the maturity date of January 2,
      2009.  Principal may be prepaid without penalty.  Upon
      default, the entire P&S Loan amount (including accrued unpaid interest and
      any fees) would be accelerated, and the Company would be required to pay any
      costs of collection. The P&S Loan Agreement includes certain affirmative
      covenants, including, without limitation, a financial reporting requirement
      (quarterly – 45 days after the close of a calendar quarter), and a requirement
      that the Company maintain a ratio of current assets to current liabilities
      of at
      least 1.2:1.0 and a total liabilities to tangible net worth ratio not exceeding
      2.5:1.0.  Reference is made to the Company’s Current Report on Form
      8-K, filed with the SEC on April 5, 2007, for additional information concerning
      the P&S Loan Agreement.





The
      P&S Loan Agreement grants P&S Spirit a first position security interest
      with respect to all of the Company’s assets.  The P&S Loan
      Agreement is also backed by a corporate Guaranty by Qualmax, a security interest
      in the assets of Qualmax (consisting solely of 100 shares of series A
      convertible preferred stock of the Company, par value $0.01 per share, which
      stock is convertible
      into 298,673,634 shares of the Company’s common stock, par value $0.01
      per share),and by the personal Guaranty of M. David Kamrat, who is Chairman of
      the
      Board and Chief Executive Officer of the Company as well as a director and
      executive officer of Qualmax.  M. David Kamrat’s personal Guaranty is
      limited to the sum of $1,000,000, although the guaranteed obligations include
      indemnification for certain claims against P&S Spirit relating to the
      P&S Loan Agreement.





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The
      Loan
      proceeds have been used by the Company to repay all outstanding principal,
      interest and fees payable to BoA as described above under “Bank of America Loan
      Agreement”, and to pay certain professional fees associated with preparation and
      negotiation of the P&S Loan Agreement.





The
      principals of P&S Spirit include Dr. Selvin Passen, who is a shareholder of
      the Company, as well as a former director of the Company and its former Chief
      Executive Officer, and Dr. Jacob Schorr, who is a director of the
      Company.





**Overview
        of Current Business**


We
        are
        currently focused on three principal lines of business: (i) VoIP technology
        development and equipment manufacturing (via our wholly-owned subsidiary
        located
        in Israel, IP Gear, Ltd.); (ii) resale and distribution of VoIP and other
        telephony equipment, and related professional services; and (iii) telephony
        service resale and direct call routing.


We
        believe that VoIP communication has gained popularity for at least two
        reasons.  First, voice transmission over IP networks rather than PSTNs
        can offer call cost savings under current technological and regulatory
        conditions. Second, communications technologies and applications are converging,
        and there is a trend toward IP-based “bundled” communication
        services, presenting the opportunity for a whole communications
        solution that is more valuable that the sum of its parts.





*Brief
      history of the Qualmax business.*





Effective
      September 15, 2006, the Company sold its wine and spirits distribution business
      and acquired substantially all of the assets of Qualmax.  Qualmax was
      formed in 2002 by the father and son team of David and Noah Kamrat as a value
      added reseller (“VAR”) of IP communications equipment manufactured by companies
      such as Cisco, Quintum, Cantata (Excel), Sun Microsystems, Redback and Valiant,
      serving mid-level carriers and VoIP service providers.  Qualmax
      reinvested a share of its operating profits into a related venture, launching
      a
      new business called “iNode” focusing on IP Telephony services.  iNode
      provided the type of VoIP services provided or purchased by Qualmax’s equipment
      customers.  Qualmax’s equipment customer and vendor bases provided a
      ready market for iNode’s wholesale international IP telephony
      services.  Together the two businesses pursued a single broader
      business vision, buying and selling both equipment and services to and from
      various VoIP carriers and related service providers.  Combined under
      the “Qualmax” name revenues and net income grew from $7.8 million and $203,675
      in 2003, to $12.7 million and $591,082 in 2004, and $18 million and $204,006
      in
      2005, respectively.  During those periods, Qualmax was strictly a
      reseller of other manufacturers’ products and conducted no meaningful
      development or manufacturing operations.





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In
      late
      2005, Qualmax undertook a series of steps intended to facilitate its entry
      into
      proprietary technology development and product manufacturing, in pursuit of
      a
      business plan to produce greater long term shareholder value by creating and
      owning its own product line and distribution network.  In November
      2005, Qualmax merged with and into a Pink Sheet company called Bench Group,
      Inc., which as a result of the transaction changed its name to Qualmax, Inc.
      and
      its trading symbol to QMXI.  The primary purpose of this strategy was
      to attract capital for growth through mergers, acquisitions and private
      investment.   In December, 2005, in exchange for certain shares
      of its stock, Qualmax purchased the VoIP and GSM product divisions of BOS and
      now operates those divisions as our subsidiary IP Gear, Ltd.  In June
      2006, Qualmax and the Company entered into an agreement by which the Company
      would acquire all of Qualmax’s assets and business operations, and Qualmax
      acquire control of the Company via the Reverse Acquisition.  The
      Reverse Acquisition was consummated on September 15, 2006, and as a result,
      the
      Company now operates the former business divisions and subsidiaries of
      Qualmax.





In
      conjunction with the Reverse Acquisition we have moved our headquarters from
      Florida to Eugene, Oregon, where we base all our operations other than the
      IP
      Gear, Ltd. technology development division, which is based in Yokneam,
      Israel.





Our
      VoIP
      and GSM equipment development and manufacturing business is operated by our
      Company’s wholly owned subsidiary ***IP Gear, Ltd.***, based
      in Yoknaem, Israel.  Our VoIP-related telecommunications equipment
      resale business is operated by our U.S. division named “***IP
      Gear***,” based in Eugene, Oregon.  Our wholesale
      international VoIP service business is operated by our other U.S. division
      named
“***IP Gear Connect***,” also based in Eugene,
      Oregon.





*Overview
      of the IP Gear, Ltd. division (equipment development and manufacturing based
      in
      Israel).*





IP
      Gear,
      Ltd. is the Company’s R&D and manufacturing division for proprietary VoIP
      and GSM gateways, servers and adaptors.  The IP Gear, Ltd. product
      line is composed of two distinct groups: VoIP products branded as the
“***Claro***” line, and cellular GSM products branded as the
      “***Quasar***” line.





The
      IP
      Gear, Ltd. division, consisting of technology and other intellectual property,
      inventory and equipment, was acquired by Qualmax from BOS on December 31,
      2005.  Qualmax issued certain shares of its common stock to BOS as
      payment for an agreed price of slightly over $4.5 million, approximately $3.5
      million of which was allocated to technology (the remainder to inventory and
      fixed assets).  In addition, BOS loaned $1 million to Qualmax as
      bridge financing for business operations (the “***BOS
      Loan***”), and Qualmax was required to pay a 4% royalty on sales up
      to a cumulative total of $800,000. Both the loan and royalty obligations were
      subsequently converted to equity, effective December 31, 2006, as discussed
      herein in more detail in Item 5, “Market for Common Equity and Related
      Stockholder Matters and Small Business Issuer Purchases of Equity Securities
–
Recent Sales of Unregistered Securities.”





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Our
      Claro
      product line provides a range of VoIP gateways.  The Claro product
      line’s principal function is to allow small and medium enterprises
      (“***SME***s”) to benefit from IP telephony services without
      abandoning their existing traditional phone systems.  Replacement of
      an entire phone system is a prohibitive cost for many SMEs – the Claro solution
      resides between an SME’s key system and/or PBX and the Internet, meaning that
      the customer’s telecommunications hardware and dial plan may not need to change
      or be replaced in order to use VoIP services.  The Claro gateway
      performs an “intelligent routing” function, routing calls to the PSTN or VoIP
      networks depending on call quality parameters and can provide “on-net” calling
      (from Claro to Claro) facilitating cost effective and high quality
      communications among a networked group.  Claro products can also be
      used by smaller retail IP communications providers, such as call
      shops.  The Claro line offers a low cost, simplified solution to a
      complicated technological migration in voice communications.  The
      Claro line was one of the early entrants into the VoIP gateway space and has
      experienced significant repeat sales.  By selling products to end
      users primarily via distributors and resellers, IP Gear, Ltd. has continued
      the
      two-tier distribution method for the Claro and Quasar lines acquired from its
      predecessor, BOS.





The
      Quasar brand was one of the first entrants in the GSM gateway
      space.  Although we believe the Quasar technology is well-respected in
      the industry, the product has not been able to maintain market edge in relation
      to some of its competitors and has been a lower profit margin product than
      the
      Claro.  We continue to upgrade and improve the Quasar product line,
      and to consider ways in which Quasar features and functions may complement
      Claro
      development efforts.





Our
      IP
      Gear, Ltd. subsidiary in Israel maintains an R&D staff, a manufacturing and
      fulfillment staff, and a small sales staff focusing on Europe and
      Israel.  Currently, IP Gear, Ltd.’s focus is on completing development
      and roll-out of an enhanced and updated Claro product line, and on continuing
      to
      expand market penetration in Europe, including the EU and eastern Europe, and
      Israel.  Our U.S. IP Gear operation based in Eugene, Oregon is working
      to establish a North and South American sales base for our proprietary product
      lines, primarily through distributor and reseller relationships, but also
      through direct sales.





The
      success of our current business plan for the IP Gear, Ltd. division depends
      upon
      our ability to maintain and improve a state of the art R&D
      team.  The Company can only compete on the leading technological edge
      by continuing to enhance existing products, develop new products and
      applications, and customize products as necessary.  In addition,
      product sales growth will require additional capital to fund what we hope will
      be a growing sales and inventory pipeline.  The Company’s current cash
      flows (including cash flows from other divisions) will not be adequate in the
      near term both to cover IP Gear, Ltd.’s R&D, sales and general and
      administrative costs, and to finance growing inventory as product sales
      expand.  IP Gear, Ltd. will require substantial additional capital to
      achieve its R&D and market penetration goals.





We
      hope
      that you will visit our website at www.ipgear.net to learn more about our
      Claro and Quasar product lines, and about IP Gear, Ltd. in general.





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*Overview
      of the IP Gear division (equipment resale, refurbishing and distribution based
      in the U.S.).*





IP
      Gear,
      the business division historically operated under the names “Qualmax” and
“Qualmax Professional Services” as well as “IP Gear,” is a second-tier
      distributor and VAR of new, used and refurbished IP communications equipment
      made by manufacturers such as Cisco, Quintum, Adtran, Carrier Access, and other
      telephony industry leaders.  Resale of third-party IP communications
      equipment was Qualmax’s core legacy business, and the Company’s VAR business
      continues to be a core revenue component.  IP Gear also acts as a
      distributor and reseller of IP Gear, Ltd.’s Claro and Quasar
      products.





IP
      Gear
      sells technology building blocks and system components for use in IP systems
      enabling the transmission of voice, data and fax communications over the
      Internet and other IP-based networks, and particularly for use to facilitate
      VoIP.  Products include gateways, routers and switches, servers, and a
      variety of other IP communication equipment, related components and
      parts.  Currently our two best selling product lines are Cisco and
      Quintum.  In addition to selling new equipment, IP Gear operates a
      refurbishing business specializing in pre-owned gear. The primary manufacturers
      of focus in the refurbished business are Cisco, Juniper, Paradyne, ADTRAN and
      Kentrox.  IP Gear’s technical****expertise focuses
      on new and refurbished gateways, routers, switches, and access
      servers.





IP
      Gear’s
      customers are mid-level telecommunication carriers and VoIP service providers,
      located primarily in the U.S. but with a growing foreign sales
      base.  IP Gear’s suppliers include other resellers, and manufacturers
      and telephony service providers.  IP Gear does not rely upon long-term
      supply or sale agreements with vendors or customers, but instead competes for
      small-volume, short-term purchasing and selling opportunities on a daily basis
      in an active market.





*Overview
      of the IP Gear Connect division (VoIP Telephony service
      provider).*





The
      IP
      Gear Connect division is a wholesale provider of VoIP termination service,
      connecting carrier-level buyers and sellers of VoIP service, currently focused
      on international call routing.  We receive VoIP traffic from buyers
      (originating carriers) who are interconnected to our network, and we route
      the
      VoIP traffic via IP networks to sellers (local service providers, terminating
      carriers) in the destination countries from whom we purchase completion or
      termination services (our sellers provide the communications service to complete
      the calls within the destination country).  We offer this service on a
      wholesale basis to carriers, VoIP companies and telephony resellers, and other
      telecommunication service providers.  We are party to a number of
      reciprocal carrier agreements, through which we both buy from and sell to a
      carrier, and set-off, or net out, the parties’ respective fees for termination
      services.  To the extent we sell VoIP equipment (under the IP Gear
      division) to our VoIP termination service providers, we may set-off accounts
      receivable for equipment against accounts payable for communication services.
      We
      have call termination agreements with local lower-tier service providers in
      Europe, Asia, Latin America, and Africa.





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Competition
      in the wholesale VoIP service industry is intense and diverse, including “tier
      1” telecom companies in the U.S. and abroad, as well as smaller “tier 2”
carriers, and very small niche service providers.  The IP Gear Connect
      division does business with very large entities, including a number of foreign
      tier one incumbent providers, as well as a number of small niche providers
      in
      certain foreign markets.  As a result of deregulation, growth of the
      Internet and IP network infrastructure generally, and development of more
      powerful, lower cost VoIP equipment, the price of entry into the VoIP service
      business has dramatically decreased.  Lower cost of entry has drawn a
      growing number of entrepreneurs to the industry and has driven down the cost
      of
      telecom services at both the wholesale and retail levels.  As a result
      both supply and demand have skyrocketed, and although we see a growing number
      of
      customer and vendor opportunities, we also see a growing number of aggressive
      competitors, declining prices, and declining technological barriers to
      entry.  Nonetheless, IP Gear Connect seeks to increase both revenues
      and gross profit margins by cultivating relationships with a manageable number
      of quality service providers and building a stable, reliable customer
      base.





In
      addition, although the Company’s VoIP service business is currently entirely
      wholesale, management is identifying and evaluating opportunities to move into
      the potentially higher gross margin retail business in certain niche markets,
      potentially including calling card opportunities, call shop opportunities,
      and
“bundled” VoIP service opportunities (“bundled” meaning the offering of both
      VoIP equipment and VoIP connectivity service as a turnkey VoIP solution for
      SMEs).  As of the date of filing this Report we consider all such
      opportunities to be in the evaluation and/or testing stage, and their potential
      effect upon our gross and net profits is too speculative to
      quantify.





**Employees**





As
      of
      December 31, 2006, we had 29 full-time employees and 2 part-time employees
      based
      at our Eugene, Oregon headquarters (including outside sales staff reporting
      to
      management in Eugene), and we had 23 full time and no part-time employees based
      at our IP Gear, Ltd. subsidiary’s primary facility in Yokneam,
      Israel.  We consider our employee relationships to be
      good.  None of our employees are members of a labor union, and we have
      never experienced a work stoppage.





**Competition**





The
        markets for our IP telephony products and services are extremely competitive
        and
        subject to rapid change. We are a small company in an industry dominated
        by very
        large companies that are better capitalized and, in comparison to us, have
        greater sales, marketing, customer support, R&D, and technical resources,
        have access to more experienced management, can take advantage of larger
        economies of scale, and have much greater name recognition and reputation.
        We
        have been able to compete in this market due to our experience and adaptability,
        and to the relatively low barriers to entry in the reseller and VoIP service
        provider businesses. We expect that the conditions that have facilitated
        our
        entry into the VoIP industry will allow additional competitors, including
        large
        companies and niche operators, to enter the market. The fundamental technology
        and computer hardware component of the IP telephony service solution is readily
        available. Accordingly, although development of new proprietary technology
        presents a substantial barrier to entry into the manufacturing and R&D
        business, relatively few barriers to entry exist in our other businesses
        for
        companies with computer and network experience. A rapid increase in competition
        could negatively affect the amount of business that we get and the prices
        that
        we can charge.





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*Competition
        in VoIP development and manufacturing*.





IP
        Gear,
        Ltd.’s competitors in the market for VoIP equipment include telecommunications
        companies, data communication companies and companies specializing in VoIP
        products, many of which have greater name recognition, larger installed customer
        bases and significantly greater resources than we do. Many of our competitors
        have the ability to offer vendor-sponsored financing programs to prospective
        customers. Competitors with broad product portfolios may also be able to
        offer
        lower prices on products that compete with ours because of their ability
        to
        recoup a loss of margin through sales of other products or services. Future
        competitors may also include companies that currently provide computer software
        products and services, such as telephone, media, publishing and cable
        television. The ability of some of our competitors to bundle other enhanced
        services or complete solutions with VoIP products could give these competitors
        an advantage over us.





To
        successfully compete in the equipment R&D and manufacturing market we
        believe that we must leverage our size, the proximity of our upper management
        to
        day-to-day sales activity, and our R&D team’s depth of experience with VoIP
        technology, by bringing new, high-demand products to market faster than our
        larger competitors.  To some extent, we may be able to adjust our
        manufacturing processes or sources faster than larger companies, giving us
        a
        potential time-to-market edge.  Also, our developers and management
        team may be more involved in day-to-day sales and support activity as compared
        to development and management teams in larger companies, giving us a potential
        advantage in identifying high-demand product features and functionality at
        the
        early demand stage and bringing them to market.  And our R&D team
        is led by experienced R&D professionals who have been at the leading edge of
        VoIP technology for many years.  We will also continue to follow
        industry trends by outsourcing a growing portion of our manufacturing process,
        in an attempt to reduce cost of goods.  As a result, we hope both to
        compete at the leading edge of VoIP technology development, and to exploit
        opportunities resulting from weaknesses or limitations in our larger
        competitors’ product lines.





*Competition
        among resellers*.





Our
        VAR
        business competes not only with small boutique IT firms that have entered
        the
        market due to reduced costs of entry resulting from various technological
        advances, but also with large, global companies, including manufacturers
        who now
        compete against us to sell directly to end users. Although we offer our clients
        a range of professional services in conjunction with a select product line
        at
        competitive prices, increased competition may require us to further reduce
        prices, potentially reducing profit margins. We believe the current market
        trend
        favors larger, well-capitalized specialty resellers who can afford to take
        advantage of cost savings in bulk purchases, foreclosure sales, and other
        large
        opportunities, and who can afford to warehouse substantial amounts of inventory
        until profitable opportunities arise.  Nonetheless, niche
        opportunities remain in this business, and we believe that our ability to
        identify currently popular products to sell, and our experience with a diverse
        market of refurbished equipment buyers and sellers, gives us a continued
        competitive edge over new competitors in the market.





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*Competition
        among wholesale telecom service providers*.





Our
        IP
        Gear Connect wholesale VoIP business competes principally on price and quality
        of service. The communications industry, including VoIP, is highly competitive,
        rapidly evolving, and subject to constant technological change and intense
        marketing by providers with similar products and services. We expect that
        new
        competitors, including the growth of “gray market” operators (potentially
        including operators who arrange call termination in a manner that bypasses
        the
        postal telephone and telegraph company), are likely to enter the communications
        industry, including the market for VoIP, Internet, and data
        services.  Also, a number of large VoIP service providers appear to be
        aggressively seeking market share via acquisitions and competitive
        pricing.  We believe the trend in this area is for increased
        competition to continue to drive down market prices and our profit
        margins.  Our ability to continue to compete in this market will
        depend upon our ability to secure more stable vendor relationships, to implement
        a more stable network infrastructure capable of handling higher call volume,
        and
        to continue to build long-term customer relationships.





**CERTAIN
      RISK FACTORS**





There
      are
      a number of important factors that could cause our business, financial
      condition, cash flows, and results of operations to differ materially from
      historical results or those indicated by any forward-looking statements,
      including the risk factors identified below and other factors about which we
      may
      or may not yet be aware. Prospective and existing investors are strongly urged
      to carefully consider the various cautionary statements and risks set forth
      in
      this Report and our other public filings.





**Risks
      Associated with the Business in General**





*Our
      results of operations may fluctuate.*





Our
      revenue and results of operations have fluctuated and will continue to fluctuate
      significantly from quarter to quarter in the future due to a number of factors,
      including but not limited to, those discussed below, some of which are not
      in
      our control.  Because of these factors and others, we cannot not rely
      on quarter-to-quarter or year-to-year comparisons of our results of operations
      as an indication of our future performance.  It is possible that, in
      future periods, our results of operations will be significantly lower than
      the
      estimates of public market analysts, investors, or our own estimates. Such
      a
      discrepancy could cause the price of our Common Stock to decline significantly
      and adversely affect profitability.





*We
      finished fiscal year 2006 with a net loss, and expect to incur losses a net
      loss
      for the 2007 fiscal year, and our future sales levels and ability to achieve
      profitability are unpredictable.*





For
      the
      one year period ending December 31, 2006, we experienced a net loss before
      income taxes of $5,898,579. We will most likely experience a net operating
      loss
      for fiscal year 2007.  Our operating history, particularly in the
      R&D business, is limited, our business has changed rapidly over the past two
      years, and we are competing in an emerging technology industry. We cannot be
      assured that profitability will be achieved, or if it is achieved that it will
      continue, in upcoming quarters or years, nor can we be assured that we will
      be
      able to improve operating margins or increase revenues, or adequately control
      our operating expenses.





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*We
        need additional near-term capital.*




We
        will
        need additional capital to continue to pursue our current business model,
        and
        there can be no assurance that adequate capital will be available to us on
        acceptable terms as needed. In particular, the continued operation of our
        development and manufacturing division, IP Gear, Ltd., requires additional
        near
        term funding, both for R&D and for inventory production.  In
        addition, our business plan calls for the expansion of sales of our IP telephony
        products and services, including expansion through acquisitions, to enterprises
        in geographical markets where we currently do not operate. If we are not
        able to
        secure adequate capital, we may have to delay the implementation of our business
        plan, and potentially discontinue non-profitable business operations,
        particularly, in the near term, those related to our development and
        manufacturing operations in Israel. Our ability to obtain additional financing
        is subject to a number of factors, including general market conditions, our
        operating performance, our financial condition, and investor acceptance of
        our
        business plan. We can provide no assurance that we will be able to obtain
        necessary financing, or if financing is available that the terms will be
        favorable to existing stockholders or acceptable to our Board. If future
        capital
        investment is made available, existing shareholders will experience dilution
        of
        their stock ownership positions in order for us to secure that additional
        investment.





As
        detailed in Item 5, “Market for Common Equity and Related Stockholder Matters
        and Small Business Issuer Purchases of Equity Securities – Recent Sales of
        Unregistered Securities,” on December 29, 2006, we entered into an agreement by
        which P&S Spirit, LLC, agreed to purchase between $3 million and $5 million
        of our stock.  $3 million was invested on December 29, 2006, and under
        the terms of the stock purchase agreement the remaining $2 million was required
        to be invested, in two payments of $1 million each, contingent upon our success
        in meeting certain financial targets described in more detail in herein in
        Item
        5, “Market for Common Equity and Related Stockholder Matters and Small Business
        Issuer Purchases of Equity Securities – Recent Sales of Unregistered Securities
– P&S Spirit share purchase.”  There can be no assurance that we
        will meet those targets or otherwise become entitled to all or part of the
        remaining $2 million.





*We
        face changing market conditions for products and
        services.*





The
      market for VoIP service is still in the relatively early stages of development
      and market acceptance, and is characterized by rapid technological change,
      evolving industry standards and strong customer demand for new products,
      applications and services. As is typical of a new and rapidly evolving industry,
      the demand for, and market acceptance of, recently introduced IP telephony
      products and services are highly uncertain. We cannot be sure that the delivery
      of telephone and other communications services over IP networks rather than
      over
      traditional telephone networks will expand. We cannot be sure that packet based
      voice networks will become widespread or that connections between packet
      networks and telephone networks will become commonplace. The inability to
      deliver traffic over the Internet with significant cost advantages could slow
      or
      stop the growth of VoIP technology. The adaptation process of connecting packet
      networks and telephone networks can be time consuming and costly. In addition,
      limitations of VoIP technology, such as the inability to make a call during
      a
      power outage and difficulty in accessing 911 services, could adversely affect
      the market for VoIP services. If this market does not develop, or develops
      more
      slowly than we expect, we may not be able to sell our products or offer our
      services in sufficient volume to meet our financial goals.





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*Changes
      in governmental regulations could slow the growth of the VoIP
      market.*





In
      the
      United States, changes in governmental regulation are being considered that
      may
      negatively impact the VoIP telephony market. The Federal Communications
      Commission (the “***FCC***”) is examining the enactment of
      new regulations governing Internet telephony and the question of whether certain
      forms of telephone services over the Internet should be subject to the same
      FCC
      regulations as telecommunications services. VoIP equipment can be used as a
      way
      to provide telecommunication services while bypassing the local service
      operator, in what is sometimes referred to as “toll bypass,” whereby
      telecommunications traffic is diverted from traditional phone lines to the
      Internet, avoiding long distance call charges. Phone companies in the U.S.
      and
      abroad are seeking the adoption of regulations to require VoIP providers or
      users to pay a charge to local service providers. The cost of providing Internet
      phone service could increase as a result of these actions or more aggressive
      regulation or taxation of VoIP services by the FCC or foreign governments,
      which
      could result in slower growth and decreased profitability for the industry
      and
      potentially for the Company.





*We
      may fail to manage our growth and multiple business lines
      effectively.*





We
      have
      actively expanded our operations in the past and seek to continue to expand
      them
      in the future. In 2004 and 2005 we undertook a series of restructurings of
      our
      operations involving, among other things, the expansion of our workforce and
      corporate headquarters, the consolidation of our equipment reseller operations,
      and the acquisition of a development and manufacturing operation based in
      Israel. The implementation of these restructurings in 2006 has placed, and
      in
      2007 will continue to place, a significant strain on our management systems
      and
      financial resources. In addition, our business requires us to focus on multiple
      business models simultaneously. We are a young company with a limited operating
      history, and our management team regularly faces new challenges.  None
      of our senior managers has operated a public reporting company
      before.  To continue to compete in the highly competitive and rapidly
      developing IP communications industry we will be forced to quickly adapt to
      changing market conditions in multiple areas, such as shifts in capital needs,
      in fundamental communications technologies, and in product lines and supply
      sources, and there can be no assurance management can meet these
      challenges.





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*We
        rely upon key personnel, and must attract and retain additional qualified
        personnel.*





We
        are
        dependent on the continued efforts of our senior management team, including
        our
        Chairman and Chief Executive Officer, M. David Kamrat, our President Noah
        Kamrat, our Secretary and Vice President, Duy Tran, and the manager or our
        IP
        Gear, Ltd. operations in Israel, Shalom Amsalem. If these or other key personnel
        do not continue to be active in management, our business, financial condition
        or
        results of operations could be adversely affected. We cannot assure you that
        we
        will be able to continue to retain our senior executives or other personnel
        necessary for the development of our business. In addition, at present there
        is
        a shortage of qualified management, sales and technical personnel in our
        industry and we are in direct recruiting competition for these applicants
        with
        larger businesses that are able in some cases to offer more competitive
        compensation.  We are also limited in our recruiting efforts by our
        primary location in the relatively small Eugene, Oregon market and Pacific
        Northwest region. We have used stock options and other forms of equity
        compensation as key components of our employee compensation program in order
        to
        align employees’ interests with the interests of our stockholders, to encourage
        employee retention, and to provide competitive compensation. The changing
        regulatory landscape could make it more difficult and expensive for us to
        grant
        stock options to employees in the future. In addition, the use of alternative
        equity incentives may increase our compensation expense and reduce our earnings,
        and may dilute other shareholders.





*We
      extend credit to customers for product purchases, creating bad debt
      risk.*





A
      portion
      of our receivables result from credit extended to customers for purchases of
      our
      products and services. We cannot be sure that we will be able to collect all
      of
      these accounts receivable. Although we have internal credit risk policies to
      identify companies with poor credit histories, we may not effectively manage
      these policies and may provide services to companies that refuse to pay. The
      risk is even greater in foreign countries, where the legal and collection
      systems available may not be adequate for us to enforce the payment provisions
      of our contracts. Our cash reserves will be reduced and our results of
      operations will be materially adversely affected if we are unable to collect
      amounts from our customers. Although past such losses have not been significant,
      future losses, if incurred, could harm our business and have a material adverse
      effect on our results and financial condition.





*Litigation
        may harm our operating results or financial condition.*





We
      are a
      party to lawsuits in the normal course of our business. Litigation can be
      expensive, lengthy, consumptive of management’s time and disruptive to normal
      business operations. The results of complex legal proceedings are difficult
      to
      predict, and expensive to defend or pursue. An unfavorable resolution of a
      particular lawsuit could have a material adverse effect on our business,
      operating results, or financial condition. For additional information regarding
      certain of the lawsuits in which we are involved, see Item 3, “Legal
      Proceedings.”





*Our
        international operations subject us to additional risks and increased
        costs.*





We
        intend
        to continue to pursue international opportunities, both in our IP Gear Connect
        business and in our IP Gear, Ltd. division.  International operations
        are subject to a number of risks and barriers, including:


·
              unexpected
                  changes in regulatory requirements and telecommunication
                  standards;


·
              tariffs
                  and other trade barriers, exchange controls or other currency
                  restrictions;


·
              difficulty
                  in collecting receivables;





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·
              difficulty
                  in staffing and managing foreign
                  operations;


·
              the
                  need to customize marketing and product features to meet foreign
                  requirements;


·
              inadequate
                  protection of intellectual property in countries outside the United
                  States; and


·
              political
                  and economic instability.





We
        may
        not be able to overcome some of these barriers and may incur significant
        costs
        in addressing others. In addition, foreign currency fluctuations may affect
        the
        prices of our products. Our prices in all countries other than Israel are
        denominated in U.S. dollars or Euros. We cannot be sure that our international
        customers will continue to place orders denominated in dollars or Euros,
        but
        sales denominated in Euros could make our revenues subject to fluctuation
        in the
        Euro/dollar exchange rate. In the event that the Euro loses value relative
        to
        the dollar or New Israeli Shekel, our pricing strength could be negatively
        affected: the currency of our vendors and fixed costs (dollars and shekels)
        would become less valuable relative to the currency of foreign
        customers.





*We
      face state tax uncertainties.*





Various
      states have sought to require the collection of state and local sales taxes
      on
      products shipped to the taxing jurisdiction’s residents. We cannot predict the
      level of contact, including electronic commerce, shipping, and Internet or
      IP
      communications activity that might give rise to future or past tax collection
      obligations based on existing law. Many states aggressively pursue out-of-state
      businesses, and legislation that would expand the ability of states to impose
      sales tax collection obligations on out-of-state businesses has been introduced
      in Congress on many occasions. A change in the law could require us to collect
      sales taxes or similar taxes on sales in states in which we have no presence
      and
      could potentially subject us to a liability for prior year sales, either of
      which could have a material adverse effect on our business, financial condition,
      and results of operations.





*Our
      business could be disrupted by systems failure*.





Our
      operations are dependent on the reliability of information, telecommunication
      and other systems that are used for sales, distribution, marketing, purchasing,
      inventory management, order processing, customer service, and general accounting
      functions. Interruption of our information systems, Internet, or
      telecommunication systems could have a material adverse effect on our business,
      financial condition, cash flows, and results of operations.





*We
      face increased expenses as a result of being a public company*.





The
      costs
      of being a public company have increased significantly since the enactment
      of
      the Sarbanes-Oxley Act of 2002. We expect that our general and administrative
      expenses, in particular legal, accounting, and IT systems expenses, will
      increase as a result of our efforts to comply with applicable securities laws,
      in particular with the Sarbanes-Oxley Act. In addition, we are required to
      comply with the internal control evaluation and certification requirements
      of
      Section 404 of the Sarbanes-Oxley Act by no later than the end of our 2008
      fiscal year. We are in the process of determining whether our existing internal
      controls over financial reporting systems are compliant with Section 404. This
      process will divert internal resources, and may force us to implement new
      internal controls and reevaluate our financial reporting, or hire additional
      personnel, in order for us to comply with Section 404. If we are unable to
      effectively implement these changes, it could harm our operations and financial
      results, and could result in our being unable to obtain an unqualified report
      on
      internal controls from our independent auditors.





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**Risks
      most specific to our IP Gear, Ltd. (Israel) division (VoIP technology
      development and manufacturing).**





The
      following are certain risks we consider most important to the IP Gear, Ltd.
      division of our business, but these risks should be read in connection with
      all
      the other risks described herein (including those specific to other
      divisions).





*We
      currently lack the capital to execute on the IP Gear, Ltd. component of our
      business plan.*





If
      we are
      unable to secure adequate near term working capital to fund development and
      production, we may be unable to continue IP Gear, Ltd. operations at current
      levels, and we could be forced to discontinue the division
      altogether.




*Our
      industry is rapidly evolving and we may not be able to keep pace with
      technological changes.*




We
      are
      involved in a continuous process of evaluating changing market demands and
      customer requirements in order to develop and introduce new products, features
      and applications. We need to be able to interpret market trends and the
      advancement of technology in order to successfully develop and introduce new
      products, features, and applications. In addition, the industry standards and
      network components that apply to our products are continually evolving, and
      we
      must evolve with and adapt to them.





*Our
      products generally have long sales cycles and implementation periods, which
      increase our costs in obtaining orders and reduce the predictability of our
      revenues.*





Our
      products are technologically complex and are typically intended for use in
      applications that may be critical to the business of our customers. Prospective
      customers generally must make a significant commitment of resources to test
      and
      evaluate our products and to integrate them into larger systems. As a result,
      our sales process is often subject to delays associated with lengthy approval
      processes that typically accompany the design and testing of new communications
      equipment. This time may be further extended because of internal testing, field
      trials, and requests for the addition or customization of features, delaying
      the
      time until we realize revenue and results in our investing significant resources
      in an attempt to make sales. In addition, orders expected in one quarter could
      shift to another because of the timing of customers’ procurement decisions. The
      time required to implement our products can vary significantly with the needs
      of
      our customers and generally exceeds several months; larger implementations
      can
      take multiple calendar quarters. This complicates our planning processes and
      reduces the predictability of our revenues.





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*We
      have limited product offerings, and our revenues may suffer if demand for any
      of
      our products declines o**r fails to develop as we
      expect**.*





We
      derive
      a substantial portion of our revenues from sales of our Claro product line,
      and
      we expect that these products will continue to account for a majority of our
      revenues for the foreseeable future. As a result, factors adversely affecting
      the pricing of or demand for these products, such as competition, technological
      change or a slower than anticipated rate of development or deployment of new
      products, features and technologies, could cause a significant decrease in
      our
      revenues and profitability. Introducing new and enhanced products requires
      a
      lengthy and costly commitment to R&D that may not result in
      success.





*We
      have depended on a small number of customers. The loss of, or reduction in,
      purchases by a significant customer could have a material adverse effect on
      our
      revenue.*





Historically,
      a substantial portion of our revenue has been derived from large purchases
      by a
      small number of network equipment providers, systems integrators, and
      distributors. We do not enter into long-term sales agreements in which the
      customer is obligated to purchase a set quantity of our products. Based on
      our
      experience, we expect that our customer base may change from period to period.
      If we lose a large customer and fail to add new customers there could be a
      material adverse effect on our results of operations.





*We
      have a limited order backlog.*





We
      have a
      limited order backlog, which makes revenues in any quarter substantially
      dependent on orders received and delivered in that quarter. A delay in the
      recognition of revenue, even from one customer, may have a significant negative
      impact on our results of operations for a given period. We base our decisions
      regarding our operating expenses on anticipated revenue trends, and our expense
      levels are relatively fixed, or require some time for adjustment. Because only
      a
      small portion of our expenses varies with our revenues, if revenue levels fall
      below our expectations, our results of operations will be adversely
      affected.





*We
      rely on subcontractors to assemble our products and perform other manufacturing
      functions.*





A
      growing
      portion of our products are manufactured and assembled by third-party
      subcontractors, and in the coming year we plan to move substantially all of
      our
      manufacturing and assembly, and certain testing and development work, to
      subcontractors. As a result of our reliance on a relatively small number of
      third-party subcontractors, we cannot directly control manufacturing costs
      or
      product delivery schedules. We have in the past experienced delays in delivery
      schedules, cost overruns, and other problems in production. This reliance could
      also lead to product shortages or quality assurance problems, which, in turn,
      could lead to an increase in the costs of manufacturing or assembling our
      products.





*Our
      products could contain defects.*





We
      develop complex and evolving products. Despite testing by us and our customers,
      undetected errors or defects may be found in existing or new products. The
      introduction of products with reliability, quality, or compatibility problems
      could result in reduced revenues, additional costs, increased product returns,
      and difficulty or delays in collecting accounts receivable. The risk is higher
      with products still in the development stage, where full testing or
      certification is not yet completed. This could result in, among other things,
      a
      delay in recognition or loss of revenues, loss of market share, or failure
      to
      achieve market acceptance. We could also be subject to material claims by
      customers that are not covered by our insurance.





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*Sales
      growth in our product portfolio will require us to service and support more
      products.*





We
      are
      required in most sales to provide to our customers sales support and
      maintenance, often for a specified period of time. This period of time may
      exceed the working life of the product or extend past the period of time that
      we
      may intend to manufacture or support a product. We may be required to supply
      upgraded components or parts as replacements if the original versions are no
      longer available. Product support may be costly and any extra service revenues
      may not cover the hardware and software costs associated with providing
      long-term support or maintenance.





*Our
        proprietary technology is difficult to protect, and our products may infringe
        on
        the intellectual property rights of third parties.*





Our
        success depends to a significant degree on our proprietary technology and
        other
        intellectual property. Although we regard our technology as proprietary,
        we do
        not hold any patents (pending or otherwise) and are not actively seeking
        patent
        protection. We rely on a combination of copyrights, trademarks, trade secrets,
        confidentiality agreements and contractual restrictions to establish and
        protect
        our proprietary rights. These measures, however, afford only limited protection
        and may not provide us with any competitive advantage or prevent third parties
        from misappropriating our technology or other intellectual property. In
        addition, the laws of certain foreign countries do not protect our proprietary
        rights to the same extent as do the laws of the U.S., which makes
        misappropriation of our technology and other intellectual property more likely.
        It is possible that others will independently develop similar products or
        design
        around our patents and other proprietary rights. Enforcement of intellectual
        property rights, or defense of infringement claims against us, even if without
        merit, may be expensive and may divert attention of management and of R&D
        personnel away from our business. If we fail to successfully enforce or defend
        our intellectual property rights or if we fail to detect misappropriation
        of our
        proprietary rights, our ability to effectively compete could be seriously
        impaired, which would limit our future revenues and harm our
        prospects.





*Conditions
      in Israel affect our operations.*





Our
      IP
      Gear, Ltd. division is based in Israel, where most of our R&D, and IP Gear,
      Ltd. manufacturing operations and inventory, are located. Political, economic
      and military conditions in Israel have directly affected our operations,
      particularly the recent military actions relating to Lebanon and the recent
      terrorist attacks against Israel. We cannot predict the effect on us of an
      increase in these hostilities or any future armed conflict, political
      instability, or violence in the region. Some of our officers and employees,
      and
      key professional advisors, in Israel are obligated to perform regular military
      reserve duty and are subject to being called for additional active duty under
      emergency circumstances. We cannot predict the full impact of these conditions
      on us in the future, particularly if emergency circumstances or an escalation
      in
      the political situation occurs. If many of our employees are called for active
      duty, our operations in Israel and our business may be adversely affected.
      Additionally, a number of countries continue to restrict or ban business with
      Israel or Israeli companies, which may limit our ability to make sales in those
      countries.





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**Risks
      most specific to our IP Gear (U.S.) division (IP communications equipment
      resale).**





The
      following are certain risks we consider most important to the IP Gear division
      of our business, but these risks should be read in connection with all the
      other
      risks described herein (including those specific to other
      divisions).





*Rapid
      technological change and inventory obsolescence*.





The
      computer industry is characterized by rapid technological change and frequent
      introductions of new or enhanced products. To timely meet demand and obtain
      better purchase pricing, we may be required to carry significant inventory
      levels of certain products, which subject us to increased risk of inventory
      obsolescence. We participate in first-to-market and end-of-life purchase
      opportunities, both of which carry the risk of inventory obsolescence. Special
      purchase products are sometimes acquired without return privileges, and there
      can be no assurance that we will be able to avoid losses related to such
      products if the related purchase contract is not completed. In addition, we
      currently depend substantially upon sale of used or refurbished
      products.  Manufacturers with large market share, particularly Cisco,
      may release new generations of products that make used or refurbished products
      obsolete or unattractive.





*Concentrated
      customer risk*.





We
      derive
      a significant amount of our revenue from a relatively small number of clients.
      If we were to lose one or more of these customers, and the business were not
      replaced, it could have an adverse impact on our results of operations and
      financial condition. While no customer accounted for 10% or more of our IP
      Gear
      revenues during the year ending December 31, 2006, our top ten customers
      accounted for a significant amount of our business. Although we to continue
      to
      do business with these clients, and have no reason to believe we will cease
      doing business with any of them in the foreseeable future, the loss of any
      large
      client could adversely impact our results of operations if the revenue stream
      were not replaced by other sales.





*Reliance
      on market purchase and sale opportunities*.





We
      acquire a significant portion of our inventory on secondary markets as used
      or
      refurbished product, and we rely upon purchasing opportunities on the open
      market. We do not currently rely upon purchases direct from manufacturers,
      nor
      do we purchase primarily from “top tier” distributors of new products (top tier
      meaning those distributors who purchase directly from major manufacturers such
      as Cisco). We do not have long-term supply or sale contracts for inventory,
      and
      we do not participate in large buying opportunities, which may offer larger
      discounts. Termination, interruption, or contraction of our relationships with
      our vendors, or unavailability on the open market of our core products, could
      have a material adverse effect on our business, financial condition, cash flows,
      or results of operations.





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**Risks
      most specific to our IP Gear Connect division (wholesale VoIP service
      provider).**





The
      following are certain risks we consider most important to the IP Gear Connect
      division of our business, but these risks should be read in connection with
      all
      the other risks described herein (including those specific to other
      divisions).





*Potential
      for key supplier interruptions.*





We
      do not
      rely upon or maintain any long term supply or termination service contracts,
      and
      all of our vendor agreements are terminable at will by either party without
      notice.  In addition, our suppliers rely upon short term contracts or
      arrangements with other local service providers, including tier 1 service
      providers, to supply termination routes; these contracts or arrangements may
      also be terminated upon short notice.  Therefore, our VoIP service
      business is subject to supply disruptions that are not within our control and
      that could have a material adverse effect upon the IP Gear Connect division’s
      financial results. Critical issues concerning the commercial use of the
      Internet, including security, cost, ease of use and access, intellectual
      property ownership, and other legal liability issues, remain unresolved and
      could materially and adversely affect both the growth of Internet usage
      generally and our business in particular. Finally, we will not be able to
      increase our VoIP service traffic if Internet infrastructure does not continue
      to expand to more locations worldwide, particularly into emerging markets and
      developing nations.





*We
      rely on third-party providers of phone and data lines and other
      telecommunications services and local communications service
      providers.*





Our
      business model depends on the availability of the Internet and traditional
      telephone networks to transmit voice and fax calls. Third parties maintain
      and
      own these networks, other components that comprise the Internet, and business
      relationships that allow telephone calls to be terminated over the public
      switched telephone network. Some of these third parties are telephone companies.
      They may increase their charges for using these lines at any time and thereby
      increase our expenses. They may also fail to maintain their lines properly,
      fail
      to maintain the ability to terminate calls, or otherwise disrupt our ability
      to
      provide service to our customers. Any such failure that leads to a material
      disruption of our ability to complete calls or provide other services could
      discourage our customers from using our network. We maintain relationships
      with
      local communications service providers in foreign countries, some of whom own
      the equipment that translates calls from traditional voice networks to the
      Internet, and vice versa. We rely upon these third parties both to provide
      lines
      over which we complete calls and to increase their capacity, when necessary,
      as
      the volume of our traffic increases. In turn, many of these parties rely upon
      their relationships with local phone companies and the use of local PSTN to
      complete calls at the termination location. There is a risk that these third
      parties may be slow, or may fail, to provide lines, which would affect our
      ability to complete calls to certain destinations. Because we rely upon entering
      into relationships with local service providers to expand into additional
      countries, we may not be able to increase the number of countries to which
      we
      provide service. Finally, any technical difficulties that these providers
      suffer, or difficulties in their relationships with companies that manage the
      public switched telephone network, could affect our ability to transmit calls
      to
      the countries that those providers help serve, significantly reducing our
      revenue and cash flows, as well as hurting our reputation.





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*Single
      points of failure on our network, or computer vandalism, may make our business
      vulnerable.*





We
      currently operate two principal network operations centers, one in our Eugene,
      Oregon facility and one in a leased collocation facility in Portland, Oregon.
      In
      some cases, we have designed redundant systems, provided for excess capacity,
      and taken other precautions against platform and network failures, as well
      as
      facility failures relating to power, air conditioning, destruction, or theft.
      Nonetheless, some of our infrastructure and functionality, including that
      associated with certain components of our wholesale business, such as switching
      or routing equipment, operate as a single point of failure, meaning, failures
      of
      the type described may prohibit us from offering services. If the overall
      performance of the Internet is seriously downgraded by website attacks, failure
      of service attacks, or other acts of computer vandalism or virus infection,
      our
      ability to deliver our communication services over the Internet could be
      adversely impacted, which could cause us to have to increase the amount of
      traffic we must carry over alternative networks, including the more costly
      public switched telephone network. In addition, our business interruption
      insurance may not cover losses we could incur because of any such disruption
      of
      the Internet.





*International
      governmental regulation and legal uncertainties could limit our ability to
      provide current services or increase costs, or subject us to legal
      liability.*





Regulatory
      treatment of Internet telephony outside the United States varies from country
      to
      country. In many countries in which we purchase termination services, the status
      of the laws that may relate to our services, including their interpretation
      and
      enforcement, is unclear.  We cannot be certain that our customers,
      local service providers, or other affiliates are currently in compliance with
      regulatory or other legal requirements in their respective countries, or that
      they or we will be able to comply with existing or future requirements. We
      provide our services in reliance on and local service providers that may be
      subject to telecommunications regulations in their home countries. In some
      of
      those countries, licensed telephony carriers, as well as government regulators
      and law enforcement authorities may question the legal authority of our local
      service providers and/or our legal authority. Because of our relationships
      with
      resellers, some countries may assert that we are required to register as a
      telecommunications carrier in that country. In such case, our failure to do
      so
      could subject us to regulatory action such as fines or penalties, including
      asset forfeitures. In addition, some countries are considering subjecting VoIP
      services to the regulations applied to traditional telephone companies. If
      foreign governments or other bodies begin to impose related restrictions on
      VoIP
      or our other services or otherwise enforce laws or regulations against us,
      our
      affiliates, or our vendors, such actions could have a material adverse effect
      on
      our operations.  In addition, deregulation of the communications
      markets in developing countries may not continue, and incumbent providers,
      trade
      unions and others may resist legislation directed toward deregulation and may
      resist allowing us to interconnect to their network switches. Governments and
      regulations may change, resulting in availability of licenses and/or
      cancellations or suspensions of licenses, confiscation of equipment and/or
      rate
      increases; the instability of the regulations applicable to our businesses
      and
      their interpretation and enforcement in these markets could materially and
      adversely affect our business.





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*Domestic
      regulatory changes may subject us to additional fees, taxes, or tariffs, or
      service restrictions.*





We
      are
      not licensed to offer traditional telecommunications services in any U.S. state
      and we have not filed tariffs for any service at the FCC or at any state
      regulatory commission. While the FCC has traditionally maintained an informal
      policy that information service providers, including VoIP providers, are not
      telecommunications carriers for regulatory purposes, various entities have
      challenged this idea before the FCC and at various state government agencies.
      Local exchange carriers are lobbying the FCC and the states to regulate VoIP
      on
      the same basis as traditional telephone services. Aspects of our operations
      may
      currently be, or may become, subject to state or federal regulations governing
      licensing, universal service funding, access charges, advertising, disclosure
      of
      confidential communications or other information, excise taxes, U.S. embargos,
      and other reporting or compliance requirements.





**Risks
      Associated With the Company’s Stock.**





*Relative
      illiquidity of stock; share price fluctuations*.





There
      is
      relatively limited trading of our stock in the public markets, and this imposes
      significant practical limitations on any shareholder’s ability to achieve
      liquidity at any particular quoted price. Efforts to sell significant amounts
      of
      our stock on the open market may precipitate significant declines in the prices
      quoted by market makers. The market price for our ordinary shares and the prices
      of shares of other technology companies have been volatile. Our quarterly and
      annual operating results are difficult to predict and may fluctuate
      significantly. It is possible that we will fail to achieve revenue or profit
      expectations in the future. The following factors, many of which are beyond
      our
      control, may cause significant fluctuations in the market price of our
      shares:


·
            fluctuations
                in our quarterly revenues and earnings or those of our
                competitors;


·
            shortfalls
                in our operating results compared to levels forecast by securities
                analysts;


·
            announcements
                concerning us, our competitors, or IP telephony, including technological
                innovations;


·
            the
                introduction of new products, changes in product lines, or changes
                in
                business models;


·
            market
                conditions in the industry, and in technology securities markets;
                and


·
            political,
                economic, and other developments in Israel and
                worldwide.





*Business
        acquisitions, dispositions, joint ventures, or private equity transactions,
        entail risks and may disrupt our business, dilute stockholder value, or distract
        management attention.*





We
        have
        grown in part through the acquisition of companies, products, or technologies.
        We expect to continue to review opportunities to acquire other businesses
        or
        technologies that would complement our current products, expand the breadth
        of
        our markets, enhance our technical capabilities or otherwise offer growth
        opportunities. Acquisitions are inherently risky and no assurance can be
        given
        that our previous or future acquisitions (including, without limitation,
        our
        acquisition of the BOS VoIP and GSM product lines) will be successful or
        will
        not materially and adversely affect our business, operating results, or
        financial condition. If we make any further acquisitions, we may issue stock
        that would dilute our existing shareholders’ percentage ownership, and we may
        incur substantial debt, and/or assume contingent or unknown liabilities.
        In the
        event of any equity-based financing transaction, it is likely that existing
        shareholders will experience dilution of their stock ownership positions
        in
        order for us to secure additional capital.





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*Substantial
      shareholders may sell all or a substantial portion of the shares they own or
      acquire at any time in the future, which could cause the market price of our
      Common Stock to decline.*





The
      sale,
      or the possibility of a sale, by any substantial holder of our Common Stock
      could cause the market price of our stock to decline. The sale of a substantial
      number of shares or the possibility of such a sale also could make it more
      difficult for us to sell new Common Stock or other new equity securities in
      the
      future at a time and at a price best for the Company.





*We
      do
      not anticipate declaring any cash dividends on our ordinary
      shares.*





We
      have
      not paid cash dividends in the past and do not plan to pay any cash dividends
      in
      the near future.





*Voting
      control by principal stockholders.*





As
      of
      March 21, 2007, Qualmax owned preferred stock convertible into approximately
      76.05% of our Common Stock, with commensurate current voting and economic
      rights.  M. David Kamrat and Noah Kamrat, father and son, together
      with their spouses (collectively, the “***Kamrat
      Family***”), control approximately 46.65% of the common stock of
      Qualmax; P&S Spirit, an entity controlled by Dr. Selvin Passen and Jacob
      Schorr, Ph.D., controls approximately 17.82% of the common stock of Qualmax;
      and
      Dr. Selvin Passen controls approximately 4.07% of the common stock of Qualmax,
      Inc.  Therefore, the members of Kamrat Family, P&S Spirit, and Dr.
      Passen collectively are able, indirectly via their influence on matters
      requiring Qualmax shareholder vote, to significantly influence the vote on
      matters requiring our stockholders’ approval, including the election of
      directors.





**ITEM
                2.**
            **DESCRIPTION
                OF PROPERTY**





Our
      U.S.
      operations are headquartered in Eugene, Oregon, in leased commercial premises
      in
      two buildings, located at 340 W. 5th Avenue
      and at 488
      Lincoln Street.  Our Israel operations are headquartered in leased
      commercial premises located in the Yokneam Industrial Zone in Yokneam,
      Israel.  The condition of these leased premises is good, and we have
      recently made substantial tenant improvements to all three
      premises.  The principal terms and lease payment obligations are
      discussed in more detail under Item 7, “Financial Statements – Note
      J.”







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**ITEM
                3.**
            **LEGAL
                PROCEEDINGS**





*The
      Singer Litigation*.





We
      are a
      defendant in a lawsuit filed by a former employee, Fred Singer, who has made
      claims for unpaid salary and for certain previously granted stock
      options.  Via mediation on February 7, 2007, we have settled this
      lawsuit, and as part of the settlement, we agreed that Mr. Singer holds options
      to purchase up to 70,000 shares of the Company’s Common Stock at a price of
      $0.10 per share, which options were issued to Mr. Singer during his association
      with the Company prior to 2002.  As of the time of the filing of this
      Report we have not received final documentation dismissing the lawsuit and
      settling and releasing claims, but we expect to conclude final settlement
      documentation within a matter of weeks.





*The
      MPI Litigation.*





As
      a
      result of the Reverse Acquisition the Company assumed the liabilities of
      Qualmax.  Qualmax was named as a defendant in certain litigation filed
      in France before the Trade Tribunal of Nanterre against BOS by Media Partners
      International (“***MPI***,” and the “***MPI
      Litigation***”), a former distributor of BOS, whose contract with BOS
      allegedly related to certain distribution rights for the product division
      Qualmax purchased from BOS on December 31, 2005.  Pursuant to the
      asset purchase agreement between Qualmax and BOS, BOS agreed to indemnify and
      hold Qualmax harmless from liability, without limitation, arising from the
      claims raised in the MPI Litigation, and BOS has undertaken defense of Qualmax
      at BOS’s expense.  The litigation remains in its early stages, and at
      last report from counsel the French court had not yet made definitive rulings
      on
      defendant’s motion to change venue and jurisdiction from France to
      Israel.  Initial hearings on the motion for change of venue were
      concluded in February, 2007, and we are advised that final hearing will be
      conducted in late April, 2007, and a decision likely rendered in May,
      2007.  If venue is in fact moved to Israel that decision may have a
      material impact on the plaintiff’s willingness to continue the litigation, due
      to increased expense, but the outcome of the venue hearings, and the impact
      of
      that outcome on plaintiff’s claims, is purely speculative at this
      point.  At present, based upon the limited progress in the matter and
      without the benefit of completion of factual discovery, management believes
      this
      litigation does not pose a significant financial risk to the
      Company.





*The
      Blackstone Litigation.*





Qualmax
      was named as a defendant in a lawsuit entitled Capital Securities, LLC and
      Blackstone Communications Company v. Carlos Bertonnatti, Worldwide PIN Payment
      Corp. and Qualmax, Inc., Case No. 2006-15824-CA-01, in the Circuit Court of
      the
      11th Judicial
      Circuit in and for Miami-Dade County, Florida, filed August 10,
      2006.  The facts underlying the proceeding relate to a contract
      between defendant Worldwide PIN Payment Corp. and plaintiffs, and a third party,
      to plaintiff’s allegations of misappropriation of trade secrets and corporate
      opportunity, and to claims that defendants, or some of them, tortiously
      interfered with plaintiffs’ contract with a third party.  Plaintiffs’
seek monetary damages.  Management believes it is not entirely clear
      from the pleadings filed to date whether plaintiffs claim that Qualmax
      misappropriated trade secrets, or tortiously interfered with a third party
      contract, or is liable under some other theory.





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On
      March
      29, 2007, the first deposition in this matter was conducted, of a non-party
      witness who is one of the principal creators of certain intellectual property
      owned, or controlled, by Worldwide PIN Payment Corp.
      (“***WPP***”), and the deposition will be continued but a
      continuation has not been scheduled as of the time of filing of this
      Report.  The first formal discovery request was made of the Company on
      March 27, 2007, followed by a second request on April 10, 2007.  The
      Company has not yet been required to file any responsive pleadings, and has
      not
      provided materials responsive the plaintiff’s discovery requests.





Co-defendants
      have answered and filed counterclaims and third party claims, but none of the
      claims of co-defendants are against Qualmax nor do they allege wrongdoing by
      Qualmax as a defense to claims against them by plaintiffs.  The
      Company is still investigating the claims against it, and the facts surrounding
      the claims against co-defendants, but that investigation is in its early stages
      and is incomplete.  Based on the limited information available to
      management at this point, management does not believe Qualmax or the Company
      is
      liable for any wrongdoing, act or omission, in relation to the litigation,
      and
      management believes that Qualmax is not properly a party to the
      litigation.  However, management does not have sufficient information
      to provide a meaningful assessment of all the facts and circumstances relating
      to the claims against Qualmax and co-defendants nor to determine how costly
      and
      time-consuming defense of the matter may be regardless of the merits of the
      Company’s defense.  In addition, the Company believes it has viable
      claims for indemnification and damages against co-defendants but has not yet
      formally raised those claims or made a full determination of their value or
      role
      in the litigation.





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





None.





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**PART
      II**





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





**Market
      for Common Stock**





Our
      common stock is currently traded in the over-the-counter market on the OTC
      Electronic Bulletin Board (“OTC BB”) under the symbol “NWBD.OB.”  The
      following table sets forth, for the fiscal quarters indicated, high and low
      closing bid prices for the common stock in the over-the-counter market as
      reported by the NASD.  The information below reflects inter-dealer
      prices, without retail mark-up, mark-down or commissions, and may not
      necessarily represent actual transactions.





Low
                    Bid
                
                
                High
                    BidFiscal
                    Year Ended December 31, 2006First
                    Quarter
                
                $
                0.180
                
                
                $
                0.180Second
                    Quarter
                
                
                0.330
                
                
                
                0.330Third
                    Quarter
                
                
                0.180
                
                
                
                0.210Fourth
                    Quarter
                
                
                0.090
                
                
                
                0.110Fiscal
                    Year Ended May 31, 2006First
                    Quarter
                
                $
                0.131
                
                
                $
                0.220Second
                    Quarter
                
                
                0.085
                
                
                
                0.180Third
                    Quarter
                
                
                0.075
                
                
                
                0.300Fourth
                    Quarter
                
                
                0.150
                
                
                
                0.245Fiscal
                    Year Ended May 31, 2005First
                    Quarter
                
                $
                0.240
                
                
                $
                0.600Second
                    Quarter
                
                
                0.220
                
                
                
                0.310Third
                    Quarter
                
                
                0.240
                
                
                
                0.360Fourth
                    Quarter
                
                
                0.180
                
                
                
                0.270





**Stockholders**





As
      of
      March 21, 2007, there were approximately 163 holders of record of our common
      stock.  Based upon our recent Information Statement to shareholders
      mailed April 2, 2007, we believe there are approximately 935 total holders
      of
      our common stock, including those holding shares in “street
      name.”  The closing bid and asked prices for our common stock on March
      21, 2007, were $0.06 and $0.06, respectively.





Due
      to
      negative cash flow, we have not paid any cash dividends on our common stock
      to
      date, and we do not contemplate the payment of cash dividends in the foreseeable
      future.  The future dividend policy will depend on our earnings,
      capital requirements, financial condition, and other factors considered relevant
      to our ability to pay dividends.





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**Stock
      Option Grants**





For
      the
      twelve months ended December 31, 2006, we granted options to employees and
      consultants to purchase 3,245,000 shares of our common stock.  All of
      these options were granted prior to the date of the Reverse
      Acquisition.  The options were issued in a transaction exempt from
      registration under the Securities Act of 1933, as amended (the
“***Securities Act***”).





**Recent
      Sales of Unregistered Securities**





*Passen
      share purchase*.





On
      September 14, 2006, Dr. Selvin Passen purchased 7,500,000 shares of the
      Company’s Common Stock at a price of $0.20 per share, for a total purchase price
      of $1,500,000.  The shares of Common Stock issued without registration
      under the Securities Act, in reliance on Section 4(2) of the Securities Act
      and Rule 506 of Regulation D promulgated thereunder.





*P&S
      Spirit share purchase*.





Effective
      December 29, 2006, the Company entered into a Subscription Agreement (the
“***P&S Spirit Subscription Agreement***”) with P&S
      Spirit pursuant to which P&S Spirit agreed to invest between $3 million and
      $5 million in the Company by purchasing shares of the Company’s Preferred Stock
      in three stages, at a price of $268,806.27 per share of Preferred Stock
      (equivalent to $0.09 per share of Common Stock, par value $0.01 per share,
      on an
      as-converted basis): (i) on December 29, 2006, an investment of $3,000,000
      by
      purchase of 11.160454 shares of Preferred Stock of the Company, convertible
      into
      33,333,333 shares of Common Stock; and (ii) after the second fiscal quarter
      of
      2007, subject to certain conditions set forth in the Subscription Agreement
      and
      summarized below, an additional investment of $1,000,000 (the
“***Second Tranche***”) by purchase of 3.720151 shares of
      Series A Preferred Stock, convertible into 11,111,111 shares of Common Stock;
      and (iii) after the third fiscal quarter of 2007, subject to certain conditions
      set forth in the Subscription Agreement and summarized below, an additional
      investment of $1,000,000 (the “***Third Tranche***”) by
      purchase of 3.720151 shares of Preferred Stock, convertible into 11,111,111
      shares of Common Stock.  P&S Spirit was also issued warrants
      representing in the aggregate the right to purchase 9.300378 shares of Preferred
      Stock (convertible into 27,777,778 shares of common Stock), at an exercise
      price
      $268.806.27 per share (equivalent to $0.09 per share of Common Stock, on an
      as-converted basis).  In addition, as part of the transaction M. David
      Kamrat and Noah Kamrat (the “***Kamrats***”) agreed to
      transfer a total of 3,827,655 shares of common stock, par value $0.01 per share,
      of Qualmax to P&S Spirit, and in consideration of the Kamrats’ agreement the
      Company agreed to issue warrants to the Kamrats representing, in the aggregate,
      the right to purchase 9.300378 shares of Preferred Stock (convertible into
      27,777,778 shares of Common Stock), at an exercise price $268.806.27 per share
      (equivalent to $0.09 per share of Common Stock on an as-converted basis); the
      warrants issued to the Kamrats have the same terms as the warrants issued to
      P&S Spirit.





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The
      Second Tranche is only payable by P&S Spirit in the event that the Company’s
      consolidated unaudited financial statements as filed on Form 10-QSB (or, Form
      10-Q, if applicable) for the second quarter ending June 30, 2007 reflect EBITDA
      of: (A) $543,000 or greater for the three month period ending June 30, 2007;
      or
      (B) $618,000 or greater for the six month period ending June 30,
      2007.  Therefore, if the foregoing conditions are met, the Second
      Tranche payment could be required no sooner than 5 days after the filing of
      the
      Company’s Quarterly Report on Form 10-QSB for the quarter ending June 30,
      2007.





The
      Third
      Tranche is only payable by P&S Spirit in the event the Company’s
      consolidated unaudited financial statements as filed on Form 10-QSB (or, Form
      10-Q, if applicable) for the third quarter ending September 30, 2007 reflect
      EBITDA of: (A) $885,000 or greater for the three month period ending September
      30, 2007; or (B) $1,503,000 or greater for the nine month period ending
      September 30, 2007.  Therefore, if the foregoing conditions are met,
      the Third Tranche payment could be required no sooner than 5 days after the
      filing of the Company’s Quarterly Report on Form 10-QSB for the quarter ending
      September 30, 2007.  In addition, if the Second Tranche has not been
      paid at the time the Third Tranche becomes payable, the Second Tranche payment
      must be made simultaneously with the Third Tranche payment.





The
      shares of Preferred Stock issued to P&S Spirit are issued without
      registration under the Securities Act, in reliance on Section 4(2) of the
      Securities Act and Rule 506 of Regulation D promulgated thereunder.





*BOS
      debt conversion*.





Effective
      December 31, 2006 the Company, Qualmax, IP Gear, Ltd., P&S Spirit, and
      BOS entered into an agreement pursuant to which, among other things, the parties
      agreed to convert approximately $1.48 million, in the aggregate, of amounts
      due
      and payable to BOS under certain loan, royalty, and outsourcing agreements,
      into
      5.50652 shares of Preferred Stock, par value $0.01 per share, of the Company;
      this Preferred Stock is convertible into 16,446,544 shares of Common Stock,
      par
      value $0.01 per share, of the Company. The price of the Preferred Stock issued
      to BOS was $268.806.27 per share (equivalent to $0.09 per share of Common Stock
      on an as-converted basis).





The
      shares of Preferred Stock issued to BOS are issued without registration under
      the Securities Act, in reliance on Section 4(2) of the Securities Act and
      Rule 506 of Regulation D promulgated thereunder.





*Lock-Up
      Agreement.*





In
      connection with the transactions
      contemplated by the P&S Spirit Subscription Agreement, the Company, the
      Kamrats, P&S Spirit, certain affiliates of the Kamrats and P&S Spirit,
      and BOS entered into a Lock-Up Agreement, as herein described in more detail
      in
      Item 11, “Security Ownership of Certain Beneficial Owners and Management and
      Related Stockholder Matters – Lock-Up Agreement Among Principal
      Shareholders.”





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





**General**





The
      following discussion and analysis provides information which management believes
      is relevant to an assessment and understanding of our results of operations
      and
      financial operations and financial conditions.  This discussion should
      be read in conjunction with the consolidated financial statements and notes
      thereto appearing elsewhere herein, and in conjunction with Part 1, “Disclosure
      Regarding Forward-Looking Statements,” and Item 1, “Description of Business -
      Certain Risk Factors.”





**Results
      of Operations**





*Company
      revenue and cost of goods.*





Company-wide
      revenue and cost of goods for the year ended December 31, 2006 and the year
      ended December 31, 2005:





Company-Wide
                          Year
                              End Dec. 31. 2005
                          Year
                              End Dec. 31, 2006
                          ChangeRevenue
                          $18,037,537
                          $20,130,471
                          11.6%Cost
                              of Goods
                          $15,537,684
                          $17,891,452
                          15.2%Gross
                              Margin
                          14%
                          11%





2006
      was
      a year of investment for the Company.  Qualmax became a Pink Sheets
      company on November 30, 2005, and acquired IP Gear, Ltd. on December 31,
      2005.  We invested money in physical and technological infrastructure,
      and major systems software upgrades.  We successfully recruited or
      promoted qualified personnel for key management positions, in the U.S. and
      Israel.  We have made substantial progress toward development and
      commercial release of an upgraded and expanded product line.  And our
      new management team has been learning for the first time to deal with the
      requirements of operating a reporting public company.





Our
      investments in 2006 were funded primarily by two investors, Dr. Selvin Passen,
      who has been affiliated with the company since 2004, and Jacob Schorr, Ph.D.,
      who joined our Board at the time of the Reverse Acquisition in September
      2006.





The
      modest increase in revenues 2005 to 2006 reflect the additional revenues
      generated by the IP Gear, Ltd. division, increased revenues from VoIP services
      by our IP Gear Connect division, and reduced revenues (particularly in the
      third
      and fourth quarters of 2006) from our VAR business operated by the IP Gear
      division in the U.S.  Cost of goods increase was primarily due to
      higher costs in the IP Gear division.  We experienced relatively
      stable gross margins from IP Gear Connect revenue during fiscal
      2006.





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*IP
      Gear, Ltd. (Israel) Division Revenue and Cost of Goods.*





Because
      the Company did not acquire the IP Gear, Ltd. division until December 31, 2005,
      it did not exist during 2005 for comparison purposes.  Revenue and
      cost of goods for the year ending December 31, 2006:





IP
                                Gear, Ltd.
                            Year
                                End Dec. 31. 2006Revenue
                            $2,592,543Cost
                                of Goods
                            $2,190,874Gross
                                Margin
                            15%





Our
      IP
      Gear, Ltd. division lost money in fiscal 2006, and it is likely to lose money
      in
      2007.  Our current business plan is to continue to invest money in IP
      Gear, Ltd. in fiscal 2007.  We intend to build a redesigned and
      enhanced product line and expand our sales and marketing efforts, rather than
      address the loss by attempting to limit costs and maintain sales in the short
      term. We have recently secured investment capital that has funded operation
      of
      IP Gear, Ltd. in 2006, and we believe it will fund operations in
      2007.  However, our access to a significant portion of that capital is
      continent upon reaching certain EBITDA targets at the end of Q2 and Q3, 2007
      (see our Current Report on Form 8-K filed January 8, 2007, and see also Item
      5,
“Market for Common Equity and Related Shareholder Matters and Small Business
      Issuer Purchases of Equity Securities – Recent Sales of Unregistered
      Securities,” for a detailed discussion of the Subscription Agreement between
      P&S Spirit and the Company).  Due to the volatility of the market
      for our goods and services, and the uncertainty of our ability to deliver on
      all
      points of our business plan, we cannot be certain whether we will reach these
      EBITDA targets, and based on preliminary information management believes it
      is
      likely that we will not reach one or both of the relevant EBITDA
      targets.  Therefore, we continue to actively seek additional funding
      to continue to develop and expand our IP Gear, Ltd. business.





IP
      Gear,
      Ltd. was acquired as a division of BOS, where the company had been operating
      for
      many years.  Defining IP Gear, Ltd. as an entity of its own, separate
      from its former parent, has been management’s first challenge, both in the U.S.
      and in Israel.  Although division-level management remained in place
      after Qualmax’s December 31, 2006 acquisition of the business, the company and
      nature of the business were new to U.S.-based senior management, and the
      division’s location is physically remote from the U.S.-based company’s Eugene,
      Oregon headquarters.  IP Gear, Ltd. changed division managers
      mid-year, and via an outsourcing agreement with BOS gradually separated its
      operations from BOS over the course of the year (the division shared office
      space and a variety of systems with BOS until the end of fiscal
      2006).  The transition has not been efficient at all times, and it
      undoubtedly has had a negative impact on sales and product
      development.  In addition, we have struggled to control costs and
      forecast revenues, and the division’s revenue and profit margins have been lower
      than we anticipated at the time of the acquisition.  As a result, we
      have been forced to secure additional financing to cover our operating
      shortfalls, and to aggressively limit costs.  As a result we have had
      to restrict our R&D and sales efforts, delay inventory purchases, and
      postpone related strategic initiatives.  Our ability to reverse this
      trend depends upon our ability to secure additional investment capital, and
      to
      reduce costs relative to revenues.





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A
      second
      major challenge for IP Gear, Ltd. in 2006 was the implementation of three
      R&D initiatives, designed to better position our products and improve our
      gross margins:





1.           To
      redesign and enhance the Claro and Quasar product series to achieve three goals:
      (a) to decrease costs of production; (b) to provide increased and enhanced
      monitoring features, and greater flexibility in feature arrays; and (c) to
      expand each product’s scalability by expanding from a 2 Primary Rate Interface
      (“***PRI***”) capacity to a 4 PRI capacity.  We
      currently expect that the redesigned Claro product line will be fully completed
      for release by the end of the fourth quarter, 2007, and that certain products
      within the Claro line will be ready before that date.





2.           To
      create new software, generally known as a SIP proxy, to add management features
      and other functionality applicable to all our products, and to contribute toward
      a redeveloped software foundation for future product design.  This SIP
      proxy is currently employed on some of our Claro products, and it will
      eventually be used with all of our products.  The software may also
      provide a better means for our products to work with other companies’ products
      as part of integrated IP communications solutions.  Although the
      software is currently in production, it is in its early stages and will continue
      to be improved over the course of this year.





3.           To
      develop a 4 port GSM card to serve a variety of purposes, in particular and
      most
      immediately to insert in our 16 port Claro gateway in order to provide an
      adaptable “4 way” IP telephony gateway, combining 4 port FXO, FXS, GSM and IP
      cards in versatile arrays.  We currently project completion of this
      initiative by the end of fiscal 2007.





A
      third
      challenge has been our gradual transition away from manufacturing all of our
      own
      products, to outsourcing manufacturing of more of our components, and in some
      cases finished products.  The principal goal of this project has been
      to reduce our costs of goods, positioning us to increase profit margins and
      compete in an industry where technology tends to become cheaper as it
      matures.  Outsourcing production has involved product design
      challenges, and challenges in identifying and qualifying suitable outsource
      manufacturers and component providers.





A
      fourth
      challenge has been our effort to build distribution channels in North and South
      America.  Generating substantial sales through distributors and
      resellers in a large new geographic market requires an effort over months or
      years.  We have executed distribution contracts with a number of North
      American distributors, and have sold IP Gear., Ltd. product via those
      distribution agreements, as well as to a small number of end users in North
      America, but we have not yet seen meaningful sales results in these new
      markets.  We believe it will be a number of quarters, perhaps into
      2008, before we may begin to reap the benefit of our efforts over the past
      year
      in North and South America.





We
      believe it is also important to note that our cost of goods for fiscal 2006
      was increased by recent inventory write-downs, a move we believe is
      necessary to accurately reflect the declining value during 2006 of some parts
      and work in progress resulting from increased outsourcing of manufacturing
      operations.  We have taken reserves for slow moving or obsolete
      inventory in 2006, and if we experience another shift in the market for our
      core products, or another shift in manufacturing methods, we may experience
      inventory adjustments and reserves in 2007.





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*IP
      Gear (U.S.) Division Revenue and Cost of Goods.*





Revenue
      and cost of goods for the IP Gear division (equipment reseller and refurbisher)
      for the year ended December 31, 2006 and year ended December 31,
      2005:





IP
                            Gear
                        Year
                            End Dec. 31. 2005
                        Year
                            End Dec. 31, 2006
                        ChangeRevenue
                        $9,810,314
                        $6,307,644
                        (36%)Cost
                            of Goods
                        $8,126,649
                        $5,317,852
                        (35%)Gross
                            Margin
                        17%
                        16%





Although
      our gross profit margin has remained relatively stable from 2005 to 2006, our
      revenues in this division declined substantially in 2006, and in the third
      and
      fourth quarters of 2006 we experienced decreasing gross margins on resale of
      other manufacturer’s products.  We can identify at least two primary
      reasons for the decline in revenues and profit margin.





1.           The
      first reason is a shift in market conditions.  Our sales in this
      division have historically been of VoIP gateways, access servers, and related
      components.  Based upon our discussions with customers, vendors, and
      competitors in the market, we believe that the market for these products is
      not
      necessarily slowing, but has matured.  The access server resale
      business has for the past four or five years presented niche opportunities
      for
      nimble VARs, particularly in the used or refurbished equipment markets, who
      found many small purchase and resale opportunities.  However, in the
      past one or two years we believe that larger competitors have gained market
      share, have become knowledgeable about the technology and how to sell equipment
      in smaller lots, and have established better and larger channels for used or
      refurbished equipment to reach end users.  The result has been tougher
      competition for smaller VARs like us.  By buying in large lots, often
      from bankrupt or over-leveraged sellers, larger companies have reduced profit
      margins for smaller companies that cannot fund large purchases, making it harder
      for small companies to compete based on price.  In response to these
      market conditions, we have chosen not to dedicate necessary capital and build
      infrastructure to compete with large resellers for buying opportunities, but
      instead to seek only adequately profitable opportunities we can finance without
      substantial leverage.  We have attempted to reduce sales volume, and
      pursue only higher margin sales opportunities, rather than by pursuing a higher
      volume of lower margin opportunities – a strategy that we believe requires
      greater inventory and accounts receivable financing than we are currently able
      to access.  We believe it is also important to note that our cost of
      goods has been increased by recent inventory write-downs, a move we believe
      is
      necessary to accurately reflect the declining value during 2006 of some of
      our
      core VAR products.  We have taken reserves for slow moving or obsolete
      inventory in 2006, and if we experience another shift in the market for our
      core
      products we may experience additional inventory adjustment and reserves in
      2007.





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The
      impact of the gateway and access server market shift is illustrated by our
      trend
      away from sales to other mid-tier resellers, and toward end users.  We
      find that currently other mid-tier resellers (and many larger end users) can
      obtain better pricing from larger distributors and top-tier resellers, and
      therefore, our customers have become almost exclusively end users, typically
      mid-tier carriers or other telecom service providers.





2.           The
      second reason for the division’s revenue decline is a shift in our sales and
      marketing focus, away from other companies’ equipment and toward our
      own.  We acquired the IP Gear, Ltd. VoIP and GSM technology division
      at the end of 2005 with the intention of expanding the Claro product’s market
      into North and South America, and with the intention of combining technical
      and
      market expertise in certain areas.  Establishing sales channels in a
      new market has been a challenge for our relatively small U.S.-based sales force,
      and inevitably has diverted sales, marketing and management efforts away from
      our legacy VAR business to support sales of our own products.  We can
      sell our own products at much higher margins than other companies’ products, and
      we are investing our sales, marketing, and management efforts to substantially
      expand the market for our own products in the long term, at the expense of
      the
      market for other companies’ products in the short term.  Currently, we
      estimate that approximately 50% of our U.S.-based sales, marketing, and
      management efforts are dedicated to the IP Gear, Ltd. product line, and 50%
      to
      our legacy VAR business.  We expect that the efforts dedicated to IP
      Gear, Ltd. products will increase relative to our VAR business over the course
      of the next year.





*IP
      Gear Connect Division Revenue and Cost of Goods.*





Revenue
      and cost of goods for the IP Gear Connect division (wholesale VoIP services)
      for
      the year ended December 31, 2006 and year ended December 31, 2005:





IP
                              Gear Connect
                          Year
                              End Dec. 31. 2005
                          Year
                              End Dec. 31, 2006
                          ChangeRevenue
                          $8,227,223
                          $11,230,284
                          37%Cost
                              of Goods
                          $7,411,035
                          $10,382,726
                          40%Gross
                              Margin
                          10%
                          8%





We
      have
      worked hard in 2006 to build a stable foundation under the VoIP service provider
      business we built in 2005, with a goal of steadily increasing division revenues,
      while maintaining gross margins, and limiting problems with technological
      failures and accounts receivable (“***AR***”)
      collections.  Our efforts have focused on three areas:





1.           We
      have continued to improve our technological infrastructure, increasing our
      capacity to direct VoIP traffic, our ability to control the quality of the
      connections, and our ability to monitor and account and bill for VoIP
      traffic.  In particular, we are in the process of migrating to new,
      larger capacity switching technology, which we believe will enable us to
      increase the volume of telephony service we can provide.  We
      anticipate that our migration to this new technology will be completed by the
      end of the third fiscal quarter of 2007.





Page
            39 of 61
 *Table
            of Contents*




2.           We
      have improved the quality of the foreign termination services we resell, by
      building relationships with those foreign vendors who have provided reliable
      quality connections over a period of time.  We continue to pursue
      higher-quality and more reliable termination opportunities with larger foreign
      carriers where possible.





3.           We
      have continued our efforts to build a high quality customer base, building
      relationships over time and carefully monitoring credit.  We continue
      to pursue sales opportunities with top-tier telecom customers where
      possible.  However, higher credit customers often command longer AR
      cycles, and our ability to finance AR growth under those conditions has been
      limiting in 2006.  In addition, increased competition and decreased
      technological barriers to entry into the VoIP service business has put downward
      pressure on gross margins.





*Total
      Company expenses.*





Total
      Company expenses (sales, marketing, general and administrative) for the year
      ended December 31, 2006 and year ended December 31, 2005:





Year
                        End Dec. 31. 2005
                    Year
                        End Dec. 31, 2006
                    ChangeTotal
                        Expenses
                    $2,286,127
                    $7,880,960
                    245%





We
      believe the increase in total expenses is due to the following factors, among
      others:





·
            new
                general, administrative and sales expenses of our new IP Gear, Ltd.
                division, acquired December 31,
                2005;


·
            increased
                internal sales and marketing expenses relating to the IP Gear, Ltd.
                division and to turnover at key sales and management
                positions;


·
            increased
                travel and lodging expenses relating to management and operation
                of IP
                Gear, Ltd. in Israel (including travel for U.S. personnel to Israel,
                and
                for Israel personnel to the U.S.);


·
            increased
                professional, travel and lodging expenses relating to the investigation
                of
                retail VoIP business opportunities in Europe and the
                U.S.;


·
            increased
                personnel expenses relating to the Company’s implementation of a new
                accounting and customer relationship management
                (“***CRM***”) software system and related controls
                and
                procedures, turnover in key personnel (including the appointment
                of Shalom
                Amsalem as manager of our IP Gear, Ltd. operations in Israel, Jason
                Johnson as U.S.-based equipment sales manager, Ian Richardson as
                General
                Counsel, and the expense of supporting an interim Chief Financial
                Officer
                with outside consultants and recruiting a new permanent Chief Financial
                Officer, and including the hiring of U.S.-based sales and accounting
                staff);


·
            increased
                accounting fees relating to a change in accountant, and increased
                legal
                fees relating to a change in law
                firms;





Page
            40 of 61
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            of Contents*




·
            increased
                external accounting expenses, particularly audit and review expenses,
                and
                legal expenses and insurance costs, relating to or occurring as a
                result
                of the Company’s status as a publicly traded
                company;


·
            costs
                of raising capital;


·
            increased
                internal legal expenses relating to the Company’s employment of a
                full-time in-house general counsel starting April
                2006;


·
            writedowns
                for aged accounts receivable deemed
                uncollectible;


·
            expensing
                of approximately $400K of previously capitalized BOS acquisition
                costs, as
                a result of management’s determination that the income stream from the
                investment did not meet expectations at the time of the acquisition;
                and


·
            increased
                legal expenses relating to FCC regulatory changes/compliance and
                various
                other matters.





*Interest.*





Interest
      expense increased to $178,967 for the year ended December 31, 2006 from $123,831
      for the year ended December 31, 2005.  The increase is due to
      fluctuations in the principal amount of the Bank of America Loan, and the
      addition of the BOS Loan effective December 31, 2005, and corresponding
      fluctuations in interest expense.  The Bank of America Loan and BOS
      Loan are discussed in more detail below in this Item 6, “Management’s Discussion
      and Analysis or Plan of Operation – Liquidity and Capital
      Resources.”





*Amortization
      and Depreciation.*





Year
                          End Dec. 31. 2005
                      Year
                          End Dec. 31, 2006
                      ChangeDepreciation
                      $182,097
                      $349,372
                      92%Amortization
                      $0
                      $1,815,230
                      n/a





Increased
      depreciation and amortization has resulted from a substantial increase in
      capital expenditures for equipment, facilities and technology.  The
      increase in depreciation reflects acquisition of equipment during 2006 to add
      equipment for our operations, rather than to replace fully depreciated
      equipment.  The increase in amortization is due entirely to our
      acquisition of technology from BOS effective December 31, 2005.





*Net
      Loss*.





The
      above
      factors contributed to a net loss before taxes of ($5,898,579) for the year
      ended December 31, 2006 as compared to net income before taxes of $322,234
      for
      the year ended December 31, 2005.





**Liquidity
      and Capital Resources**





We
      have
      recurring quarterly net losses and had cash used in operations in the year
      ending December 31, 2006 of ($1,658,872).  We had positive working
      capital of $3,809,358 at December 31, 2006.  Management believes the
      Company will have sufficient liquid resources to continue business during fiscal
      2007, subject to sales and gross profit results and subject to management’s
      ability to adjust overhead and other costs of operations, and to restructure
      unprofitable business operations, as may be necessary to meet changing cash
      flow
      needs in the future.





Page
            41 of 61
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            of Contents*




*Capital
      expenditures.*





Total
      capital expenditures for the year ending December 31, 2006 and the year ending
      December 31, 2005:





Year
                        End Dec. 31. 2005
                    Year
                        End Dec. 31, 2006
                    ChangeCapital
                        Expenditures
                    $385,004
                    $3,352,667
                    1064%





The
      increase in capital expenditures from December 31, 2005 to December 31, 2006
      is
      due to the following factors:





·
            expansion
                of and leasehold improvements to the Company’s principal place of business
                in Eugene, Oregon, and move of our IP Gear, Ltd. (Israel) operations
                to
                new leased commercial space;


·
            expansion
                and improvement of the Company’s VoIP network equipment, including
                equipment located at the Company’s primary network operations center in
                Eugene, Oregon, and its collocation facilities in Portland, Oregon,
                and
                Los Angeles, California;


·
            certain
                costs relating to the Reverse Acquisition and similar capital
                transactions;


·
            R&D
                costs, primarily at IP Gear, Ltd.’s facility in Israel, but including some
                R&D activities funded directly by IP Gear in the U.S., for the
                development of IP Gear, Ltd.
                technology;


·
            acquisition
                of new accounting and management software systems for the Company
                as a
                whole and for the VoIP service division;
                and


·
            certain
                additional costs of raising
                capital.





Net
      cash
      provided by equity-based financing activities increased by $4,190,000 during
      the
      year ending December 31, 2006 as compared to an increase of $290,996 during
      the
      year ending December 31, 2005, due to sales of our securities to Dr. Passen,
      Dr.
      Schorr, and related entities during the year ending December 31, 2006, and
      in
      smaller sums to other parties.  Net cash provided by debt-based
      financing activities decreased during the year ended December 31, 2006 by
      $1,460,000, and during  the year ending December 31, 2005 increased by
      $2,892,612.  The decrease during fiscal year 2006 was due a net
      decrease in the Bank of America Loan principal amount of
      $1,460,000.





*Refinancing
      of term loan.*





Qualmax
      entered into a loan agreement with Bank of America, N.A.,
      (“***BoA***”) on April 20, 2005 in the original principal
      amount of $2,000,000 (the “***BoA
      Loan***”).  Effective September 15, 2006, the BoA Loan
      agreement was modified for an adjusted principal amount of $984,323 and an
      extended maturity date of March 31, 2007, with interest on the principal amount
      at 3% over BoA’s Prime Rate.  The BoA Loan was in the name of Qualmax,
      guaranteed by the Company and personally by M. David Kamrat, and it was secured
      by a pledge of all the Company’s stock owned by Qualmax.  BoA declined
      to extend the BoA Loan maturity date beyond March 31, 2007, and therefore,
      the
      Company secured substitute financing in the form of the P&S Loan Agreement
      discussed below, and it repaid all outstanding BoA Loan principal, interest
      and
      fees on March 30, 2007.





Page
            42 of 61
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            of Contents*




On
      March
      30, 2007, the Company entered into a Term Loan and Security Agreement (the
      “***P&S Loan Agreement***” and the debt obligation
      pursuant thereto, the “***P&S Loan***”) with P&S
      Spirit.  The principal amount of the P&S Loan is $1,000,000; the
      interest rate is 2% over the Prime Rate (as reported in The Wall Street
      Journal); consecutive monthly payments of interest only (payable in arrears)
      are
      required commencing May 1, 2007; and all unpaid principal, interest and charges
      are due upon the maturity date of January 2, 2009.  Principal may be
      prepaid without penalty.  Upon default, the entire P&S Loan amount
      (including accrued unpaid interest and any fees) would be accelerated, and
      the
      Company would be required to pay any costs of collection. The P&S Loan
      Agreement includes certain affirmative covenants, including, without limitation,
      a financial reporting requirement (quarterly – 45 days after the close of a
      calendar quarter), and a requirement that the Company maintain a ratio of
      current assets to current liabilities of at least 1.2:1.0 and a total
      liabilities to tangible net worth ratio not exceeding 2.5:1.0.





The
      P&S Loan Agreement grants P&S Spirit a first position security interest
      with respect to all of the Company’s assets.  The P&S Loan
      Agreement is also backed by a corporate Guaranty by Qualmax (which, pending
      completion of the contemplated merger of Qualmax into the Company, holds a
      controlling interest in the Company), a security interest in the assets of
      Qualmax (consisting solely of 100 shares of the Company’s Preferred Stock,
      convertible
      into 298,673,634 shares of the Company’s Common Stock, par value $0.01
      per share),and by the personal Guaranty of M. David Kamrat, Chairman of the
      Company’s Board and Chief Executive Officer of the Company, as well as a
      director and executive officer of Qualmax.  M. David Kamrat’s personal
      Guaranty is limited to the sum of $1,000,000, although the guaranteed
      obligations include indemnification for certain claims against P&S Spirit
      relating to the P&S Loan Agreement.





The
      Loan
      proceeds have been used by the Company to repay all outstanding principal,
      interest and fees payable to BoA as described above, and to pay certain
      professional fees associated with preparation and negotiation of the P&S
      Loan Agreement.  The principals of P&S Spirit include Dr. Selvin
      Passen, who is a director of the Company, as well as a shareholder of the
      Company and its former Chief Executive Officer, and Dr. Jacob Schorr, who is
      a
      director of the Company.





*Need
      for additional capital.*





In
      the
      past year, we have funded our cash requirements from sales of products, bank
      borrowings and sales of equity securities to and loans from Dr. Selvin Passen
      and others.  Moreover, we have also issued equity securities in
      exchange for services rendered.  During the year ending December 31,
      2006, sales of our products were not sufficient to fund our cash
      requirements.  We had continuing negative cash flow from operating
      activities, and we expect those operating losses and negative cash flow to
      continue into 2007, and it is likely that we will end 2007 with a net
      loss.  As a result, we will continue to rely heavily on borrowings and
      sales of equity securities to fund operations.





Page
            43 of 61
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            of Contents*




In
      2006,
      virtually all of our private equity financing was provided by Dr. Passen and
      a
      related entity, Oregon Spirit, LLC (“***Oregon Spirit***”),
      and P&S Spirit.  Dr. Passen and Oregon Spirit invested a total of
      $1.25 million by purchasing common stock of Qualmax prior to the Reverse
      Acquisition on September 15, 2006.  In addition, P&S Spirit
      invested a total of $3 million in 2006 by purchasing our stock, and it may
      invest an additional $2 million in 2007, and has funded the refinancing of
      the
      BoA Loan in a principal amount of approximately $1 million.  These
      capital infusions, combined with the reduction of long term debt pursuant to
      the
      BOS debt conversion discussed under Item 12, “Certain Relationships and Related
      Transactions, and Director Independence – BOS Debt Conversion,” have
      substantially improved our 2006 year end balance sheet as compared to our
      balance sheet at the end of the third quarter of 2006.





As
      discussed in Item 5, “Market for Common Equity and Related Stockholder Matters
      and Small Business Issuer Purchases of Equity Securities Recent Sales of
      Unregistered Securities – P&S Spirit Share Purchase,” we must achieve
      certain EBITDA targets in order to receive Tranches 2 and 3 of the P&S
      Spirit investment.  We believe that if sales of our higher margin
      products increase sufficiently during the first three quarters of 2007, we
      should be able to adequately manage our costs in order to reach those
      targets.  However, an increase in sales depends largely on factors
      beyond our control, and cost management may involve future challenges we don’t
      currently anticipate.





Our
      ability to rely on other sources of capital other is highly uncertain, and
      we
      face a critical need for additional capitalization in order to continue our
      current research and R&D-based business plan.  Management intends
      to continue to seek additional capital actively, however, if capital is
      insufficient, we may need to consider limiting or discontinuing business
      operations that are unprofitable or speculative in the near term, even if
      management continues to believe that those lines of business are likely to
      be
      profitable or otherwise valuable in the longer term. Further, no assurance
      can
      be given that as a result of market changes, business operations or management
      decisions we will not need additional capital more immediately and that, if
      we
      do face such a need, capital will be available when needed in adequate amounts
      or on terms acceptable to us.





**Technology**





As
      a
      result of our acquisition of the IP Gear, Ltd. technology assets, our balance
      sheet reflects a carrying value for our Claro software technology.  As
      of December 31, 2005 our balance sheet reflected an acquisition cost for the
      Claro technology of $3,523,707.  As a result of increases during
      fiscal year 2006 resulting from capitalized R&D, and from revaluation of the
      software due to conversion of BOS royalty and loan obligations to equity, our
      balance sheet as of December 31 ,2006 reflected a Claro software value of
      $5,894,827, before amortization.








Page
            44 of 61
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            of Contents*





**ITEM
                7.**
            **FINANCIAL
                STATEMENTS**





New
      World
      Brands financial statements for the fiscal year ended December 31, 2006 are
      attached hereto.







Page
            45 of 61
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            of Contents*




**NEW
      WORLD BRANDS, INC. AND SUBSIDIARY**





**CONSOLIDATED
      FINANCIAL STATEMENTS**





**DECEMBER
      31, 2006**










**NEW
      WORLD BRANDS, INC. AND SUBSIDIARY**


**TABLE
      OF CONTENTS**


**DECEMBER
      31, 2006**








PageReport
                          of independent registered public accounting firm
                      F-1Financial
                          statements:Consolidated
                          balance sheet
                      F-2Consolidated
                          statements of comprehensive income (loss)
                      F-4Consolidated
                          statements of changes in stockholders' equity
                      F-5Consolidated
                          statements of cash flows
                      F-7Notes
                          to consolidated financial statements
                      F-9








**REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 To
        the
        Audit Committee and Stockholders
 New
        World
        Brands, Inc. and Subsidiary
 Eugene,
        Oregon
 
 We
        have
        audited the accompanying consolidated balance sheet of New World Brands,
        Inc.
        and Subsidiary as of December 31, 2006 and the related consolidated statements
        of income, changes in stockholders’ equity and cash flows for the years ended
        December 31, 2006 and 2005.  These consolidated financial statements
        are the responsibility of the Company's management.  Our
        responsibility is to express an opinion on the consolidated financial statements
        based on our audit.
 
 We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States).  Those standards require
        that we plan and perform the audit to obtain reasonable assurance about whether
        the financial statements are free of material misstatement.  The
        company is not required to have, nor were we engaged to perform, an audit
        of its
        internal control over financial reporting.  Our audit included
        consideration of internal control over financial reporting as a basis for
        designing audit procedures that are appropriate in the circumstances, but
        not
        for the purpose of expressing an opinion on the effectiveness of the company’s
        internal control over financial reporting.  Accordingly, we express no
        such opinion.  An audit also includes examining, on a test basis,
        evidence supporting the amounts and disclosures in the financial statements,
        assessing the accounting principles used and significant estimates made by
        management, as well as evaluating the overall financial statement
        presentation.  We believe that our audits provide a reasonable basis
        for our opinion.
 
 In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the consolidated financial position of New World
        Brands, Inc. and Subsidiary as of December 31, 2006, and the consolidated
        results of its operations and its cash flows for the years ended December
        31,
        2006 and 2005 in conformity with accounting principles generally accepted
        in the
        United States of America.
 
 **BERENFELD,
        SPRITZER, SHECHTER & SHEER**
 
 April
        14,
        2007


F-1





**NEW
      WORLD BRANDS, INC. AND SUBSIDIARY**


**CONSOLIDATED
      BALANCE SHEET**


**DECEMBER
      31, 2006**








**ASSETS****Current
                            Assets:**Cash
                            and cash equivalents
                        
                        $
                        3,396,617Accounts
                            receivable, net
                        
                        
                        1,496,865Inventories,
                            net
                        
                        
                        1,817,824Prepaid
                            expenses
                        
                        
                        175,367Income
                            tax refund receivable
                        
                        
                        403,995Other
                            current assets
                        
                        
                        220,802Total
                            Current Assets
                        
                        
                        7,511,470**Property
                            and Equipment, net**
                        
                        
                        5,839,651**Other
                            Assets:**Deposits
                            and other assets
                        
                        
                        153,411**Total
                            Assets**
                        
                        $
                        13,504,532




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


F-2





**NEW
      WORLD BRANDS, INC. AND SUBSIDIARY**


**CONSOLIDATED
      BALANCE SHEET**


**DECEMBER
      31, 2006**





**LIABILITIES
                                    AND STOCKHOLDERS' EQUITY****Current
                                    Liabilities:**Note
                                    payable, current portion
                                
                                $
                                984,323Capital
                                    lease obligations, current portion
                                
                                
                                169,202Accounts
                                    payable
                                
                                
                                1,238,551Accrued
                                    expenses
                                
                                
                                1,196,746Customer
                                    deposits
                                
                                
                                59,625Advances
                                    from shareholders
                                
                                
                                53,665Total
                                    Current Liabilities
                                
                                
                                3,702,112**Long-Term
                                    Liabilities:**Capital
                                    lease obligations, net of current portion
                                
                                
                                175,147Other
                                
                                
                                53,411Total
                                    Long-Term Liabilities
                                
                                
                                228,558**Total
                                    Liabilities**
                                
                                
                                3,930,670**Commitments
                                    and Contingencies****Stockholders'
                                    Equity:**Preferred
                                    stock, $.01 par value, 1,000 shares authorized,   200
                                    shares designated as Series A preferred stock
                                
                                
                                -Series
                                    A preferred stock, $.01 par value, 200 shares
                                    authorized   116.666974 shares issued and
                                    outstanding
                                
                                
                                1Common
                                    stock, $.01 par value, 50,000,000 shares
                                    authorized,   44,303,939 shares issued and
                                    outstanding
                                
                                
                                443,040Additional
                                    paid-in capital
                                
                                
                                36,462,218Accumulated
                                    other comprehensive loss
                                
                                
                                (49,295
                                )Accumulated
                                    deficit
                                
                                
                                (27,282,102
                                )Total
                                    Stockholders' Equity
                                
                                
                                9,573,862**Total
                                    Liabilities and Stockholders' Equity**
                                
                                $
                                13,504,532





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





F-3





**NEW
      WORLD BRANDS, INC. AND SUBSIDIARY**


**CONSOLIDATED
      STATEMENTS OF COMPREHENSIVE INCOME (LOSS)**


**FOR
      THE YEARS ENDED DECEMBER 31, 2006 AND 2005**








**2006**
                                                  
                                                  
                                                  **2005****Net
                                                      sales:**Resale
                                                      and proprietary hardware
                                                  
                                                  $
                                                  8,800,437
                                                  
                                                  
                                                  $
                                                  9,810,314Wholesale
                                                      carrier service
                                                  
                                                  
                                                  11,330,034
                                                  
                                                  
                                                  
                                                  8,227,22220,130,471
                                                  
                                                  
                                                  
                                                  18,037,536**Cost
                                                      of sales:**Resale
                                                      and proprietary hardware
                                                  
                                                  
                                                  (7,508,726
                                                  )
                                                  
                                                  
                                                  (8,126,649
                                                  )Wholesale
                                                      carrier service
                                                  
                                                  
                                                  (10,382,726
                                                  )
                                                  
                                                  
                                                  (7,411,035
                                                  )(17,891,452
                                                  )
                                                  
                                                  
                                                  (15,537,684
                                                  )**Gross
                                                      profit on sales**
                                                  
                                                  
                                                  2,239,019
                                                  
                                                  
                                                  
                                                  2,499,852**Selling
                                                      general and administrative
                                                      expenses**
                                                  
                                                  
                                                  (7,880,960
                                                  )
                                                  
                                                  
                                                  (2,286,127
                                                  )**Income
                                                      (loss) from operations**
                                                  
                                                  
                                                  (5,641,941
                                                  )
                                                  
                                                  
                                                  213,725**Other
                                                      income and expenses:**Interest
                                                      and other income
                                                  
                                                  
                                                  64,286
                                                  
                                                  
                                                  
                                                  232,340Interest
                                                      and other expenses
                                                  
                                                  
                                                  (320,924
                                                  )
                                                  
                                                  
                                                  (123,831
                                                  )(256,638
                                                  )
                                                  
                                                  
                                                  108,509**Income
                                                      (loss) before income taxes**
                                                  
                                                  
                                                  (5,898,579
                                                  )
                                                  
                                                  
                                                  322,234**Benefit
                                                      (provision) for income taxes**
                                                  
                                                  
                                                  472,905
                                                  
                                                  
                                                  
                                                  (118,229
                                                  )**Net
                                                      income (loss)**
                                                  
                                                  $
                                                  (5,425,674
                                                  )
                                                  
                                                  $
                                                  204,005**Basic
                                                      earnings (loss) per share**
                                                  
                                                  $
                                                  (0.04
                                                  )
                                                  
                                                  $
                                                  0.00**Diluted
                                                      earnings (loss) per share**
                                                  
                                                  $
                                                  (0.04
                                                  )
                                                  
                                                  $
                                                  0.00**Weighted
                                                      average shares outstanding:**Basic
                                                  
                                                  
                                                  125,192,000
                                                  
                                                  
                                                  
                                                  166,861,000Diluted
                                                  
                                                  
                                                  125,192,000
                                                  
                                                  
                                                  
                                                  250,387,000**Comprehensive
                                                      income (loss):**Net
                                                      income (loss)
                                                  
                                                  $
                                                  (5,425,674
                                                  )
                                                  
                                                  $
                                                  204,005Loss
                                                      on foreign currency translation,
                                                      net of income tax benefit
                                                  
                                                  
                                                  (49,295
                                                  )
                                                  
                                                  
                                                  -Comprehensive
                                                      income (loss)
                                                  
                                                  $
                                                  (5,474,969
                                                  )
                                                  
                                                  $
                                                  204,005





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





F-4





**NEW
      WORLD BRANDS, INC. AND SUBSIDIARY**


**CONSOLIDATED
      STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY**


**FOR
      THE YEARS ENDED DECEMBER 31, 2006 AND 2005**








**Accumulated**
                                    
                                    
                                    **Retained****Series
                                        A**
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    **Additional**
                                    
                                    
                                    **Other**
                                    
                                    
                                    **Earnings**
                                    
                                    
                                    **Total****Preferred
                                        Stock**
                                    
                                    
                                    **Common
                                        Stock**
                                    
                                    
                                    **Paid-in**
                                    
                                    
                                    **Comprehensive**
                                    
                                    
                                    **(Accumulated**
                                    
                                    
                                    **Stockholders'****Shares**
                                    
                                    
                                    **Amount**
                                    
                                    
                                    **Shares**
                                    
                                    
                                    **Amount**
                                    
                                    
                                    **Capital**
                                    
                                    
                                    **Loss**
                                    
                                    
                                    **Deficit)**
                                    
                                    
                                    **Equity****Balances
                                        at January 1, 2005**
                                    
                                    
                                    -
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    
                                    107,767,034
                                    
                                    
                                    $
                                    1,077,670
                                    
                                    
                                    $
                                    (1,077,670
                                    )
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    860,642
                                    
                                    
                                    $
                                    860,642Issuances
                                        of stock - 2005Exercise
                                        of stock options in exchange for existing  common stock
                                        shares
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    79,827,423
                                    
                                    
                                    
                                    798,274
                                    
                                    
                                    
                                    (798,274
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Exercise
                                        of stock option
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    1,995,686
                                    
                                    
                                    
                                    19,957
                                    
                                    
                                    
                                    (3,622
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    16,335Issuance
                                        of common stock for cash
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    1,995,686
                                    
                                    
                                    
                                    19,957
                                    
                                    
                                    
                                    85,043
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    105,000Issuance
                                        of stock for equipment
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    7,982,742
                                    
                                    
                                    
                                    79,827
                                    
                                    
                                    
                                    170,173
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    250,000Issuance
                                        of common stock from recapitalization
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    17,105,876
                                    
                                    
                                    
                                    171,059
                                    
                                    
                                    
                                    (171,059
                                    )
                                    
                                    
                                    -Issuance
                                        of common stock resulting from dilutive  provisions of
                                        recapitalization
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    7,127,449
                                    
                                    
                                    
                                    71,274
                                    
                                    
                                    
                                    (71,274
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Issuance
                                        of common stock for cash
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    2,075,214
                                    
                                    
                                    
                                    20,752
                                    
                                    
                                    
                                    165,244
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    185,996Issuance
                                        of common stock for asset acquisition
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    45,554,731
                                    
                                    
                                    
                                    455,547
                                    
                                    
                                    
                                    4,044,453
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    4,500,000Return
                                        of capital in settlement of related
                                        party  receivables
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (10,223
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (10,223
                                    )Net
                                        income - 2005
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    204,005
                                    
                                    
                                    
                                    204,005**Balances
                                        at December 31, 2005**
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    271,431,841
                                    
                                    
                                    
                                    2,714,317
                                    
                                    
                                    
                                    2,332,791
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    1,064,647
                                    
                                    
                                    
                                    6,111,755Issuances
                                        of stock - 2006Additional
                                        common stock issued in consideration  of asset
                                        acquisition
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    5,806,633
                                    
                                    
                                    
                                    58,066
                                    
                                    
                                    
                                    594,321
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    652,387Issuance
                                        of common stock for cash
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    13,315,856
                                    
                                    
                                    
                                    133,159
                                    
                                    
                                    
                                    1,206,841
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    1,340,000Issuance
                                        of common stock in exchange for partial  repayments of principal
                                        on note payable
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    5,981,070
                                    
                                    
                                    
                                    59,811
                                    
                                    
                                    
                                    540,189
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    600,000Issuance
                                        of stock for equipment
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    2,138,235
                                    
                                    
                                    
                                    21,382
                                    
                                    
                                    
                                    193,118
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    214,500Recapitalization
                                        of Qualmax common stock as a result  of the reverse
                                        acquisition
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (298,673,635
                                    )
                                    
                                    
                                    (2,986,735
                                    )
                                    
                                    
                                    2,986,735
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -





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





F-5





**NEW
      WORLD BRANDS, INC. AND SUBSIDIARY**


**CONSOLIDATED
      STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY**


**FOR
      THE YEARS ENDED DECEMBER 31, 2006 AND 2005**








**Accumulated**
                              
                              
                              **Retained****Series
                                  A**
                              
                              
                              
                              
                              
                              
                              
                              
                              **Additional**
                              
                              
                              **Other**
                              
                              
                              **Earnings**
                              
                              
                              **Total****Preferred
                                  Stock**
                              
                              
                              **Common
                                  Stock**
                              
                              
                              **Paid-in**
                              
                              
                              **Comprehensive**
                              
                              
                              **(Accumulated**
                              
                              
                              **Stockholders'****Shares**
                              
                              
                              **Amount**
                              
                              
                              **Shares**
                              
                              
                              **Amount**
                              
                              
                              **Capital**
                              
                              
                              **Loss**
                              
                              
                              **Deficit)**
                              
                              
                              **Equity**Issuances
                                  of stock - 2006 (continued)Recapitalization
                                  of New World Brands as a result of  the reverse
                                  acquisition
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              44,303,939
                              
                              
                              
                              443,040
                              
                              
                              
                              24,278,035
                              
                              
                              
                              -
                              
                              
                              
                              (22,921,075
                              )
                              
                              
                              1,800,000Issuance
                                  of Series A preferred stock as a result of  the reverse
                                  acquisition
                              
                              
                              100
                              
                              
                              
                              1
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (1
                              )
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Issuance
                                  of Series A preferred stock for cash
                              
                              
                              11.160454
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              3,000,000
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              3,000,000Cost
                                  of raising capital
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (150,000
                              )
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (150,000
                              )Issuance
                                  of Series A preferred stock in exchange for  partial repayment
                                  of note payable, accrued royalties  and outsourcing expenses,
                                  and release of obligations  from operating
                                  agreements
                              
                              
                              5.50652
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              1,480,189
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              1,480,189Net
                                  loss - 2006
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (5,425,674
                              )
                              
                              
                              (5,425,674
                              )Loss
                                  on foreign currency translation, net of tax benefit
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (49,295
                              )
                              
                              
                              
                              
                              
                              
                              (49,295
                              )116.666974
                              
                              
                              $
                              1
                              
                              
                              
                              44,303,939
                              
                              
                              $
                              443,040
                              
                              
                              $
                              36,462,218
                              
                              
                              $
                              (49,295
                              )
                              
                              $
                              (27,282,102
                              )
                              
                              $
                              9,573,862





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





F-6





**NEW
      WORLD BRANDS, INC. AND SUBSIDIARY**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**FOR
      THE YEARS ENDED DECEMBER 31, 2006 AND 2005**








**2006**
                                    
                                    **2005****Cash
                                        flows from operating activities:**Net
                                        income (loss)
                                    
                                    $
                                    (5,425,674
                                    )
                                    $
                                    204,005Adjustments
                                        to reconcile net income (loss) to net cashused
                                        in operating activities:Depreciation
                                        and amortization
                                    
                                    
                                    2,164,602
                                    
                                    
                                    182,097Issuance
                                        of stock for royalties and outsourcing expenses
                                    
                                    
                                    356,817
                                    
                                    
                                    -Changes
                                        in operating assets and liabilities:-
                                        Accounts receivable
                                    
                                    
                                    59,894
                                    
                                    
                                    (1,114,127
                                    )-
                                        Inventories
                                    
                                    
                                    663,672
                                    
                                    
                                    (1,131,040
                                    )-
                                        Prepaid expenses
                                    
                                    
                                    112,919
                                    
                                    
                                    (240,669
                                    )-
                                        Income tax refund receivable
                                    
                                    
                                    (403,995
                                    )
                                    
                                    --
                                        Deferred tax asset
                                    
                                    
                                    45,467
                                    
                                    
                                    --
                                        Other current assets
                                    
                                    
                                    (158,605
                                    )
                                    
                                    (39,097
                                    )-
                                        Deposits and other assets
                                    
                                    
                                    229,788
                                    
                                    
                                    (358,199
                                    )-
                                        Accounts payable
                                    
                                    
                                    266,341
                                    
                                    
                                    348,374-
                                        Accrued expenses
                                    
                                    
                                    541,484
                                    
                                    
                                    530,006-
                                        Customer deposits
                                    
                                    
                                    (23,712
                                    )
                                    
                                    83,337-
                                        Income taxes payable
                                    
                                    
                                    -
                                    
                                    
                                    (301,776
                                    )- Deferred
                                        income
                                        taxes
                                    
                                    
                                    (111,540
                                    )
                                    
                                    (11,588
                                    )-
                                        Other liabilities
                                    
                                    
                                    53,411
                                    
                                    
                                    (2,500
                                    )**Net
                                        cash used in operating activities**
                                    
                                    
                                    (1,629,131
                                    )
                                    
                                    (1,851,177
                                    )**Cash
                                        flows from investing activities:**Acquisition
                                        of property and equipment
                                    
                                    
                                    (1,277,327
                                    )
                                    
                                    (385,004
                                    )Net
                                        cash acquired from the reverse acquisition
                                    
                                    
                                    1,800,000
                                    
                                    
                                    -**Net
                                        cash provided by (used in) investing activities**
                                    
                                    
                                    522,673
                                    
                                    
                                    (385,004
                                    )**Cash
                                        flows from financing activities:**Proceeds
                                        from notes payable
                                    
                                    
                                    -
                                    
                                    
                                    3,444,323Payments
                                        of principal on notes payable
                                    
                                    
                                    (1,460,000
                                    )
                                    
                                    (551,711
                                    )Payments
                                        of principal on capital lease obligations
                                    
                                    
                                    (141,153
                                    )
                                    
                                    (5,298
                                    )Net
                                        repayment of advances from shareholders
                                    
                                    
                                    (75,245
                                    )
                                    
                                    100,972Sales
                                        of common and preferred stock
                                    
                                    
                                    4,190,000
                                    
                                    
                                    290,996Exercise
                                        of stock options
                                    
                                    
                                    -
                                    
                                    
                                    16,335**Net
                                        cash provided by financing activities**
                                    
                                    
                                    2,513,602
                                    
                                    
                                    3,295,617**Net
                                        increase in cash and cash equivalents**
                                    
                                    
                                    1,407,144
                                    
                                    
                                    1,059,436**Cash
                                        and cash equivalents, beginning of year**
                                    
                                    
                                    1,989,473
                                    
                                    
                                    930,037**Cash
                                        and cash equivalents, end of year**
                                    
                                    $
                                    3,396,617
                                    
                                    $
                                    1,989,473





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





F-7





**NEW
      WORLD BRANDS, INC. AND SUBSIDIARY**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**FOR
      THE YEARS ENDED DECEMBER 31, 2006 AND 2005**








**2006**
                                                          
                                                          
                                                          **2005****Supplemental
                                                              disclosures of cash
                                                              flow information:****Cash
                                                              paid during the year
                                                              for:**-
                                                              Income taxes
                                                          
                                                          $
                                                          -
                                                          
                                                          
                                                          $
                                                          469,573-
                                                              Interest
                                                          
                                                          $
                                                          178,168
                                                          
                                                          
                                                          $
                                                          123,831**Non-cash
                                                              investing and financing
                                                              activities:**Issuance
                                                              of common stock for
                                                              asset acquisition-
                                                              Inventories
                                                          
                                                          
                                                          79,179
                                                          
                                                          
                                                          $
                                                          800,000-
                                                              Property and equipment
                                                          
                                                          
                                                          573,208
                                                          
                                                          
                                                          
                                                          3,700,000-
                                                              Additional paid-in
                                                              capital
                                                          
                                                          
                                                          (652,387
                                                          )
                                                          
                                                          
                                                          (4,500,000
                                                          )$
                                                          -
                                                          
                                                          
                                                          $
                                                          -Issuance
                                                              of stock for payment
                                                              of note payable-
                                                              Note payable
                                                          
                                                          $
                                                          600,000
                                                          
                                                          
                                                          $
                                                          --
                                                              Additional paid-in
                                                              capital
                                                          
                                                          
                                                          (600,000
                                                          )
                                                          
                                                          
                                                          -$
                                                          -
                                                          
                                                          
                                                          $
                                                          -Issuance
                                                              of common stock for
                                                              property and equipment-
                                                              Fair value of property
                                                              and equipment acquired
                                                          
                                                          $
                                                          214,500
                                                          
                                                          
                                                          $
                                                          250,000-
                                                              Additional paid-in
                                                              capital
                                                          
                                                          
                                                          (214,500
                                                          )
                                                          
                                                          
                                                          (250,000
                                                          )$
                                                          -
                                                          
                                                          
                                                          $
                                                          -Issuance
                                                              of preferred stock
                                                              for partial repayment
                                                              of note payable, accrued
                                                              royalties and outsourcing
                                                              expenses, and release
                                                              of obligations from
                                                              operating agreements-
                                                              Note payable
                                                          
                                                          $
                                                          400,000
                                                          
                                                          
                                                          $
                                                          --
                                                              Royalties and outsourcing
                                                              expenses
                                                          
                                                          
                                                          356,817-
                                                              Property and equipment
                                                          
                                                          
                                                          723,372
                                                          
                                                          
                                                          
                                                          --
                                                              Additional paid-in
                                                              capital
                                                          
                                                          
                                                          (1,480,189
                                                          )
                                                          
                                                          
                                                          -$
                                                          -
                                                          
                                                          
                                                          $
                                                          -Acquisition
                                                              of property and equipment
                                                              through capital lease
                                                              obligations-
                                                              Fair value of property
                                                              and equipment acquired
                                                          
                                                          $
                                                          387,384
                                                          
                                                          
                                                          $
                                                          103,416-
                                                              Capital lease obligations
                                                              incurred
                                                          
                                                          
                                                          (387,384
                                                          )
                                                          
                                                          
                                                          (103,416
                                                          )$
                                                          -
                                                          
                                                          
                                                          $
                                                          -Reclassification
                                                              of related party transactions-
                                                              Advances from shareholders
                                                          
                                                          $
                                                          -
                                                          
                                                          
                                                          $
                                                          (10,223
                                                          )-
                                                              Additional paid-in
                                                              capital
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          10,223$
                                                          -
                                                          
                                                          
                                                          $
                                                          -





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





F-8


**NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 **NOTE
                    A    –**
                **ORGANIZATION,
                    CAPITALIZATION AND SUMMARY OF SIGNIFICANT **ACCOUNTING
                    POLICIES****
  **Organization
          and Basis of Presentation**
 
 New
          World
          Brands, Inc. (“***New World Brands***”, the
“***Company***”, “***we***”,
          “***us***” or “***our***”) is a Delaware
          corporation that until September 15, 2006 was an importer of wine and spirits
          beverages for sale and distribution throughout the United States.  On
          September 15, 2006, we sold our wine and spirits business, and, by way
          of a
          reverse acquisition, acquired all of the assets and assumed all of the
          liabilities of Qualmax, Inc., a Delaware corporation
          (“***Qualmax***” and the reverse acquisition the
“***Reverse Acquisition***”).
 
 As
          a
          result of the Reverse Acquisition we are no longer in the wine and spirits
          business, and instead we are now a telecommunications research and development,
          sales, and service company, focusing on products and services utilizing
          voice
          over internet protocol (“***VoIP***”)
          technology.  We develop, manufacture and sell our own line of VoIP
          technology products through our wholly owned subsidiary, IP Gear, Ltd.,
          an
          Israeli corporation (“***IP Gear, Ltd.***”).  We
          are also a reseller of VoIP related telecommunications equipment, and a
          reseller
          of wholesale VoIP telephony service.
 
 Our
          acquisition of Qualmax and its wholly owned subsidiary IP Gear, Ltd. was
          accounted for as a reverse acquisition.  Although New World Brands was
          the company that made the acquisition, Qualmax was treated as the surviving
          company for accounting purposes.  As a result, the accompanying
          financial statements reflect the results of operations and cash flows of
          Qualmax
          and IP Gear, Ltd. prior to September 15, 2006, and the financial position,
          results of operations, and cash flows of New World Brands, Qualmax, and
          IP Gear,
          Ltd. from and after September 15, 2006.
 
 All
          inter-company accounts and transactions have been eliminated in
          consolidation.
 
 On
          September 15, 2006 the Company changed its fiscal year end from May 31
          to
          December 31, which is Qualmax’s fiscal year end.  The change in fiscal
          year results from the acquisition of Qualmax and IP Gear, Ltd., which was
          accounted for as a reverse acquisition.
 
 **Reverse
          Acquisition Accounting**
 
 In
          June
          2006, New World Brands determined to change its business plan by selling
          its
          wine and spirits business for the sum of $500,000 (the “***Sale
          Transaction***”), issuing 7,500,000 shares of common stock for
          $1,500,000 (the “***Private Equity Investment***”), and
          merging with Qualmax and its wholly owned subsidiary IP Gear, Ltd. under
          the Reverse Acquisition.  The Sale Transaction and Private Equity
          Investment each took place on September 14, 2006, after which New World
          Brands
          assets consisted solely of cash in the
  F-9
  **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    A    –**
                **ORGANIZATION,
                    CAPITALIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
                    (CONTINUED)**
  amount
          of
          $2,000,000, and certain contract rights under the Reverse Acquisition agreement
          with Qualmax.  The Reverse Acquisition was completed on September 15,
          2006, subject to shareholder ratification and certain filings and amendments
          that are necessary to finalize the merger.
 
 Pursuant
          to the Reverse Acquisition, New World Brands issued 100 shares of its Series
          A
          Convertible Preferred Stock (the “***Preferred Stock***”) to
          Qualmax.  The preferred stock was issued because New World Brands did
          not have sufficient authorized and available common stock shares to issue
          on
          September 15, 2006 when the Reverse Acquisition was consummated.  The
          Preferred Stock represented, as of September 15, 2006, the right to vote
          approximately eighty-six percent (86%) of the issued and outstanding shares
          of
          our capital stock, calculated under the premise that the Preferred Stock
          had
          been converted to the appropriate number of shares of our common stock
          (meaning,
          on an “as-converted” basis).
 
 The
          Boards of Directors of New World Brands and Qualmax (the
“***Boards***”) have each agreed that Qualmax will be merged
          with the Company (the “***Merger***”), after which the
          separate corporate existence of Qualmax shall cease.
 
 The
          Boards have agreed that the following events (the “***Merger
          Events***”) must occur in order to complete the Merger.
  1.
                Any
                    filings that may be necessary to complete the
                    Merger.
  2.
                The
                    stockholders of New World Brands and Qualmax must approve the
                    Merger.  Qualmax, in its capacity as the holder of Preferred
                    Stock currently holding (as of the date of these financial statements)
                    the
                    right to vote approximately seventy-six percent (76%) of the
                    issued and
                    outstanding shares of our capital stock, calculated on an as-converted
                    basis, has agreed to vote its shares in favor of the Merger,
                    and Qualmax
                    will cease to exist once the Merger is
                    completed.
  The
          acquisition of Qualmax resulted in a change of control of New World
          Brands.  As a result of the reverse acquisition accounting treatment,
          Qualmax is deemed to be the acquiring company for accounting
          purposes.  Effective on the acquisition date of September 15, 2006,
          New World Brands’ consolidated balance sheet included the assets and liabilities
          of Qualmax and its wholly owned subsidiary IP Gear, Ltd. and its consolidated
          equity accounts were recapitalized to reflect the combined equity of New
          World
          Brands, Qualmax and IP Gear, Ltd. Consolidated financial statements for
          the year
          ended December 31, 2005 are those of Qualmax and IP Gear, Ltd.
          only.
  F-10
  **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    A    –**
                **ORGANIZATION,
                    CAPITALIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
                    (CONTINUED)**
  **Basis
          of Accounting and Revenue Recognition**
 
 The
          accompanying consolidated financial statements have been prepared using
          the
          accrual method of accounting.  Revenues from our VoIP telephony
          services division have been recognized as services are
          rendered.  Revenue from the sale of products from our own line of VoIP
          equipment or reseller equipment is recognized as our customers take delivery
          of
          our products.  Any amounts received from our customers in advance are
          recorded as customer deposits and classified as other current
          liabilities.
 
 **Use
          of Estimates**
 
 The
          preparation of consolidated 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 disclosure of contingent assets and liabilities
          at
          the date of the consolidated financial statements and the reported amounts
          of
          revenues and expenses during the reporting period.  Accordingly,
          actual results could differ from those estimates.
 
 **Cash
          and Cash Equivalents**
 
 The
          Company considers all highly liquid investments in debt instruments purchased
          with original maturities of three months or less to be cash
          equivalents.
 
 **Accounts
          Receivable**
 
 Accounts
          receivable are presented at net realizable value, which is comprised of
          total
          accounts receivable less any allowances for uncollectible
          accounts.  The Company provides an allowance for potentially
          uncollectible accounts based upon a periodic review and analysis of outstanding
          accounts receivable balances.  The resulting estimate of uncollectible
          receivables is charged to an allowance for doubtful
          accounts.  Recoveries of accounts previously written off are used to
          offset the allowance account in the periods in which the recoveries are
          made.  Accordingly, as of December 31, 2006 and 2005, accounts
          receivable has been written down to its estimated net realizable value,
          and
          results of operations for the year ended December 31, 2006 and 2005 include
          corresponding charges of approximately $437,000 and $144,000,
          respectively.  The allowance for doubtful accounts as of December 31, 2006
          was approximately $143,000.
  F-11
  **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    A    –**
                **ORGANIZATION,
                    CAPITALIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
                    (CONTINUED)**
  **Inventories**
 
 Inventories
          are valued at the lower of cost or market. Cost is determined on a
          first-in, first-out basis.  Market represents the lower of replacement
          cost or net realizable value on inventories as a whole.  Inventories
          are made up primarily of high technology telephone switching and VoIP routing
          equipment and their parts.  Some of these inventories are manufactured
          and may include finished goods, work in process or unassembled
          components.  The majority of inventories are finished goods for resale
          that were purchased from other manufacturers.  Due to rapid
          technological advancements in the industry, inventories may, from time
          to time,
          be subject to impairment and obsolescence.  We record an allowance for
          slow-moving and obsolete inventories based upon a periodic review and analysis
          of inventories on hand.  During 2006, we segregated our obsolete and
          slow-moving inventories, which were comprised of outdated telephone switching
          and VoIP routing equipment.  Accordingly, the allowance for obsolete
          inventories as of December 31, 2006 was approximately $246,000.
 
 **Concentration
          of Credit Risk**
 
 From
          time
          to time, the Company has cash in financial institutions in excess of federally
          insured limits.  However, the Company has not experienced any losses
          in such accounts and believes it is not exposed to any significant credit
          risk
          on its cash balances.  Cash exceeding federally insured limits
          amounted to approximately $3,170,000 as of December 31, 2006.
 
 **Business
          Concentrations**
 
 We
          did
          not have any single supplier that represented more than ten percent of
          purchases
          or any single customer that represented more than ten percent of sales
          during
          the year ended December 31, 2006.  We had three major suppliers that
          accounted for 48% of our purchases but no single customer that represented
          more
          than ten percent of sales during the year ended December 31, 2005.
 
 **Impairment
          of Long-Lived Assets and Long-Lived Assets Subject to
          Disposal**
 
 We
          review
          our long-lived assets for impairment whenever events or changes in circumstances
          indicate that the carrying amount of an asset may not be recoverable, in
          accordance with Statement of Financial Accounting Standards
          (“***SFAS***”) No. 144.  Recoverability of assets
          to be held and used is measured by a comparison of the carrying
  F-12
  **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    A    –**
                **ORGANIZATION,
                    CAPITALIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
                    (CONTINUED)**
  **Impairment
          of Long-Lived Assets and Long-Lived Assets Subject to Disposal
          (Continued)**
 
 amount
          of
          an asset to future undiscounted cash flows expected to be generated by
          the
          asset.  If such assets are considered to be impaired, the impairment
          to be recognized is measured by the amount by which the carrying amount
          of the
          assets exceeds its fair value.  Assets subject to disposal are
          reported at the lower of the carrying amount or fair value less costs to
          sell.  We had no impairment of our long-lived assets during the years
          ended December 31, 2006 or 2005.
 
 **Property
          and Equipment**
 
 Property
          and equipment are recorded at cost.  For financial statement purposes,
          depreciation of software, furniture and equipment is computed using the
          straight-line method over their estimated useful lives of the assets while
          leasehold improvements are amortized over the shorter of their estimated
          useful
          lives or the terms of their respective leases.  Expenditures for
          replacements, maintenance and repairs that do not extend the lives of the
          assets
          are charged to operations as the expenses are incurred.  When assets
          are retired, sold or otherwise disposed of, their costs and related accumulated
          depreciation are removed from the accounts and resulting gains or losses
          are
          reflected in the year of disposal.
 
 **Stock
          Options**
 
 Effective
          January 1, 2006, we adopted the fair value method of accounting for awards
          of
          employee stock and options in accordance with SFAS No. 123, “Accounting for
          Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for
          Stock-Based Compensation, Transition and Disclosure,” and SFAS No. 123R,
“Share-Based Payment.” These standards require the cost associated with employee
          services in exchange for equity instruments based on the grant date fair
          value
          of the award, be recognized over the period during which the employee is
          required to provide services in exchange for the award. No compensation
          cost is
          recognized for awards for which employees do not render the requisite service.
          Because the Company changed its method of accounting from the intrinsic
          method
          as per APB Opinion No. 25, upon adoption, the grant date fair value of
          employee
          share options was estimated using the Black-Scholes model. Compensation
          cost for
          the unvested portion of equity awards granted prior to January 1, 2006,
          will be
          recognized over the remaining vesting periods. Due to the prospective adoption
          of SFAS No. 123R, results of operations for prior periods have not been
          restated.
 
 Prior
          to
          2006, the Company applied the intrinsic-value-based method of accounting
          prescribed by Accounting Principles Board (APB) Opinion No. 25, *Accounting
          for stock*
  F-13
  **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    A    –**
                **ORGANIZATION,
                    CAPITALIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
                    (CONTINUED)**
  **Stock
          Options (Continued)**
 
 *issued
          to Employees,* and related interpretations including FASB Interpretation No.
          44, *Accounting for Certain Transactions involving Stock Compensation—an
          interpretation of APB Opinion No. 25,* issued in March 2000, to account for
          its fixed-plan stock options. Under this method, compensation expense was
          recorded on the date of grant only if the current market price of the underlying
          stock exceeded the exercise price. SFAS No. 123, *Accounting for Stock-Based
          Compensation,* established accounting and disclosure requirements using a
          fair-value-based method of accounting for stock-based employee compensation
          plans. As allowed by SFAS No. 123, the Company elected to continue to apply
          the
          intrinsic-value-based method of accounting described above, and had adopted
          only
          the disclosure requirements of SFAS No. 123. See Note G, Stock Option
          Plans.
 
 **Software
          Costs**
 
 Certain
          computer software development costs are capitalized in the accompanying
          consolidated balance sheet in accordance with SFAS No. 86, *Accounting for
          the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed*.
          Capitalization of computer software development costs begins upon the
          establishment of technological feasibility. Capitalization ceases and
          amortization of capitalized costs begins when the software product is
          commercially available for general release to customers. Amortization of
          capitalized computer software development costs is included in general
          and
          administrative expenses and is provided using the straight-line method
          over the
          remaining estimated economic life of the product, not to exceed three
          years.  Net unamortized software costs as of December 31, 2006
          amounted to approximately $4,080,000.  Amortization of software costs
          for the years ended December 31, 2006 and 2005 was approximately $1,815,000
          and
          $0, respectively.
 
 **Segment
          Information**
 
 Our
          business consists of three operating segments: (i) proprietary hardware,
          which
          is our VoIP technology development and equipment manufacturing subsidiary
          that
          is located in Israel, IP Gear, Ltd.; (ii) resale hardware, which is the
          sale and
          distribution of VoIP and other telephony equipment and related professional
          services via our U.S.-based business operated under the name "IP Gear";
          and
          (iii) wholesale carrier services, which is telephony service resale and
          direct
          call routing via our U.S.-based VoIP service business operated under the
          name
          "IP Gear Connect".  See Note P – Business Segment
          Reporting.
  F-14
  **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    A    –**
                **ORGANIZATION,
                    CAPITALIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
                    (CONTINUED)**
  **Fair
          Value of Financial Instruments**
 
 Our
          financial instruments consist primarily of cash, certificates of deposit,
          accounts receivable, accounts payable, accrued liabilities and notes
          payable.  The carrying amounts of such financial instruments
          approximate their respective estimated fair values due to the short-term
          maturities and approximate market interest rates of these
          instruments.  The estimated
          fair values are not necessarily indicative of the amounts we would realize
          in a
          current market exchange or from future earnings or cash flows.
 
 **Earnings
          per Share**
 
 Net
          income per share is computed in accordance with SFAS No. 128, “Earnings per
          Share.” Basic net income per share is based upon the weighted average number of
          common shares outstanding during the period. Diluted net income per share
          is
          based upon the weighted average number of common shares outstanding and
          dilutive
          common stock equivalents outstanding during the period. Common stock equivalents
          are options and warrants granted by the Company and are calculated under
          the
          treasury stock method. Common equivalent shares from unexercised stock
          options
          and warrants are excluded from the computation when there is a loss as
          their
          effect is antidilutive, or if the exercise price of such options and warrants
          is
          greater than the average market price of the stock for the
          period.  See Note F for the computation of basic and diluted
          share data.
 
 **Income
          Taxes**
 
 We
          account for income taxes in accordance with SFAS No. 109 *“Accounting for
          Income Taxes”*,**which requires recognition of deferred tax
          assets and liabilities for expected future tax consequences of events that have
          been included in the consolidated financial statements or tax
          returns.  Under this method, deferred tax assets and liabilities are
          determined based on the difference between the financial statement and
          tax bases
          of assets and liabilities using enacted tax rates in effect for the year
          in
          which the differences are expected to reverse.  Valuation allowances
          are established when necessary to reduce deferred tax assets amounts expected
          to
          be realized.  IP Gear, Ltd. files an individual income tax return in
          Israel.  U.S. income taxes are not provided on undistributed earnings,
          which are expected to be permanently reinvested by the foreign subsidiary,
          unless the earnings can be repatriated in a tax-free or cash-flow neutral
          manner.
  F-15
  **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    A    –**
                **ORGANIZATION,
                    CAPITALIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
                    (CONTINUED)**
  **Advertising
          and Promotional Costs**
 
 We
          expense advertising and promotional costs as incurred.  Advertising
          and promotional expenses amounted to approximately $283,000 and $88,000
          for the
          years ended December 31, 2006 and 2005, respectively.
 
 **Leases**
 
 We
          account for leases in accordance with SFAS No.13 *“Accounting for
          Leases”*, under which we perform a review of each newly acquired lease to
          determine as whether it should be treated either as a capital or an operating
          lease.  A capital lease asset is capitalized and depreciated over the
          term of the initial lease.  A liability equal to the present value of
          the aggregated lease payments is recorded utilizing the stated lease interest
          rate.  If an interest rate is not stated, we will determine our
          estimated incremental borrowing rate.
 
 **Foreign
          Currency Translation**
 
 IP
          Gear,
          Ltd.’s functional currency is the New Israeli Shekel, which is its local
          currency. Accordingly, balance sheet accounts are translated at the exchange
          rate in effect at the end of the year and income statement accounts are
          translated at the average exchange rate for the year.  Translation
          gains and losses are included as a separate component of stockholders’ equity as
          cumulative translation adjustments.  Foreign currency transaction
          gains and losses are included in operations as other income and
          expenses.  For the years ended December 31, 2006 and 2005, foreign
          currency transaction losses were approximately $30,000 and $0,
          respectively.
 
 **Comprehensive
          Income (Loss)**
 
 Comprehensive
          income is comprised of net income and other comprehensive income. Other
          comprehensive income includes certain changes in equity that are excluded
          from
          net income.  As of December 31, 2006, the Company’s net accumulated
          other comprehensive loss of approximately $49,000 was comprised of the
          cumulative foreign currency translation loss in the amount of approximately
          $79,000 less deferred tax benefit on the foreign currency translation loss
          of
          approximately $30,000.  As of December 31, 2005, there were no
          components of comprehensive income other than net income.
  F-16
  **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    A    –**
                **ORGANIZATION,
                    CAPITALIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
                    (CONTINUED)**
 
 **Recent
          Accounting Pronouncements**
 
 In
          February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS
          No. 159, *The Fair Value Option for Financial Assets and Financial
          Liabilities*.  SFAS No. 159 permits entities to choose to
          measure eligible financial instruments at fair values.  The unrealized
          gains and losses on items for which the fair value option has been elected
          should be reported in earnings.  The decision to elect the fair value
          options is determined on an instrument by instrument basis, should be applied
          to
          an entire instrument, and is irrevocable.  Assets and liabilities
          measured at fair values pursuant to the fair value option should be reported
          separately in the balance sheet from those instruments measured using other
          measurement attributes.  SFAS No. 159 is effective as of the
          beginning of the first
          fiscal year that begins after November 15, 2007.  We are
          currently analyzing the potential impact of adoption of SFAS No. 159 on our
          consolidated financial statements.
 
 In
          September 2006, the Securities and Exchange Commission (“SEC”) issued Staff
          Accounting Bulletin (“SAB”) No. 108, *Considering the Effects of Prior
          Year Misstatements when Quantifying Misstatements in Current Year Financial
          Statements*.  SAB 108 provides guidance on the consideration of
          effects of the prior year misstatements in quantifying current year
          misstatements for the purpose of a materiality assessment.  The SEC
          staff believes registrants must quantify errors using both a balance sheet
          and
          income statement approach and evaluate whether either approach results
          in
          quantifying a misstatement that, when all relevant quantitative and qualitative
          factors are considered, is material.  SAB 108 was effective for the
          first annual period ending after November 15, 2006 with early application
          encouraged.  We adopted the provisions of SAB 108 in 2006 and the
          impact of adoption was not material to our consolidated financial
          statements.
 
 In
          September 2006, the FASB issued SFAS No. 157, *Fair Value
          Measurements*.  SFAS No. 157 defines fair value, establishes a
          framework for measuring fair value in generally accepted accounting principles
          and expands disclosures about fair value measurements. SFAS No. 157 is
          effective
          for financial statements issued for fiscal years beginning after
          November 15, 2007 and interim periods within those fiscal
          years.  We do not anticipate that the adoption of this standard will
          have a material impact on our consolidated financial statements.
 
 In
          June
          2006, the FASB issued Interpretation No. 48, *Accounting for Uncertainty
          in Income Taxes-an interpretation of SFAS 109,* (“FIN 48”).  FIN
          48 provides interpretive guidance for the financial statement recognition
          and
          measurement of a tax position taken or expected to be taken in a tax
          return.  FIN 48 is effective for fiscal years beginning after
          December 15, 2006.  We are reviewing the impact of adopting FIN
          No. 48, but we do not anticipate that the impact will be material to our
          consolidated financial statements.
  F-17
  **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    A    –**
                **ORGANIZATION,
                    CAPITALIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
                    (CONTINUED)**
 
 **Recent
          Accounting Pronouncements (Continued)**
 
 In
          March
          2006, the FASB issued SFAS No. 156, *Accounting for Servicing of
          Financial Assets*, which will be effective for fiscal years that begin after
          December 15, 2006.  This statement amends SFAS No. 140,
*Accounting for Transfers and Servicing of Financial Assets and
          Extinguishments of Liabilities, a replacement of FASB Statement 125,* or
          SFAS No. 140*,* regarding (1) the circumstances under which a
          servicing asset or servicing liability must be recognized, (2) the initial
          and subsequent measurement of recognized servicing assets and liabilities,
          and
          (3) information required to be disclosed relating to servicing assets and
          liabilities.  We do not anticipate that the adoption of this standard
          will have a material impact on our consolidated financial
          statements.
 
 In
          February 2006, the FASB issued SFAS No. 155, *Accounting for Certain
          Hybrid Financial Instruments,* or SFAS No. 155, which will be effective for
          fiscal years that begin after December 15, 2006.  This statement
          amends SFAS No. 133, *Accounting for Derivative Instruments and Hedging
          Activities*, to narrow the scope exception for interest-only and
          principal-only strips on debt instruments to include only such strips
          representing rights to receive a specified portion of the contractual interest
          or principal cash flows.  SFAS No.****155 also
          amends SFAS No.****140 to allow qualifying special-purpose
          entities to hold a passive derivative financial instrument pertaining to
          beneficial interests that are derivative financial instruments.  We do
          not anticipate adoption of this standard will have a material impact on
          our
          consolidated financial statements.
 
 In
          May
          2005, the FASB issued SFAS No. 154, *Accounting Changes and Error
          Corrections,* which was adopted effective January 1,
          2006.  This statement addresses the retrospective application of such
          changes and corrections and will be followed if and when necessary. Adoption
          of
          this standard did not have a material impact on our consolidated financial
          statements.
  F-18
  **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    B    –**
                **INVENTORIES**
 
 Inventories
          as of December 31,2006
          consisted
          of the following:
 
 Resale
                                    Hardware
                                  
                                  
                                  Proprietary
                                    Hardware
                                  
                                  
                                  TotalRaw
                                      materials
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  313,200
                                  
                                  
                                  $
                                  313,200Work-in
                                      progress
                                  
                                  
                                  -
                                  
                                  
                                  
                                  145,221
                                  
                                  
                                  
                                  145,221Finished
                                      goods
                                  
                                  
                                  979,727
                                  
                                  
                                  
                                  625,316
                                  
                                  
                                  
                                  1,605,043Total
                                      inventories
                                  
                                  
                                  979,727
                                  
                                  
                                  
                                  1,083,737
                                  
                                  
                                  
                                  2,063,464Less
                                      allowance for obsolete inventories
                                  
                                  
                                  (93,975
                                  )
                                  
                                  
                                  (151,665
                                  )
                                  
                                  
                                  (245,640
                                  )Inventories,
                                      net
                                  
                                  $
                                  885,752
                                  
                                  
                                  $
                                  932,072
                                  
                                  
                                  $
                                  1,817,824
 
 **NOTE
                    C    –**
                **PROPERTY
                    AND EQUIPMENT**
  As
          of
          December 31,2006,
          our
          property and equipment consisted of the following:
 
 Useful
                                        Lives
                                      (In
                                        Years)Operating
                                        equipment
                                    
                                    $
                                    1,483,898
                                    
                                    
                                    
                                    5Rental
                                        equipment
                                    
                                    
                                    101,056
                                    
                                    
                                    
                                    5Leasehold
                                        improvements
                                    
                                    
                                    232,519
                                    
                                    
                                    
                                    15Computer
                                        software
                                    
                                    
                                    6,297,206
                                    
                                    
                                    
                                    3
                                        -
                                        5Furniture
                                        and fixtures
                                    
                                    
                                    62,206
                                    
                                    
                                    
                                    5
                                        -
                                        10Other
                                    
                                    
                                    4,100
                                    
                                    
                                    
                                    5Total
                                        property and equipment
                                    
                                    
                                    8,180,985Less
                                        accumulated depreciation and amortization
                                    
                                    
                                    2,341,334Property
                                        and equipment, net
                                    
                                    $
                                    5,839,651Operating
                                        equipment acquired under capital leases
                                    
                                    $
                                    489,007Less
                                        accumulated amortization
                                    
                                    
                                    (82,527
                                    )$
                                    406,480
 
 Depreciation
          and amortization expense amounted to approximately $2,165,000 and $182,000
          for
          the years ended December 31, 2006 and 2005,
          respectively.  Amortization of
  F-19
  **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    C    –**
                **PROPERTY
                    AND EQUIPMENT
                    (CONTINUED)**
 
 leased
          equipment, which has been included in depreciation expense on the accompanying
          financial statements, was approximately $77,000 and $6,000 for the years
          ended
          December 31, 2006 and 2005, respectively.
 
 
 **NOTE
                    D    –**
                **NOTES
                    PAYABLE**
 
 **Bank
          of America, N.A.**
 
 We
          maintained a line of credit facility with Bank of America, N.A. (“***B
          of A***”) during 2006.  In September 2006, the line of
          credit was converted into a term loan in the amount of approximately $985,000
          that was due on March 31, 2007.  Interest only was payable monthly at
          B of A’s prime rate (B of A prime was 8.25% at December 31, 2006) plus
          3%.  As of December 31, 2006, the outstanding principal balance on the
          note payable was $984,323.
 
 The
          loan
          was secured by the assets of the Company, and as a condition of the note
          payable, ***B of A***required us to maintain a current
          assets to current liabilities ratio of at least 1.2 to 1 and a total liabilities
          to tangible net worth ratio that is not to exceed 2.5 to 1.  For the
          year ended December 31, 2006, the Company was in compliance with these
          ratios,
          and with all other terms of the loan.
 
 The
          entire principal balance was subsequently paid on March 30, 2007, in a
          transaction described in more detail in Note L, Subsequent Events and Other
          Matters, under the heading “Term Loan and Repayment of Line of Credit with B of
          A.”
 
 Total
          maturities of notes payable as of December 31, 2006 were as
          follows:
 
 2007
                              
                              $
                              984,323Total
                                  notes payable
                              
                              
                              984,323Notes
                                  payable, current portion
                              
                              
                              984,323Notes
                                  payable, net of current portion
                              
                              $
                              -
 
 Interest
          expense on the notes payable was approximately $142,000 and $109,000 for
          the
          years ended December 31, 2006 and 2005, respectively.
 
 **B.O.S.
          Better Online Systems Ltd.**
 
 In
          December 2005, we acquired certain assets of Better Online Solutions
          Ltd.
  F-20
  **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    D    –**
                **NOTES
                    PAYABLE (CONTINUED)**
 
 **B.O.S.
          Better Online Systems Ltd. (Continued)**
 
 (“***BOS***”)
          and contributed them into our wholly owned Israeli subsidiary, IP Gear,
          Ltd.  As a condition of the acquisition by Qualmax of the BOS VoIP and
          GSM product lines and related technology, BOS agreed to lend to the Company
          a
          total of $1,000,000 on December 31, 2005 (the “***BOS
          Loan***”).  The entire principal and interest balance of
          the BOS Loan was repaid during 2006 in three portions, each by the issuance
          of
          capital stock.  The first two such issuances, as payment of principal
          in the amounts of $350,000 on June 30, 2006 and $250,000 on July 31, 2006,
          were
          of the common stock of Qualmax.  The final such issuance, in the
          principal amount of $400,000 and all remaining unpaid interest, effective
          December 31, 2006, was of the Preferred Stock of the Company, and as of
          December
          31, 2006 the Company was no longer indebted to BOS in any amount.  The
          December 31, 2006 issuance of Preferred Stock in exchange for release from
          the
          BOS Loan and other obligations is discussed in more detail in Note F,
          Stockholders’ Equity, under the heading “Preferred Stock.”
 
 **NOTE
                    E    –**
                **CAPITAL
                    LEASE OBLIGATIONS**
 
 We
          currently lease equipment pursuant to seven capital lease
          agreements.  In conjunction therewith, the Company has capitalized the
          cost of the equipment in the amount of $489,000, which is the present value
          of
          the lease payments.    Interest expense on the capital lease
          obligations amounted to approximately $36,000 and $1,700 for the years
          ended
          December 31, 2006 and 2005, respectively.  Future minimum lease
          payments required under the capital leases as of December 31, 2006 were
          as
          follows:
 
 2007
                                    
                                    $
                                    194,0492008
                                    
                                    
                                    176,5662009
                                    
                                    
                                    7,027Total
                                    
                                    
                                    377,642Less:
                                        amounts representing interest
                                    
                                    
                                    (33,293
                                    )Present
                                        value of net minimum lease payments
                                    
                                    
                                    344,349Capital
                                        lease obligations, current portion
                                    
                                    
                                    169,202Capital
                                        lease obligations, net of current portion
                                    
                                    $
                                    175,147
  F-21
  **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    F    –**
                **STOCKHOLDERS’
                    EQUITY**
 
 **Capitalization**
 
 The
          Company’s authorized capital stock consists of 50,000,000 shares of common
          stock, $.01 par value per share, and 1,000 shares of preferred stock, $.01
          par
          value.  There were 44,303,939 shares of common stock and 116.666974
          shares of Series A Convertible Preferred Stock outstanding as of December
          31, 2006.
 
 The
          board
          of directors has the authority, without action by the Company’s stockholders, to
          provide for the issuance of preferred stock in one or more classes or series
          and
          to designate the rights, preferences and privileges of each class or series,
          which may be greater than the rights of the common stock.
 
 **Common
          Stock**
 
 As
          of
          December 31, 2006, our total number of authorized common stock, $.01 par
          value,
          was 50 million shares, with 44,303,909 shares issued and
          outstanding.  On February 1, 2007 our board acted to increase the
          number of authorized common stock to 600 million shares. The additional
          common
          stock shares will become available upon the effectiveness, by shareholder
          action, of an amendment to our certificate of incorporation. Upon
          authorization of the additional common shares, all Series A Convertible
          Preferred Shares will automatically convert to common shares at a ratio
          of
          2,986,736 common shares for every one preferred share.
 
 Stockholders’
          equity transactions prior to the New World Brands/Qualmax, Inc. merger
          date have
          been retroactively restated for the equivalent number of shares received
          in the
          merger after giving effect to any difference in par value of the issuer’s and
          acquirer’s stock with an offset to paid-in capital.
 
 **Preferred
          Stock**
 
 As
          of
          December 31, 2006, we had 1,000 shares of authorized preferred stock, $.01
          par
          value.  In connection with the transactions contemplated by the
          Reverse Acquisition, the Board authorized the creation and issuance of
          shares of
          voting preferred stock designated as “Series A Convertible Preferred Stock” (the
“***Preferred Stock***”).  The terms, rights,
          preferences and privileges of the Preferred Stock are set forth in a Certificate
          of Designation filed with the Secretary of State of the State of Delaware
          on
          August 30, 2006, as amended on January 8, 2007 to increase the authorized
          number
          of shares of Preferred Stock from 100 to 200 (the “***Certificate of
          Designation***”).  Pursuant to the Reverse Acquisition, the
          Company issued 100 shares of Preferred Stock to Qualmax, which shares of
          Preferred Stock are convertible into 298,673,634 shares of Common Stock
          and
          which represent more than a majority of the voting power of the Company’s issued
          and
  F-22
  **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    F    –**
                **STOCKHOLDERS’
                    EQUITY (CONTINUED)**
 
 **Preferred
          Stock (Continued)**
 
 outstanding
          shares of capital stock (on an as-converted basis).  Pursuant to the
          Certificate of Designation, the shares of Preferred Stock will be automatically
          converted into shares of Common Stock upon the filing of the Charter Amendments
          described below.
 
 During
          2006, we issued 116.666974 shares of our Series A Convertible Preferred
          Stock,
          as follows:
 
 Pursuant
          to the Reverse Acquisition, New World Brands issued 100 shares of Preferred
          Stock, convertible into 298,673,634 shares of our common stock, to
          Qualmax.
 
 Effective
          December 29, 2006, the Company entered into an Amended and Restated Stock
          Subscription and Share Transfer Agreement (the “***Subscription
          Agreement***”) with P&S Spirit,
          LLC, a Nevada limited liability company (“***P&S
          Spirit***”) pursuant to which P&S Spirit agreed to invest between
          $3 million and $5 million by purchasing shares of the Company’s Series A
          Convertible Preferred stock in three stages, at a price of $268,806.27
          per share
          of Preferred Stock (equivalent to $0.09 per share of common stock, par
          value
          $0.01 per share (the “***Common Stock***”), on an
          as-converted basis): (i) on December 29, 2006, an investment
          of $3,000,000 by purchase of 11.160454 shares of Preferred Stock of the
          Company,
          convertible into 33,333,333 shares of Common Stock; and (ii) after the
          second
          fiscal quarter of 2007, subject to certain conditions set forth in the
          Subscription Agreement and summarized below, an additional investment of
          $1,000,000 (the “***Second Tranche***”) by purchase of
          3.720151 shares of Preferred Stock, convertible into 11,111,111 shares
          of Common
          Stock; and (iii) after the third fiscal quarter of 2007, subject to certain
          conditions set forth in the Subscription Agreement and summarized below,
          an
          additional investment of $1,000,000 (the “***Third
          Tranche***”) by purchase of 3.720151 shares of Preferred Stock,
          convertible into 11,111,111 shares of Common Stock.
 
 The
          Second Tranche is only payable by P&S Spirit in the event that the Company’s
          consolidated unaudited financial statements as filed on Form 10-QSB (or,
          Form
          10-Q, if applicable) for the second quarter ending June 30, 2007 reflect
          EBITDA
          of: (A) $543,000 or greater for the three month period ending June 30,
          2007; or
          (B) $618,000 or greater for the six month period ending June 30,
          2007.  Therefore, if the foregoing conditions are met, the Second
          Tranche payment could be required no sooner than 5 days after the filing
          of the
          Company’s quarterly report on Form 10-QSB for the quarter ending June 30,
          2007.
 
 The
          Third
          Tranche is only payable by P&S Spirit in the event the Company’s
          consolidated unaudited financial statements as filed on Form 10-QSB (or,
          Form
          10-Q, if applicable) for the third quarter ending September 30, 2007 reflect
          EBITDA of: (A) $885,000 or greater for the three month period ending September
          30, 2007; or (B) $1,503,000 or greater for the nine month period ending
          September 30, 2007.  Therefore, if the foregoing conditions
          are
  F-23
  **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    F    –**
                **STOCKHOLDERS’
                    EQUITY (CONTINUED)**
 
 **Preferred
          Stock (Continued)**
 
 met,
          the
          Third Tranche payment could be required no sooner than 5 days after the
          filing
          of the Company’s quarterly report on Form 10-QSB for the quarter ending
          September 30, 2007.  Also, if the Second Tranche is not payable at the
          time the Third Tranche becomes payable, the Second Tranche payment must
          be made
          simultaneously with the Third Tranche payment.
 
 Effective
          December 31, 2006 we entered into an agreement with Better Online Solutions,
          Ltd. (“***BOS***”) (the “***BOS
          Agreement***”).  Under the terms of the BOS Agreement, we
          converted outstanding obligations under the BOS agreement in the amount
          of
          $1,480,189 into 5.50652 shares of Preferred Stock at a common stock equivalent
          price of $.09 per share, which was the prevailing market price of our common
          stock on the date of the BOS Agreement.  The Preferred Stock held by
          BOS is automatically convertible into 16,446,544 shares of our common stock,
          as
          noted below.  The total amount converted consisted of the remaining
          principal and accrued interest on our note payable to BOS, accrued royalties
          and
          outsourcing expenses incurred, and the release of any other obligations
          under
          the terms of the BOS Operating Agreements.  In addition, BOS granted
          to us, contingent upon certain conditions, the right to purchase up to
          thirty
          percent (30%) of all of BOS’s shares of our Series A Preferred Stock or our
          common stock, at a price ranging from $0.12 to $0.24 per share on a common
          stock
          equivalent basis.
 
 Conversion
          of Series A Convertible Preferred Stock into shares of our common stock
          will
          take place automatically upon the effectiveness of an amendment to our
          certificate of incorporation authorizing an increase in the number of
          outstanding shares of our common
 stock
          from 50 million shares to 600 million shares, which we expect to occur
          during
          the second quarter of 2007.  Each share of Series A Preferred Stock
          will convert into 2,986,736.34 shares of our common stock.
 
 **Common
          Stock Warrants**
 
 No
          warrants for the purchase of our common stock were granted during the 12
          months
          ending December 31, 2006.
  F-24
  **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    F    –**
                **STOCKHOLDERS’
                    EQUITY (CONTINUED)**
 
 **Common
          Stock Warrants (Continued)**
 
 Common
          stock warrant activity for the year was as follows:
 Warrants
                            
                            
                            Weighted
                              Average
                              Exercise
                                PriceBalance
                                granted at December 31, 2005
                            
                            
                            2,320,000
                            
                            
                            $
                            0.49Granted
                                in 2006
                            
                            
                            -
                            
                            
                            $
                            -Exercised
                                in 2006
                            
                            
                            -
                            
                            
                            $
                            -Balance
                                granted at December 31, 2006
                            
                            
                            2,320,000
                            
                            
                            $
                            0.49
 
 **Preferred
          Stock Warrants**
 
 Effective
          December 29, 2006, we issued two warrants, one jointly to M. David Kamrat
          and
          Noah Kamrat, each of whom are directors and officers of the Company, and
          one to
          P&S Spirit.  Each warrant will allow for the purchase of up to a
          total of 9.300378 shares of our Series A Preferred Stock at $268,806.27
          per
          share.  The warrants expire on December 31, 2011.
 
 Upon
          the
          automatic conversion of our Series A Preferred Stock to common stock, the
          warrants, if not previously exercised, will be cancelled and we will issue
          two
          new warrants, one jointly to M. David Kamrat and Noah Kamrat, and one to
          P&S
          Spirit, that each will allow for the purchase of up to 27,777,778 shares
          of our
          common stock at $.09 per share.
 
 Preferred
          stock warrant activity for the year was as follows:
 
 Warrants
                                  
                                  
                                  Weighted
                                    Average
                                    Exercise
                                      PriceBalance
                                      granted at December 31, 2005
                                  
                                  
                                  -
                                  
                                  
                                  $
                                  -Granted
                                      in 2006
                                  
                                  
                                  18.600756(as
                                      converted to common shares)
                                  
                                  
                                  55,555,548
                                  
                                  
                                  $
                                  0.09Balance
                                      granted at December 31, 2006
                                  
                                  
                                  18.600756(as
                                      converted to common shares)
                                  
                                  
                                  55,555,548
                                  
                                  
                                  $
                                  0.09
  F-25
  **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    F    –**
                **STOCKHOLDERS’
                    EQUITY (CONTINUED)**
 
 **Computation
          of Basic and Diluted Share Data**
 
 The
          following tables set forth the computation of basic and diluted share data
          for
          2006 and 2005 (rounded to the nearest thousand):
 
 Weighted
                                  average number of shares outstanding during 2005:Basic
                                  (common)
                              
                              
                              166,861,000Effect
                                  of dilutive securitiesCommon
                                  - options and warrants
                              
                              
                              86,526,000Weighted
                                  average number of shares outstanding - diluted
                              
                              
                              253,387,000Weighted
                                  average of options and warrantes not included
                                  above  (anti-dilutive)
                              
                              
                              1,530,000
 
 Weighted
                                              average number of shares outstanding
                                              during 2006:Basic
                                              (common)
                                          
                                          
                                          39,044,000Preferred
                                              (as converted to common)
                                          
                                          
                                          86,148,000Total
                                          
                                          
                                          125,192,000Effect
                                              of dilutive securitiesCommon
                                              - options and warrants
                                          
                                          
                                          -Preferred
                                              - options and warrants
                                          
                                          
                                          -Total
                                          
                                          
                                          -Weighted
                                              average number of shares outstanding
                                              - diluted
                                          
                                          
                                          125,192,000Weighted
                                              average of options and warrantes not
                                              included
                                              above  (anti-diluted):Basic
                                              (common)
                                          
                                          
                                          4,478,000Preferred
                                              (as converted to common)
                                          
                                          
                                          55,556,000Total
                                          
                                          
                                          60,034,000
 
 The
          basic
          and diluted share data for 2005 have been adjusted retroactively in a manner
          similar to a stock split to reflect the recapitalization of the
          Company.
  F-26
  **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    F    –**
                **STOCKHOLDERS’
                    EQUITY (CONTINUED)**
 
 **Lock-Up
          Agreement**
 
 In
          connection with the transactions contemplated by the Subscription Agreement,
          the
          Company, the Kamrats, P&S Spirit and certain affiliates of the Kamrats and
          P&S Spirit entered into an Amended and Restated Lock-Up Agreement (the
“***Lock-Up Agreement***”), pursuant to which each such
          party agreed to certain restrictions on transfer on certain shares of capital
          stock (and securities convertible into share of capital stock) of the Company
          on
          the terms set forth therein. A copy of the Amended and Restated Lock-Up
          Agreement is filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K
          filed with the SEC on January 8, 2007.  In particular, the parties
          agreed to restrict their ability to transfer shares of capital stock in
          the
          Company for up to two years without the prior approval of the other stockholders
          party thereto (meaning, both the Kamrats and P&S Spirit must seek the
          consent of the other to sell subject shares during the term of the Lock- Up
          Agreement).  Also, in connection with the transactions contemplated by
          the BOS Agreement BOS agreed to be subject to the Lock-Up Agreement, restricting
          the ability of BOS to transfer shares of capital stock in the Company and
          Qualmax for up to two years without the prior approval of the other stockholders
          party thereto.
 
 **Conversion
          of BOS Debt to Qualmax Common Stock**
 
 In
          connection with the acquisition of the BOS VoIP and GSM product lines and
          related technology (Note D), we entered into a $1,000,000 loan
          agreement.  During 2006, we entered into the following separate
          agreements with BOS through which the following amounts owed by us to BOS
          were
          converted into Qualmax pre-merger common shares:
 
 ·
                In
                    April 2006 we converted $350,000 of our note payable to BOS into
                    244,755
                    shares of Qualmax common stock (3,488,958 shares of New World
                    Brands
                    common stock on an as-converted basis) at a price of $1.43 per
                    common
                    share.
 ·
                In
                    June 2006 we converted $250,000 of our note payable to BOS into
                    174,825
                    shares of Qualmax common stock (2,492,112 shares of New World
                    Brands
                    common stock on an as-converted basis) at a price of $1.43 per
                    common
                    share.
 
 **Merger
          and Share Exchange Agreement with Bench Group, Inc**
 
 On
          June
          24, 2005, Qualmax entered into an agreement and plan of share exchange
          with
          Bench Group, Inc. (“Bench”), a Delaware corporation.  Bench was a
          non-operating publicly traded company, in existence since 1983.  Under
          the agreement, Bench acquired all of Qualmax’s stock from the Qualmax
          stockholders (the “*Original Qualmax stockholders*”) in exchange for
          14,000,000 newly issued shares (the “*Bench Exchange Shares*”) of Bench’s
          Common Stock (the “*Share Exchange*”).  The Bench Exchange
          Shares were issued to the
  F-27
  **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    F    –**
                **STOCKHOLDERS’
                    EQUITY (CONTINUED)**
 
 **Merger
          and Share Exchange Agreement with Bench Group, Inc
          (Continued)**
 
 original
          Qualmax stockholders on a pro rata basis, in proportion to the ratio of
          the
          number of Qualmax shares held by each original Qualmax stockholder to the
          total
          number of Qualmax shares held by all original Qualmax stockholders as of
          the
          closing date.
 
 At
          the
          closing, Qualmax became a wholly-owned subsidiary of
          Bench.  Immediately following the closing, Bench filed an Agreement
          and Plan of Merger whereby Qualmax merged with and into Bench, with Bench
          as the
          surviving entity (“the Upstream Merger”).  Although Bench was the
          surviving corporation in the Upstream Merger, the Share Exchange and Upstream
          Merger were accounted for as a “reverse acquisition” for accounting and
          financial reporting purposes, wherein Qualmax was deemed the
          surviving
 entity
          for such purposes.  The Bench Exchange shares were known as “new
          Qualmax stock”.
 
 The
          original stockholders of Bench retained their ownership interests in the
          surviving entity, and received an equivalent number of shares of new Qualmax
          common stock as a result of the Share Exchange and the Upstream
          Merger.
 
 The
          share
          exchange agreement contained a dilutive provision whereby additional shares
          of
          new Qualmax stock were issued to prevent the dilutive effect of stock
          transactions that took place between the date of the agreement and final
          closing
          (“the delay stock transactions”).  There was a significant delay
          between the agreement date and the final closing, so an addendum to the
          share
          exchange agreement was established and agreed to upon which an additional
          991,673 shares of new Qualmax stock was issued to the original Qualmax
          stockholders to prevent the dilutive effect of the delay stock
          transactions.  The 991,673 shares were allocated to the original
          Qualmax stockholders based on the proportion of their original pre-merger
          stockholdings to total Qualmax shares outstanding prior to the merger agreement
          date.
 
 **NOTE
                    G    –**
                **STOCK
                    OPTION PLANS**
 
 **Performance
          Equity Plan**
 
 We
          have a
          Performance Equity Plan (the “***Performance Equity
          Plan***”) under which we may grant incentive and nonqualified stock
          options, stock appreciation rights, restricted stock awards, deferred stock,
          stock reload options, and other stock-based awards to purchase up to 600,000
          shares of Common Stock to officers, directors, key employees, and consultants.
          The Company may not grant any options with a purchase price less than fair
          market value of Common Stock as of the date of grant.  No options or
          other stock-based rights were issued under the Performance Equity Plan
          during
          2006, and none were exercised or exercisable during 2006.
  F-28
  **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    G    –**
                **STOCK
                    OPTION PLANS
                    (CONTINUED)**
 
 **Stock
          Option Plan**
 
 In
          October 2001, we adopted a stock option plan (the “***2001 Option
          Plan***”) whereby we have reserved 5,000,000 shares of its Common
          Stock for purposes of granting options to purchase such shares pursuant
          to the
          2001 Stock Option Plan.  Options are granted to officers and employees
          of the Company by the Board of Directors and to members of the Board on
          a
          non-discretionary basis, provided that the exercise price of the options
          is
          equal or greater than the fair market price of our Common Stock on the
          date the
          option is granted. The 2001 Stock Option Plan terminates 10 years from
          its
          effective date.  A total of 2,945,000 of options (“the New World
          Brands options”), granted under the 2001 Option Plan to purchase our Common
          Stock in exchange for services rendered, were vested and exercisable as
          of
          December 31, 2006.  The employees and consultant performed services
          related to product promotion, general business, financing, and public/investor
          relations.   These options were granted prior to September 15,
          2006.
  Employee
          compensation expense for the New World Brands stock options was not recognized
          in 2006 in the accompanying consolidated statements of income as the options
          were granted and fully exercisable on September 14, 2006, prior to the
          merger
          date. The consolidated statements of income include the results of operations
          of
          New World Brands from the date of the merger, September 15, 2006, to December
          31, 2006.  As of December 31, 2006, there was approximately $41,610 of
          total unrecognized compensation cost related to unvested stock options
          granted
          under our stock option plan. That cost is expected to be recognized over
          a
          weighted average of 4 years. There are 1,755,000 shares of common stock
          available for future issuance, as of December 31, 2006.  The following
          table summarizes stock option plan as of December 31, 2006:
 
 Exercise
                                        Price
                                      
                                      Options
                                        Outstanding
                                      
                                      Weighted
                                          Average
                                        Remaining
                                          Contratual
                                        Life
                                          (in Years)
                                      
                                      Options
                                        Exercisable****$               0.18
                                      
                                      1,000,000
                                      
                                      4.9
                                      
                                      1,000,000$               0.18
                                      
                                      1,000,000
                                      
                                      4.9
                                      
                                      1,000,000$               0.18
                                      
                                      250,000
                                      
                                      4.9
                                      
                                      250,000$               0.18
                                      
                                      100,000
                                      
                                      4.9
                                      
                                      100,000$               0.18
                                      
                                      100,000
                                      
                                      4.9
                                      
                                      100,000$               0.18
                                      
                                      100,000
                                      
                                      4.9
                                      
                                      100,000$               0.50
                                      
                                      300,000
                                      
                                      3.5
                                      
                                      -$               0.25
                                      
                                      325,000
                                      
                                      1.75
                                      
                                      325,000$               0.10
                                      
                                      70,000
                                      
                                      5.5
                                      
                                      70,0003,245,000
                                      
                                      
                                      
                                      2,945,000
  F-29
  **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    H    –**
                **INCOME
                    TAXES**
 
 Income
          tax consisted of the following for the years ended December 31, 2006 and
          2005:
 
 2006
                                
                                2005Federal:Current
                                
                                $
                                403,995
                                
                                $
                                (107,423
                                )Deferred
                                
                                
                                579,475
                                
                                
                                9,676State:Current
                                
                                
                                -
                                
                                
                                (22,394
                                )Deferred
                                
                                
                                51,130
                                
                                
                                1,912Subtotal
                                
                                
                                1,034,600
                                
                                
                                (118,229
                                )Change
                                    in valuation allowance
                                
                                
                                (561,695
                                )
                                
                                -Benefit
                                    (provision) for income taxes
                                
                                $
                                (472,905
                                )
                                $
                                (118,229
                                )
  The
          effective tax rate varies from the federal statutory maximum rate for the
          year
          ended December 31, 2006 and 2005 principally due to the following:
 
 2006
                              
                              2005Federal
                                  tax rate
                              
                              
                              34
                              %
                              
                              34
                              %Loss
                                  from foreign subsidiary
                              
                              
                              -19
                              %
                              
                              -Benefit
                                  of net operating loss carryback
                              
                              
                              -7
                              %
                              
                              -State
                                  tax rate, net of federal tax benefit
                              
                              
                              1
                              %
                              
                              3
                              %Other
                              
                              
                              -1
                              %
                              
                              -Total
                              
                              
                              8
                              %
                              
                              37
                              %
  F-30
  **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    H    –**
                **INCOME
                    TAXES (CONTINUED)**
 
 Significant
          portions of the deferred tax assets and liabilities results from the tax
          effects
          of temporary differences, which of December 31, 2006, were as
          follows:
 
 Deferred
                                          tax assets (short-term):Allowance
                                          for doubtful accounts receivable
                                      
                                      $
                                      10,930Allowance
                                          for inventory obsolescence
                                      
                                      
                                      48,033Net
                                          operating loss carryforwards
                                      
                                      
                                      538,825597,788Deferred
                                          tax assets (long-term):Foreign
                                          currency translation adjustment
                                      
                                      
                                      29,741Total deferredtax
                                        assets
                                      
                                      
                                      627,529Deferred
                                          tax liabilities (long-term):Depreciation
                                      
                                      
                                      (65,834
                                      )Net
                                          Deferred taxes assets before valuation
                                          allowance
                                      
                                      
                                      561,695Valuation
                                        allowance
                                      
                                      
                                      (561,695
                                      )Net
                                        deferredtax
                                        assetafter
                                        valuation
                                      
                                      $
                                      -
 
 As
          of
          December 31, 2006, the Company had net operating losses approximately $1,400,000
          that can be carried forward for up to twenty years and deducted against
          future taxable income.  The net operating loss carryforward expires in
          2026.
 
 **NOTE
                    I    –**
                **RELATED
                    PARTY TRANSACTIONS**
 
 **Advances
          from Shareholders**
 
 The
          Company received and repaid advances from its shareholders during 2006,
          and as
          of December 31, 2006 there was $53,665 in loans from shareholders payable
          by the
          Company.  During 2006, approximately $65,000 were repaid to these
          shareholders.
 
 **Management
          Agreement**
 
 The
          Company entered into an agreement with a related party to provide management
          and
          financial services.  Management fees paid to this related party for
          the years ended December 31, 2006 and 2005 amounted to $71,785 and $95,017,
          respectively.
  F-31
  **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    I    –**
                **RELATED
                    PARTY TRANSACTIONS
                    (CONTINUED)**
 
 **Investment
          in Qualmax**
 
 Dr.
          Selvin Passen (“***Passen***”) and Oregon Spirit, LLC
          (“***Oregon Spirit***”) invested a total of $1,250,000 in
          Qualmax in three tranches prior to September 15, 2006, $500,000 on January
          30,
          2006, $500,000 on March 22, 2006, and $250,000 on June 22, 2006, in exchange
          for
          shares of Qualmax's common stock.
 
 On
          April
          10, 2006, Qualmax acquired certain assets of the CLP Group, LLC, a New
          York
          limited liability company, valued by the parties at $225,000, in exchange
          for
          shares of Qualmax's common stock.
 
  **NOTE
                    J    –**
                **COMMITMENTS
                    AND CONTINGENCIES**
 
 **Operating
          Leases**
 
 We
          have
          entered into various operating leases for our facilities and transportation
          equipment.  The future minimum annual rental payments due on these
          operating leases as of December 31, 2006 for each of the next 5 years are
          as
          follows:
 
 Year
                              ending December 31:2007
                          
                          $
                          265,0002008
                          
                          
                          144,0002009
                          
                          
                          110,0002010
                          
                          
                          104,0002011
                          
                          
                          18,000$
                          641,000
 
 Rent
          expense for the years ended December 31, 2006 and 2005 was approximately
          $143,000 and $68,000, respectively.
  F-32
  **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    J    –**
                **COMMITMENTS
                    AND CONTINGENCIES
                    (CONTINUED)**
 
 **The
          Former Employee Litigation**
 
 We
          are a
          defendant in a lawsuit filed by a former employee who has made claims for
          unpaid
          salary and for certain previously granted stock options.  Via
          mediation on February 7, 2007, we have settled this lawsuit, and as part
          of the
          settlement, we agreed that Mr. Singer holds options to purchase up to 70,000
          shares of the Company’s Common Stock at a price of $0.10 per share, which
          options were issued to Mr. Singer during his association with the Company
          prior
          to 2002.  As of the time of the filing of this Report we have not received
          final documentation dismissing the lawsuit and settling and releasing claims,
          but we expect to conclude final settlement documentation within a matter
          of
          weeks.
 
 **The
          MPI Litigation**
 
 As
          a
          result of the Reverse Acquisition the Company assumed the liabilities of
          Qualmax.  Qualmax was named as a defendant in certain litigation filed
          in France before the Trade Tribunal of Nanterre against BOS by Media Partners
          International (“***MPI***,” and the “***MPI
          Litigation***”), a former distributor of BOS, whose contract with BOS
          allegedly related to certain distribution rights for the product division
          Qualmax purchased from BOS on December 31, 2005.  Pursuant to the
          asset purchase agreement between Qualmax and BOS, BOS agreed to indemnify
          and
          hold Qualmax harmless from liability, without limitation, arising from
          the
          claims raised in the MPI Litigation, and BOS has undertaken defense of
          Qualmax
          at BOS’s expense.  The litigation remains in its early stages, and at
          last report from counsel the French court had not yet made definitive rulings
          on
          defendant’s motion to change venue and jurisdiction from France to
          Israel.  Initial hearings on the motion for change of venue were
          concluded in February, 2007, and we are advised that final hearing will
          be
          conducted in late April, 2007, and a decision likely rendered in May,
          2007.  If venue is in fact moved to Israel that decision may have a
          material impact on the plaintiff’s willingness to continue the litigation, due
          to increased expense, but the outcome of the venue hearings, and the impact
          of
          that outcome on plaintiff’s claims, is purely speculative at this
          point.  At present, based upon the limited progress in the matter and
          without the benefit of completion of factual discovery, management believes
          this
          litigation does not pose a significant financial risk to the
          Company.
 
 **The
          Blackstone Litigation**
 
 Qualmax
          was named as a defendant in a lawsuit entitled Capital Securities, LLC
          and
          Blackstone Communications Company v. Carlos Bertonnatti, Worldwide PIN
          Payment
          Corp. and Qualmax, Inc., Case No. 2006-15824-CA-01, in the Circuit Court
          of the
          11th Judicial
          Circuit in and for Miami-Dade County, Florida, filed August 10,
          2006.  The facts underlying the proceeding relate to a contract
          between defendant Worldwide PIN Payment Corp. and plaintiffs, and a third
          party,
          to plaintiff’s allegations of misappropriation of trade secrets and corporate
          opportunity, and to claims that defendants, or some of them,
  F-33
  **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    J    –**
                **COMMITMENTS
                    AND CONTINGENCIES
                    (CONTINUED)**
 
 **The
          Blackstone Litigation (Continued)**
 
 tortiously
          interfered with plaintiffs’ contract with a third party.  Plaintiffs’
seek monetary damages.  Management believes it is not entirely clear
          from the pleadings filed to date whether plaintiffs claim that Qualmax
          misappropriated trade secrets, or tortiously interfered with a third party
          contract, or is liable under some other theory.
 
 On
          March
          29, 2007, the first deposition in this matter was conducted, of a non-party
          witness who is one of the principal creators of certain intellectual property
          owned, or controlled, by Worldwide PIN Payment Corp.
          (“***WPP***”), and the deposition will be continued but
          a
          continuation has not been scheduled as of the time of filing of this
          Report.  The first formal discovery request was made of the Company on
          March 27, 2007, followed by a second request on April 10, 2007.  The
          Company has not yet been required to file any responsive pleadings, and
          has not
          provided materials responsive the plaintiff’s discovery requests.
 
 Co-defendants
          have answered and filed counterclaims and third party claims, but none
          of the
          claims of co-defendants are against Qualmax nor do they allege wrongdoing
          by
          Qualmax as a defense to claims against them by plaintiffs.  The
          Company is still investigating the claims against it, and the facts surrounding
          the claims against co-defendants, but that investigation is in its early
          stages
          and is incomplete.  Based on the limited information available to
          management at this point, management does not believe Qualmax or the Company
          is
          liable for any wrongdoing, act or omission, in relation to the litigation,
          and
          management believes that Qualmax is not properly a party to the
          litigation.  However, management does not have sufficient information
          to provide a meaningful assessment of all the facts and circumstances relating
          to the claims against Qualmax and co-defendants nor to determine how costly
          and
          time-consuming defense of the matter may be regardless of the merits of
          the
          Company’s defense.  In addition, the Company believes it has viable
          claims for indemnification and damages against co-defendants but has not
          yet
          formally raised those claims or made a full determination of their value
          or role
          in the litigation.
 
 
 **NOTE
                    K    –**
                **REGULATORY
                    MATTERS**
 
 The
          telecommunications industry is subject to federal, state and local
          regulation.  Any changes in the regulations or enforcement could
          impact the Company's ability to continue its current
          operations.
  F-34
  **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    L    –**
                **SUBSEQUENT
                    EVENTS AND OTHER
                    MATTERS**
 
 **Term
          Loan and Repayment of Note Payable with B of A**
 
 On
          and
          effective March 30, 2007, we entered into a term loan and security agreement
          with P&S Spirit (the “***P&S
          Loan***”).  The principal amount of the P&S Loan is
          $1,000,000.  Monthly payments of interest only at two percent over the
          Wall Street Journal Prime Rate payable in arrears are due commencing on
          May 1,
          2007.  The principal balance of the P&S Loan and any unpaid
          accrued interest thereon becomes due in full on January 2, 2009.  The
          P&S Loan includes certain covenants, including a financial reporting
          requirement which is due forty-five days after the close of a calendar
          quarter,
          and requirements that we maintain a ratio of current assets to current
          liabilities of at least 1.2 to 1 and a total liabilities to tangible net
          worth
          ratio not exceeding 2.5 to 1.
 
 The
          P&S Loan also grants P&S Spirit a first position security interest with
          respect to all of the Company’s assets.  The P&S Loan is also
          backed by a guaranty by Qualmax (which, pending completion of the contemplated
          merger of Qualmax into the Company, holds a controlling interest in the
          Company), a security interest in the assets of Qualmax (consisting solely
          of 100
          shares of series A convertible preferred stock of the Company, par value
          $0.01
          per share, which stock is convertible into 298,673,634 shares of the Company’s
          common stock, par value $0.01 per share), and by the personal guaranty
          of M.
          David Kamrat, Chairman of the Board of Directors and Chief Executive Officer
          of
          the Company, and a director and executive officer of Qualmax.  M.
          David Kamrat’s personal Guaranty is limited to the sum of $1,000,000, although
          the guaranteed obligations include indemnification for certain claims against
          P&S Spirit relating to the P&S Loan.
 
 The
          Loan
          proceeds were used by the Company to repay all outstanding principal, interest
          and fees due on our note payable with B of A (Note D), and to pay certain
          professional fees associated with preparation and negotiation of the P&S
          Loan.
 
 The
          principals of P&S Spirit include Dr. Selvin Passen, who is a director and
          shareholder of the Company, as well as its former Chief Executive Officer,
          and
          Dr. Jacob Schorr, who is a director of the Company
 
 **Credit
          facility with Pacific Continental Bank**
 
 The
          company entered into an agreement for the use of various credit services
          with
          Pacific Continental Bank in February 2007.  The conditions of this
          agreement require the deposit of $250,000 with the bank as security for
          the
          services.
  F-35
  **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    L    –**
                **SUBSEQUENT
                    EVENTS AND OTHER MATTERS
                    (CONTINUED)**
 
 **Amendment
          to Certificate of Incorporation**
 
 On
          January 31, 2007 we filed an Information Statement with the Securities
          and
          Exchange Commission on Schedule 14C, to provide information with respect
          to the
          approval of the actions set forth below that were approved by the board
          of
          directors of the Company and by written consent of the Company’s stockholders
          (the “***Written Consent***”) in lieu of a special meeting
          of stockholders:
 
 **ACTION
          ONE:**  Approval of the amendment and restatement of our
          Certificate of Incorporation to: (i) increase our authorized number of
          shares of
          Common Stock by five hundred fifty million (550,000,000) shares; (ii) implement
          a staggered board of directors with three classes; and (iii) make such
          other
          changes to the
 Certificate
          of Incorporation as are necessary and incidental to the foregoing (the
          “***Charter Amendments***”); and
 
 **ACTION
          TWO:** Approval of the appointment of Noah R. Kamrat as a Class II
          director and the appointment of M. David Kamrat and Jacob Schorr, Ph.D.
          as Class
          III directors (the “***Election of
          Directors***”).
 
 The
          Written Consent was executed by the holders of at least a majority of the
          issued
          and outstanding shares of (i) preferred stock, (ii) common stock and (iii)
          the
          issued and outstanding shares of capital stock of the Company entitled
          to vote
          on the matters set forth herein.  The actions approved by the Written
          Consent, if not revoked or terminated, will not become effective until
          twenty
          (20) calendar days after April 2, 2007, the date we first sent a definitive
          Information Statement to our stockholders.
 
 
 **NOTE
                    M    –**
                **JOINT
                    VENTURE WITH WORLD WIDE PIN PAYMENT,
                    LLC**
 
 On
          February 1, 2006, Qualmax entered into an LLC unit purchase agreement to
          acquire
          51 units of member interest in World Wide Pin Payment, LLC
          (“***WPP***”) (the joint venture “***WPP-TPP
          LLC***”), a Florida limited liability company engaged in the design
          and development of computer software systems, and entered into a related
          software license agreement with WPP-TPP LLC for the WPP-TPP LLC transaction
          platform.  The transaction involved a contingent assumption by Qualmax
          of the obligations of WPP-TPP LLC to perform under an Agreement of Co-operation
          with Siemens S.A.
 
 On
          August
          10, 2006, a lawsuit was filed against both WPP and Qualmax, alleging among
          other
          things that the intellectual property involved in the WPP software was
          in fact
          owned
  F-36
  **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    M    –**
                **JOINT
                    VENTURE WITH WORLD WIDE PIN PAYMENT, LLC
                    (CONTINUED)**
 
 by
          third
          parties and that we lacked the legal right to use the software, and further
          that
          our involvement with WPP had damaged the third party owners of the software
          (see
          Note J, Commitments and Contingencies, under the heading “The Blackstone
          Litigation”).  As a result, the joint venture agreement with WPP, and
          all other related agreements were terminated (including without limitation
          any
          Agreement of Co-Operation with Siemens S.A., which was rescinded), and
          the joint
          venture dissolved, and each of WPP and the Company retained their respective
          assets previously used in connection with the joint venture.  We
          believe the Company has no further obligations relating to the joint venture,
          other than obligations that may arise in relation to the Blackstone
          Litigation.
 
 
 **NOTE
                    N    –**
                **ASSET
                    PURCHASE AGREEMENT, CAPITALIZATION OF
                    WHOLLY-OWNED**
 **SUBSIDIARY,
          AND ROYALTY PAYMENT AGREEMENT**
 
 Effective
          December 31, 2005, the Company acquired certain assets of BOS. The purchased
          assets were used to capitalize IP Gear, Ltd., an Israeli company and
          wholly-owned subsidiary of the Company.  The BOS purchase agreement
          called for certain contingent obligations affecting the Company, including:
          (i)
          a royalty initially equal to 4% of the sales generated by the IP Gear,
          Ltd.
          business (the “***BOS Royalty***”); (ii) a loan in the
          principal amount of $1 million (the “***BOS Loan***”); (iii)
          an outsourcing agreement by which BOS provided certain services to IP Gear,
          Ltd.
          during a period of transition (including, for example, office space, office
          equipment, and certain personnel) (the “***Outsourcing
          Agreement***”); and (iv) an obligation of BOS to pay certain third
          party royalties and related amounts on behalf of IP Gear, Ltd.
 
 Payments
          of BOS Loan principal totaling $600,000 were made on June 30, 2006, and
          July 31,
          2006, in the amounts of $350,000 and $250,000, respectively, by issuance
          of the
          stock of Qualmax.
 
 Effective
          December 31, 2006, the entire remaining BOS Loan balance (including principal,
          interest, and any fees), the entire remaining obligation to pay the BOS
          Royalty,
          and all then-outstanding amounts payable under the Outsourcing Agreement
          or as
          reimbursement for payment of third party royalties, totaling $1,480,189,
          was
          repaid, retired and released by the issuance of 5.50652 shares of Preferred
          Stock (convertible into 16,446,544 shares of our common stock) at a common
          stock
          equivalent price (as-converted) of $.09 per share.
  F-37
  **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    O    –**
                **DEFINED
                    CONTRIBUTION PLAN**
 
 In
          May
          2005, we adopted a Savings Incentive Match Plan for Employees (SIMPLE)
          (the
“Plan”) for the benefit of our employees who are reasonably expected to receive
          at least $5,000 in compensation during a calendar year.  We have
          elected to contribute to each eligible employee’s simple individual retirement
          account a matching contribution equal to the employee’s elective salary
          reduction contributions, up to a limit of three percent of the employee’s
          compensation for the calendar year.  Total expense for the years ended
          December 31, 2006 and 2005 was approximately $11,000 and $6,000,
          respectively.
 
 
 **NOTE
                    P    –**
                **BUSINESS
                    SEGMENT REPORTING**
 
 The
          following presents our segmented financial information by business line
          for the
          years ended December 31, 2006 and 2005.  We are currently focused on
          three principal lines of businesses: (i) proprietary hardware, which is
          our VoIP
          technology development and equipment manufacturing subsidiary that is located
          in
          Israel, IP Gear, Ltd.; (ii) resale hardware, which is the sale and distribution
          of VoIP and other telephony equipment and related professional services
          via our
          U.S.-based business operated under the name "IP Gear"); and (iii) wholesale
          carrier services, which is telephony service resale and direct call routing
          via
          our U.S.-based VoIP service business operated under the name "IP Gear
          Connect".
 
 2006
                                        
                                        
                                        2005Net
                                            sales:Wholesale
                                            carrier service
                                        
                                        $
                                        11,230,284
                                        
                                        
                                        $
                                        8,227,222Resale
                                            hardware
                                        
                                        
                                        6,307,644
                                        
                                        
                                        
                                        9,810,314Proprietary
                                            hardware
                                        
                                        
                                        2,592,543
                                        
                                        
                                        
                                        -20,130,471
                                        
                                        
                                        
                                        18,037,536Cost
                                            of sales:Wholesale
                                            carrier service
                                        
                                        
                                        10,382,726
                                        
                                        
                                        
                                        7,411,035Resale
                                            hardware
                                        
                                        
                                        5,317,852
                                        
                                        
                                        
                                        8,126,649Proprietary
                                            hardware
                                        
                                        
                                        2,190,874
                                        
                                        
                                        
                                        -17,891,452
                                        
                                        
                                        
                                        15,537,684
  F-38
  **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    P    –**
                **BUSINESS
                    SEGMENT REPORTING
                    (CONTINUED)**
 
 2006
                                  
                                  
                                  2005Gross
                                      profit:Wholesale
                                      carrier service
                                  
                                  
                                  847,558
                                  
                                  
                                  
                                  1,683,665Resale
                                      hardware
                                  
                                  
                                  989,792
                                  
                                  
                                  
                                  816,187Proprietary
                                      hardware
                                  
                                  
                                  401,669
                                  
                                  
                                  
                                  -2,239,019
                                  
                                  
                                  
                                  2,499,852Sales,
                                      general and administrative expenses:Wholesale
                                      carrier service
                                  
                                  
                                  1,650,493
                                  
                                  
                                  
                                  780,635Resale
                                      hardware
                                  
                                  
                                  1,113,611
                                  
                                  
                                  
                                  1,077,946Proprietary
                                      hardware
                                  
                                  
                                  3,519,489
                                  
                                  
                                  
                                  -Unallocated
                                      corporate overhead
                                  
                                  
                                  1,597,367
                                  
                                  
                                  
                                  427,5467,880,960
                                  
                                  
                                  
                                  2,286,127Income
                                      (loss) from operations:Wholesale
                                      carrier service
                                  
                                  
                                  (802,935
                                  )
                                  
                                  
                                  903,030Resale
                                      hardware
                                  
                                  
                                  (123,819
                                  )
                                  
                                  
                                  (261,759
                                  )Properietary
                                      hardware
                                  
                                  
                                  (3,117,820
                                  )
                                  
                                  
                                  -Unallocated
                                      corporate overhead
                                  
                                  
                                  (1,597,367
                                  )
                                  
                                  
                                  (427,546
                                  )$
                                  (5,641,941
                                  )
                                  
                                  $
                                  213,725
  F-39


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





On
      September 18, 2006, the Company engaged a new independent accountant, Berenfeld,
      Spritzer, Shechter & Sheer, CPAs, for audit and review periods ending after
      September 15, 2006, to replace the Company’s prior accountant, Salberg &
Company, PA (“***Salberg***”), who was dismissed on November
      16, 2006.  The new independent accountant has acted as independent
      accountant for Qualmax for Qualmax’s 2005 annual audit, and management believes
      that the new accountant’s prior experience with the business formerly operated
      by Qualmax, and familiarity with the Company’s new management, will enable the
      new accountant to provide efficient and effective services.





The
      reports of Salberg on the Company’s consolidated financial statements for the
      fiscal years ended May 31, 2006 and 2005 contained no adverse opinion or
      disclaimer of opinion and was not qualified or modified as to uncertainty,
      audit
      scope, or accounting principle except that there was an explanatory paragraph
      describing conditions that raise substantial doubt about the Company’s ability
      to continue as a going concern.  During the fiscal years ended May 31,
      2006 and May 31, 2005, and the period from June 1, 2006 through November 16,
      2006, there were (1) no disagreements with Salberg on any matter of accounting
      principles or practices, financial statement disclosure, or auditing scope
      or
      procedure, which disagreements, if not resolved to the satisfaction of Salberg,
      would have caused them to refer to such disagreements in their report on the
      consolidated financial statements for such years, and (2) no reportable events
      (as defined in Regulation S-B Item 304(a)(1)(iv)).




**ITEM 8A.**
              **CONTROLS
                  AND PROCEDURES**


As
      of the
      end of the period covered by this Report, we have evaluated under the
      supervision and with the participation of our management, including our chief
      executive officer and chief financial officer, the effectiveness of the design
      and operation of our disclosure controls and procedures pursuant to Rules
      13a-15(e) and 15d-15(e) of the Exchange Act.  Based upon that
      evaluation, our chief executive officer and chief financial officer concluded
      that, as of December 31, 2006, our disclosure controls and procedures are
      reasonably effective in ensuring that information required to be disclosed
      by us
      in the reports that we file or submit under the Exchange Act is accumulated
      and
      communicated to management, including our principal executive and financial
      officers, or persons performing similar functions, as appropriate to allow
      timely decisions regarding required disclosure.  As a result of the
      Reverse Acquisition, the Company’s former controls and procedures have been
      replaced with those formerly of Qualmax, and this Item 8.A describes evaluation
      and operation of the controls and procedures formerly of
      Qualmax.  There has been no change in our internal controls over
      financial reporting during the year ended December 31, 2006 that has materially
      affected, or is reasonably likely to materially affect, our internal control
      over financial reporting.




**ITEM 8B.**
              ****OTHER
                  INFORMATION****


Not
      Applicable.





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            46 of 61
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**PART
      III**





**ITEM
                9.**
            **DIRECTORS,
                EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE;
                COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE
                ACT**





**Directors
      and Officers**





Our
      directors and executive officers and their positions at April 13, 2007, were
      as
      follows:





**Name**
                    
                    **Age**
                    
                    **Position(s)**M.
                        David Kamrat
                    
                    54
                    
                    Chief
                        Executive Officer & Chairman of the BoardNoah
                        R. Kamrat
                    
                    36
                    
                    President
                        & DirectorDuy
                        Tran
                    
                    31
                    
                    Vice
                        President, SecretaryShalom
                        Amsalem
                    
                    39
                    
                    Managing
                        Director, IP Gear, Ltd.Ian
                        T. Richardson
                    
                    42
                    
                    Vice
                        President & General CounselShehryar
                        Wahid
                    
                    42
                    
                    Chief
                        Financial OfficerJacob
                        M. Schorr, Ph.D.
                    
                    62
                    
                    Director





**M.
      David Kamrat** has served as the Company’s Chief Executive Officer and
      Chairman of the Board since September 15, 2006, the date on which the Company
      acquired the Qualmax business.  Prior to that, Mr. Kamrat served as
      Chief Executive Officer and Chairman of the Board of Directors of Qualmax,
      Inc.;
      he has held both positions since he founded Qualmax in 2001.  From
      1999 - 2004, Mr. Kamrat operated Mind Opening Corporation, a telecommunications
      consulting business.  Prior to that, Mr. Kamrat worked as a sales
      executive with MCI, Inc. (“***MCI***”).  Prior to
      working with MCI, Mr. Kamrat had a successful career in construction and land
      development. Mr. Kamrat also serves as Chief Executive Officer and Chairman
      of
      the Board of Qualmax, Inc.





**Noah
      Kamrat** has served as the Company’s President and as a director since
      September 15, 2006, the date on which the Company acquired the Qualmax
      business.  Prior to that, Mr. Kamrat served as President, Chief
      Operating Officer, and as a director of Qualmax, which positions he has held
      since 2002.  From 1998 to 2002, Mr. Kamrat served as President of
      Synergyx Communications Group, an IP consulting and technology
      company.  In 1998, Mr. Kamrat served as a Director of National
      Accounts for Frontier Communications (Global) located in Miami,
      Florida.  Mr. Kamrat was a sales consultant specializing in long
      distance and Internet services for MCI from 1994 to 1997.  Mr. Kamrat
      also serves as President and a Director of Qualmax, Inc.





**Duy
      Tran** has served as the Company’s Vice President and Secretary and
      served as a director from September 15, 2006, the date on which the Company
      acquired the Qualmax business, until his resignation from the Board on December
      31, 2006.  Prior to that, Mr. Tran served as Vice President and
      Secretary of Qualmax, heading up its iNode division.  Mr. Tran joined
      this division in February 2005, following iNode’s acquisition of the assets of
      Microstar Telecommunications Corp.  Before that, Mr. Tran founded
      Ypsilon Computer Handels GmbH & Co. in 1994, a reseller of personal
      computers in the German market.





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            47 of 61
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            of Contents*




**Shalom
      Amsalem**has served as the Managing Director of our Israel-based
      division of IP Gear, Ltd. since June, 2006.  Mr. Amsalem has been
      working with IP Gear technology for many years, having served at BOS (the prior
      owner of the IP Gear, Ltd. technology and product line) as VP Regional Sales
      since December 2004, as Director of International Sales for BOS from 2002 to
      2004, and as BOS’s Corporate Technical Support manager from 1999 to 2002. Mr.
      Amsalem graduated from the ‘MAMRAM’ army computer school of computers and
      communication and has a practical engineering degree from Beer-Sheva
      College.





**Ian
      T. Richardson** has served as the Company’s Vice President and General
      Counsel since September 15, 2006, the date on which the Company acquired the
      Qualmax business, and served as interim Chief Financial Officer of the Company
      from September 15, 2006 until January 31, 2007.  Prior thereto, Mr.
      Richardson served as Chief Financial Officer and Vice President as well as
      General Counsel of Qualmax, Inc., where he held the position of Vice President
      and General Counsel from May 2006 to September 15, 2006.  From 1997
      until May 2006, Mr. Richardson was in private practice with the law firm of
      Gleaves Swearingen Potter & Scott, LLP, based in Eugene, Oregon, where he
      represented Qualmax as outside counsel.  Mr. Richardson received a
      bachelor’s degree from the University of California at Berkeley, and a Juris
      Doctor degree from Northwestern School of Law at Lewis and Clark
      College.





**Shehryar
      Wahid** has served as the Company’s Chief Financial Officer since
      February 1, 2007.  From approximately September 2006 through January
      2007, Mr. Wahid acted as a consultant to the Company.  Mr. Wahid has
      over the last 16 years held various executive level positions in finance and
      operations in the telecommunications and logistics industries, and has worked
      both as an auditor, for the Financial Services Group at Ernst & Young, and
      as a controller and chief financial officer for a number of telecommunications
      companies.  Mr. Wahid holds a Chartered Accountancy Designation from
      Canada and has substantial knowledge of U.S.-based GAAP reporting
      requirements.  Mr. Wahid received a B.S. in Biochemistry from the
      University of Toronto and a Business Degree from the University of Western
      Ontario’s Ivey School of Business.





**Jacob
      M. Schorr, Ph.D.** has served as a director of the Company since
      September 15, 2006, the date on which the Company acquired the Qualmax
      business.   From April 2000 to July 2006, Dr. Schorr served as
      Chief Executive Officer and a director of Spirit Airlines, Inc., and as Chairman
      of the Board from February 2004 to July 2006.  From 1997 until 2000,
      Dr. Schorr served as Spirit Airline’s Chief Information Officer.  From
      1977 until 1994, Dr. Schorr served in various management capacities at Maryland
      Medical Laboratory, and he served as Vice President of Corning Clinical
      Laboratories from 1994 to 1996.





**Family
      Relationships**





M.
      David
      Kamrat is the father of Noah Kamrat.





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            48 of 61
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**Compliance
      with Section 16(a)**





Section
      16(a) of the Exchange Act requires our officers, directors, and persons who
      beneficially own more than 10% of a registered class of our equity securities
      (“10% stockholders”) to file reports of ownership and changes in ownership with
      the SEC. Officers, directors and 10% stockholders also are required to furnish
      us with copies of all Section 16(a) forms they file.


Pursuant
        to a transaction consummated on December 29, 2006, the Company issued shares
        of
        its Preferred Stock and warrants to purchase shares of Preferred Stock to
        P&S Spirit, an entity beneficially owned by Dr. Selvin Passen and Jacob
        Schorr, a director of the Company. As a result of the transactions contemplated
        thereby, P&S Spirit became a beneficial owner of more than 10% of the
        outstanding shares of common stock of the Company. To the knowledge of the
        Company, P&S Spirit has not timely filed a Form 3 in connection with the
        acquisition of the shares of Preferred Stock and warrants acquired in the
        transaction described above. In addition, to the knowledge of the Company,
        Dr.
        Passen and Mr. Schorr have not timely filed a Form 4 in connection with their
        indirect beneficial ownership of the shares of Preferred Stock and warrants
        acquired by P&S Spirit.




**Code
      of Ethics**





The
      Company has adopted a Code of Ethics and Business Conduct that applies to its
      principal executive officer, principal financial officer, principal accounting
      officer or controller and all other employees and directors of the Company
      and
      its subsidiaries.  The Company has posted its Code of Ethics and
      Business Conduct on its website (www. ipgear.net), and it is available in print
      to any stockholder upon request.  The Company will post any amendments
      to, or any waivers from, a provision of its Code of Ethics and Business
      Conduct.





**Audit
      Committee**





The
      Company’s entire Board acts as our audit committee, and both our Chief Financial
      Officer and General Counsel sit on the audit committee.  No member of
      our audit committee is independent.




**ITEM 10.**
              ****EXECUTIVE
                  COMPENSATION****


The
      following table sets forth compensation earned, whether paid or deferred, by
      our
      Chief Executive Officer, Chief Financial Officer, President, General Counsel,
      and Duy Tran, our most highly compensated executive officer who earned over
      $100,000 during the current fiscal year (collectively, the “***Named
      Executive Officers***”), for services rendered in all capacities to
      us during fiscal years ended December 31, 2006 and 2005.




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            49 of 61
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SUMMARY
        COMPENSATION TABLE
 
 The
        following table sets forth the compensation of the named executive officers
        of
        the Company for the Company’s last two completed fiscal
        years:




**Name
                and**
              **principal
                position**
            
            **Year**
            
            **Salary
                ($)**
            
            **Bonus
                ($)**
            
            **Stock
                Awards ($)**
            
            **Option
                Awards ($)**
            
            **Non-Equity
                Incentive Plan Compensation ($)**
            
            **Nonqualified
                Deferred Compensation**
              **($)**
            
            **All
                Other Compensation ($)**
            
            **Total**
              **($)**M.
                David Kamrat (1)
            
            2006
            
            $120,000
            
            $0
            
            $0
            
            $0
            
            $0
            
            $0
            
            $0
            
            $120,000CEO
                & Chairman
            
            2005
            
            $0
            
            $0
            
            $0
            
            $0
            
            $0
            
            $0
            
            $0
            
            $0Noah
                Kamrat (1)
            
            2006
            
            $120,000
            
            $0
            
            $0
            
            $0
            
            $0
            
            $0
            
            $0
            
            $120,000President
                & Director
            
            2005
            
            $0
            
            $0
            
            $0
            
            $0
            
            $0
            
            $0
            
            $0
            
            $0Ian
                R. Richardson (1)
            
            2006
            
            $120,000
            
            $0
            
            $0
            
            $0
            
            $0
            
            $0
            
            $0
            
            $120,000Vice
                President, General Counsel
            
            2005
            
            $0
            
            $0
            
            $0
            
            $0
            
            $0
            
            $0
            
            $0
            
            $0Duy
                Tran (1)
            
            2006
            
            $120,000
            
            $0
            
            $0
            
            $0
            
            $0
            
            $0
            
            $0
            
            $120,000Vice
                President, Secretary
            
            2005
            
            $0
            
            $0
            
            $0
            
            $0
            
            $0
            
            $0
            
            $0
            
            $0Shehryar
                Wahid (2)
            
            2006(2)
            
            $0
            
            $0
            
            $0
            
            $0
            
            $0
            
            $0
            
            $0
            
            $0Chief
                Financial Officer
            
            2005
            
            $0
            
            $0
            
            $0
            
            $0
            
            $0
            
            $0
            
            $0
            
            $0David
                Rudden (3)
            
            2006
            
            $111,700
            
            $0
            
            $0
            
            $0
            
            $0
            
            $0
            
            $0
            
            $111,700Former
                Chief Executive Officer
            
            2005
            
            $0
            
            $0
            
            $0
            
            $0
            
            $0
            
            $0
            
            $0
            
            $0





(1)
            The
                executive officer has served in such capacity since September 15,
                2006,
                the date on which the Company consummated the acquisition of the
                Qualmax
                business (as further discussed above under Item 1, “Description of
                Business – Background and Recent Developments, Change in Business from
                Wine Distribution to VoIP
                Technology”).





(2)
            Mr.
                Wahid did not become an officer until February 1, 2007, and therefore
                did
                not receive any compensation as an officer during fiscal year
                2006.  Mr. Wahid’s current annualized salary is $120,000, and he
                currently is entitled to no bonus compensation or equity/stock option
                compensation or incentives.





(3)
            Mr.
                Rudden served as Chief Executive Officer from November 10, 2005 until
                his
                resignation on September 14, 2006.





**Outstanding
      Equity Awards at Fiscal Year-End**





**OPTION
                                            AWARDS**
                                        
                                        **STOCK
                                            AWARDS**Name
                                        
                                        Number
                                            of Securities Underlying Unexercised
                                            Options
                                          (#)
                                          Exercisable
                                        
                                        Number
                                            of Securities Underlying Unexercised
                                            Options
                                          (#)
                                          Unexercisable
                                        
                                        Equity
                                            Incentive Plan Awards: Number of Securities
                                            Underlying Unexercised
                                            Unearned Options
                                          (#)
                                        
                                        Option
                                            Exercise Price
                                          ($)
                                        
                                        Option
                                            Expiration Date
                                        
                                        Number
                                            of Shares or Units of Stock That Have
                                            Not Vested
                                          (#)
                                        
                                        Market
                                            Value of Shares or Units of Stock That
                                            Have Not Vested
                                          ($)
                                        
                                        Equity
                                            Incentive Plan Awards: Number of Unearned
                                            Shares, Units or Other Rights
                                            That Have Not Vested
                                          (#)
                                        
                                        Equity
                                            Incentive Plan Awards: Market or Payout
                                            Value of Unearned Shares, Units or
                                            Other Rights That Have Not Vested
                                          (#)M.
                                            David Kamrat
                                        
                                        0
                                        
                                        0
                                        
                                        0
                                        
                                        $0
                                        
                                        n/a
                                        
                                        0
                                        
                                        $0
                                        
                                        $0
                                        
                                        $0Noah
                                            Kamrat
                                        
                                        0
                                        
                                        0
                                        
                                        0
                                        
                                        $0
                                        
                                        n/a
                                        
                                        0
                                        
                                        $0
                                        
                                        $0
                                        
                                        $0Ian
                                            Richardson
                                        
                                        0
                                        
                                        0
                                        
                                        0
                                        
                                        $0
                                        
                                        n/a
                                        
                                        0
                                        
                                        $0
                                        
                                        $0
                                        
                                        $0Duy
                                            Tran
                                        
                                        0
                                        
                                        0
                                        
                                        0
                                        
                                        $0
                                        
                                        n/a
                                        
                                        0
                                        
                                        $0
                                        
                                        $0
                                        
                                        $0Shehryar
                                            Wahid
                                        
                                        0
                                        
                                        0
                                        
                                        0
                                        
                                        $0
                                        
                                        n/a
                                        
                                        0
                                        
                                        $0
                                        
                                        $0
                                        
                                        $0




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            50 of 61
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**Compensation
      to Directors**





**DIRECTOR
                COMPENSATION**Name
            
            Fees
                Earned or Paid in Cash
              ($)
            
            Stock
                Awards
              ($)
            
            Option
                Awards
              ($)
            
            Non-Equity
                Incentive Plan Compensation
              ($)
            
            Non-Qualified
                Deferred Compensation
              ($)
            
            All  Other
                Compensation ($)
            
            Total
                ($)M.
                David Kamrat
            
            $0
            
            $0
            
            $0
            
            $0
            
            $0
            
            $0
            
            $0Noah
                Kamrat
            
            $0
            
            $0
            
            $0
            
            $0
            
            $0
            
            $0
            
            $0Jacob
                Schorr, Ph.D.
            
            $0
            
            $0
            
            $0
            
            $0
            
            $0
            
            $0
            
            $0Duy
                Tran (1)
            
            $0
            
            $0
            
            $0
            
            $0
            
            $0
            
            $0
            
            $0




(1)
            Duy
                Tran resigned from the Board effective December 31,
                2006.




**Option/SAR
      Grants in the Last Fiscal Year**





The
      following table reflects option grants to our executive officers in the prior
      fiscal year.





**Name**
                  **#
                      of Securities**
                    **Underlying
                      Options/**
                    **SARs
                      Granted**
                  **%
                      Total Options/**
                    **SARs
                      Granted to**
                    **Employees
                      in Fiscal**
                    **Year**
                  **Exercise
                      or**
                    **Base**
                    **Price
                      ($/Share)**
                  **Expiration**
                    **Date**M.
                      David Kamrat
                  -
                  -
                  -
                  -Noah
                      Kamrat
                  -
                  -
                  -
                  -Duy
                      Tran
                  -
                  -
                  -
                  -Ian
                      Richardson
                  -
                  -
                  -
                  -Shehryar
                      Wahid
                  -
                  -
                  -
                  -Selvin
                      Passen, MD(1)
                  1,000,000
                  35.09%
                  0.10
                  10/15/11David
                      Rudden(1)
                  300,000
                  10.53%
                  0.10
                  5/31/10Mark
                      Webber(1)
                  1,000,000
                  35.09%
                  0.10
                  10/15/11





(1)  Selvin
      Passen, David Rudden and Mark Webber served as officers of the Company during
      the 2006 fiscal year until September 15, 2006.


**Aggregate
        Option Exercises and Fiscal Year-End Option Values**
 
 The
        following table sets forth certain information relating to the exercise of
        stock
        options during the 2006 fiscal year for each of our executive officers and
        provides the fiscal year-end value of the unexercised options held by our
        executive officers:
 
 **Shares**
                **Acquired**
              **Value**
              **#
                  of Unexercised Options**
                **At
                  Fiscal Year End**
              **Value
                  of Unexercised**
                **In-The-Money
                  Options**
                **At
                  Fiscal Year End****Name**
              **On
                  Exercise**
              **Realized**
              **Exercisable**
              **Unexercisable**
              **Exercisable
                  (1)**
              **Unexercisable**M.
                  David Kamrat
              -
              -
              -
              -
              -
              -Noah
                  Kamrat
              -
              -
              -
              -
              -
              -Duy
                  Tran
              -
              -
              -
              -
              -
              -Ian
                  Richardson
              -
              -
              -
              -
              -
              -Shehryar
                  Wahid
              -
              -
              -
              -
              -
              -Selvin
                  Passen(2)
              -
              -
              1,750,000
              -
              -
              -David
                  Rudden(2)
              -
              -
              300,000
              -
              -
              -Mark
                  Webber(2)
              -
              -
              1,000,000
              -
              -
              -
 
 (1)
        Value
        is calculated on the basis of the difference between the option exercise
        price
        and the closing price for the Common Stock at $0.09 as of December 31, 2006,
        as
        quoted on the over-the-counter market, multiplied by the number of shares
        underlying the option.
 
 (2)  Selvin
        Passen, David Rudden and Mark Webber served as officers of the Company during
        the 2006 fiscal year until September 15, 2006.


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            51 of 61
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            of Contents*




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


The
      following table sets forth certain information as of March 21, 2007, with
      respect to (i) those persons known to us to beneficially own more than 5% of
      our
      voting securities, (ii) each of our directors, (iii) each of our executive
      officers, and (iv) all directors and executive officers as a group. The
      information is determined in accordance with Rule 13d-3 promulgated under the
      Exchange Act. Except as indicated below, the beneficial owners have sole voting
      and dispositive power with respect to the shares beneficially
      owned.





BeneficialOwnershipPercentage
                                      ofTitle
                                      of Class
                                  
                                  Name
                                      and Address of Beneficial Owner(1)
                                  
                                  Number
                                    of
                                      Shares
                                  
                                  Class
                                  
                                  Total
                                    OutstandingSeries
                                      A Preferred
                                  
                                  Qualmax,
                                      Inc.
                                  
                                  100
                                      (2)
                                  
                                  85.71%
                                  
                                  76.05%StockM.
                                      David Kamrat (3)
                                  
                                  56.093730
                                      (4)
                                  
                                  44.48%
                                  
                                  42.66%Noah
                                      Kamrat (5)
                                  
                                  56.093730
                                      (6)
                                  
                                  44.48%
                                  
                                  42.66%P&S
                                      Spirit LLC (7)
                                    c/o
                                      Oregon Spirit LLC
                                    2019
                                      SW 20th
                                      Street, Suite 108
                                    Fort
                                      Lauderdale, FL 33315
                                  
                                  38.279633 (8)
                                  
                                  30.39%
                                  
                                  29.11%Dr.
                                      Selvin Passen
                                    2019
                                      SW 20th
                                      Street, Suite 108
                                    Fort
                                      Lauderdale, FL 33315
                                  
                                  23.209112 (9)
                                  
                                  19.13%
                                  
                                  17.65%Jacob
                                      Schorr, Ph.D. (10)
                                  
                                  19.139816 (11)
                                  
                                  15.78%
                                  
                                  14.55%Ian
                                      T. Richardson (12)
                                  
                                  0.922467 (13)
                                  
                                  *
                                  
                                  *Duy
                                      Tran (14)
                                  
                                  7.351803 (15)
                                  
                                  6.28%
                                  
                                  5.41%




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            52 of 61
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B.O.S.
                    Better Online Solutions Ltd.
                  Beit
                    Rabin, Teradyon Industrial Park
                  Misgav
                    20170
                  Israel
                23.907592 (16)
                20.41%
                18.11%Total
                    directors and executive officers as a group (5)
                80.236924
                58.97%
                53.18%Common
                    Stock
                Dr.
                      Selvin Passen
                  2019
                    SW 20th
                    Street, Suite 108
                  Fort
                    Lauderdale, FL 33315
                19,250,000
                    (17)
                41.80%
                4.88%Oregon
                    Spirit LLC
                  2019
                    SW 20th
                    Street, Suite 108
                  Fort
                    Lauderdale, FL 33315
                7,500,000
                16.93%
                1.91%Maple
                    Leaf Distillers, Inc.
                  251
                    Saulteaux Crescent
                  Winnipeg
                    MB R3J367
                  Canada
                7,000,000
                    (18)
                15.28%
                1.78%Dr.
                    Selvin Passen
                19,250,000
                    (19)
                41.80%
                4.88%


*
      Represents less than 1%.





(1)
            Except
                as otherwise indicated,
                the address of each Beneficial Owner is 340 West Fifth Avenue, Eugene,
                Oregon 97401.




(2)
            The
                shares of Series A Preferred
                Stock are convertible into 298,673,634 shares of Common Stock and
                are
                entitled to vote with the shares of Common Stock (on an as-converted
                basis) in each matter brought to a vote of the Company’s
                stockholders.




(3)
            M.
                David Kamrat serves as our
                Chief Executive Officer and our Chairman of the Board. Mr. Kamrat
                is also
                a director and a principal stockholder of Qualmax, Inc., which is
                the
                record owner of 100 shares of Preferred
                Stock.




(4)
            Represents
                the number of shares
                of Preferred Stock beneficially owned as a result of Mr. Kamrat’s direct
                ownership interest in Qualmax, Inc. Also includes indirect beneficial
                ownership of shares of Preferred Stock based on Mr. Kamrat’s wife, son and
                daughter-in-law’s direct ownership interests in Qualmax,
                Inc.




(5)
            Noah
                R. Kamrat serves as our
                President and is a director. Mr. Kamrat is also a director and a
                principal
                stockholder of Qualmax, Inc., which is the record owner of 100 shares
                of
                Preferred Stock.




(6)
            Represents
                the number of shares
                of Preferred Stock beneficially owned as a result of Mr. Kamrat’s direct
                ownership interest in Qualmax, Inc. Also includes shares of Preferred
                Stock indirectly beneficially owned by each of Mr. Kamrat’s wife, father,
                and mother based upon their respective direct ownership interests
                in
                Qualmax, Inc.




(7)
            P&S
                Spirit is owned equally
                by Dr. Selvin Passen and Jacob Schorr, Ph.D., who is a director of
                the
                Company.




(8)
            Represents
                11.160454 shares of
                Preferred Stock owned directly by P&S Spirit as well as a warrant to
                purchase an additional 9.300378 shares of Preferred Stock exercisable
                within the next 60 days. Also represents the indirect beneficial
                ownership
                of an additional 17.818801 shares of Preferred Stock based upon P&S
                Spirit’s direct ownership interest in Qualmax,
                Inc.





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            53 of 61
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(9)
            Represents:
                (a) 1.627718 shares
                indirectly beneficially owned by Dr. Passen based on his direct ownership
                interest in Qualmax, Inc.; (b) 2.441577 shares indirectly beneficially
                owned by owned by Dr. Passen based on his ownership interest in Oregon
                Spirit LLC, which has a direct ownership interest in Qualmax, Inc.;
                and
                (c) 19.139816 shares indirectly beneficially owned by Dr. Passen
                based on
                his ownership of one-half of P&S Spirit
                LLC.




(10)
            Dr.
                Schorr serves as a director
                of the Company.




(11)
            Represents
                19.139816 shares
                indirectly beneficially owned by Dr. Schorr based on his ownership
                of
                one-half of P&S Spirit
                LLC.




(12)
            Mr.
                Richardson served as Vice
                President, General Counsel & interim Chief Financial Officer from
                September 15, 2006 until January 31, 2007 and currently serves as
                Vice
                President and General
                Counsel.




(13)
            Represents
                indirect beneficial
                ownership of shares of Preferred Stock based on Mr. Richardson’s ownership
                of options to purchase shares of common stock of Qualmax, Inc. exercisable
                within the next 60 days.




(14)
            Mr.
                Tran serves as Vice President
                & Secretary of the Company, and from September 15, 2006 until January
                31, 2007 served as a director of the
                Company.




(15)
            Represents:
                (a) indirect
                beneficial ownership of shares of Preferred Stock based on the direct
                ownership interest in Qualmax, Inc. by Microstar Communications Corp,
                an
                entity controlled by Mr. Tran; and (b) indirect beneficial ownership
                of
                shares of Preferred Stock based on Mr. Tran’s ownership of options to
                purchase shares of common stock of Qualmax, Inc. exercisable within
                the
                next 60 days.




(16)
            Represents:
                (a) direct ownership
                of 5.50652 shares of Preferred Stock; (b) indirect beneficial ownership
                of
                17.904767 shares of Preferred Stock based on BOS’s direct ownership
                interest in Qualmax, Inc.; and (c) indirect beneficial ownership
                of shares
                of Preferred Stock based on BOS’s ownership of options to purchase shares
                of common stock of Qualmax, Inc. exercisable within the next 60
                days.




(17)
            Represents:
                (a) 10,000,000 shares
                of Common Stock owned directly; (b) indirectly beneficial ownership
                of
                7,500,000 shares of Common Stock based on ownership by Oregon Spirit,
                LLC,
                an controlled by Dr. Passen; and (c) 1,750,000 shares issuable upon
                the
                exercise of warrants held by Dr. Passen and exercisable within the
                next 60
                days.




(18)
            Includes
                1,500,000 shares issuable upon the exercise of options exercisable
                within
                the next 60 days.Maple
                Leaf Distillers, Inc. is a
                private corporation incorporated in Canada, which is controlled by
                Protos
                International, Inc., which in turn, is controlled by two natural
                person(s), Costas Ataliotis and David Wolinsky.  Based solely on
                information publicly available to the Company, on January 4, 2006
                a
                bankruptcy petition was filed against Maple Leaf Distillers, Inc.
                and
                Protos International, Inc. in Winnipeg; on January 18, 2006, the
                accounting firm Ernst & Young was appointed receiver for both entities
                by Court of Queen’s Bench Justice Morris Kaufman (BK06-01-79826 Maple Leaf
                Distillers, Inc.); and on May 4, 2006, Manitoba Court of Queen’s Bench
                Justice Marc Monnin approved the sale of the majority of Maple Leaf’s
                assets to Angostura Ltd.; however, the Company does not know whether
                such
                sale included the shares owned by Maple Leaf Distillers,
                Inc.  Accordingly, assuming the shares were not included in the
                sale, the Company believes that Ernst & Young, as the receiver, has
                voting and investment control over the shares owned by Maple Leaf
                Distillers, Inc.




(19)
            Represents:
                (a) 10,000,000 shares
                of Common Stock owned by Dr. Passen; (b) indirect beneficial ownership
                of
                7,500,000 shares of Common Stock based on ownership by Oregon Spirit,
                LLC,
                an entity controlled by Dr. Passen; and (c) 1,750,000 shares issuable
                upon the exercise of warrants held by Dr. Passen and exercisable
                within
                the next 60 days.





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            54 of 61
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The
      following table provides information, as of December 31, 2006, with respect
      to
      all of our compensation plans under which equity securities are authorized
      for
      issuance:





**Plan
                    Category**
                **Number
                    of Securities**
                  **to
                    be issued upon**
                  **exercise
                    of**
                  **outstanding
                    options,**
                  **warrants,
                    and rights**
                **Weighted
                    average**
                  **exercise
                    price of**
                  **outstanding
                    options,**
                  **warrants,
                    and rights**
                **Number
                    of securities**
                  **remaining
                    available**
                  **for
                    future issuance**Plans
                    approved by stockholders
                --
                --
                --Plans
                    not approved by stockholders
                3,245,000
                $                     0.20
                1,755,000





**Lock-Up
      Agreement Among Principal Shareholders**





In
      connection with the transactions contemplated by the Subscription Agreement,
      the
      Company, the Kamrats, P&S Spirit and certain affiliates of the Kamrats and
      P&S Spirit entered into the Lock-Up Agreement, pursuant to which each such
      party agreed to certain restrictions on transfer on certain shares of capital
      stock (and securities convertible into share of capital stock) of the Company
      on
      the terms set forth therein. A copy of the Amended and Restated Lock-Up
      Agreement is filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K
      filed with the SEC on January 8, 2007.  In particular, the parties
      agreed to restrict their ability to transfer shares of capital stock in the
      Company for up to two years without the prior approval of the other stockholders
      party thereto (meaning, both the Kamrats and P&S Spirit must seek the
      consent of the other to sell subject shares during the term of the Lock-Up
      Agreement).  Also, in connection with the transactions contemplated by
      the BOS Agreement: (i) BOS agreed to be subject to the Lock-Up Agreement,
      restricting the ability of BOS to transfer shares of capital stock in the
      Company and Qualmax for up to two years without the prior approval of the other
      stockholders party thereto; and (ii) BOS granted the Company a three-year
      option, contingent upon certain conditions, to purchase up to 30% of the shares
      of Preferred Stock (or shares of Common Stock) held by BOS, at a price per
      share
      ranging from $0.12 to $0.24 per share (on a common-equivalent
      basis).




**ITEM 12.**
              ****CERTAIN
                  RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
                  INDEPENDENCE****


**Relationship
      with Selvin Passen**





To
      fund
      operations in the past, we have had to rely on loans from Dr. Selvin Passen,
      our
      former Chairman and a substantial stockholder (directly and beneficially, as
      disclosed in the above table in Item 11, “Security Ownership of Certain
      Beneficial Owners and Management and Related Stockholder
      Matters”).  As of September 15, 2006, none of those loans
      remained.  Dr. Passen has invested substantially in the Company since
      September 15, 2006, investing $1,500,000 on September 14 in relation to the
      Reverse Acquisition, and via P&S Spirit investing between $1,500,000 and
      $2,500,000 (based upon Dr. Passen’s 50% ownership in P&S Spirit) pursuant to
      the P&S Subscription Agreement described in more detail in this Report in
      Item 5, “Market for Common Equity and Related Stockholder Matters and Small
      Business Issuer Purchases of Equity Securities – Recent Sales of Unregistered
      Securities.”





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            55 of 61
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**Relationship
      with Jacob Schorr**





Jacob
      Schorr, Ph.D., serves on our Board and is a substantial stockholder
      (beneficially, as disclosed in the above table in Item 11, “Security Ownership
      of Certain Beneficial Owners and Management and Related Stockholder Matters”),
      investing via P&S Spirit between $1,500,000 and $2,500,000 (based upon Dr.
      Schorr’s 50% ownership in P&S Spirit) pursuant to the Subscription Agreement
      herein described in more detail in Item 5, “Market for Common Equity and Related
      Stockholder Matters and Small Business Issuer Purchases of Equity Securities
–
Recent Sales of Unregistered Securities.”





**Transactions
      with Dr. Selvin Passen, Jacob Schorr, M. David Kamrat, and Noah
      Kamrat**





Since
      January 1, 2006 the Company has entered into various transactions with Dr.
      Selvin Passen, a principal stockholder of the Company, and his affiliates,
      as
      well as with Jacob Schorr, Ph.D., a director of the Company, M. David Kamrat,
      the Company’s Chief Executive Officer and Chairman of the Board and Noah R.
      Kamrat, the Company’s President and a director. Reference is made to the
      description of each these related party transactions earlier in Item 1,
“Description of Business – Background and Recent Developments, Change in
      Business from Wine Distribution to VoIP Technology,” Item 1, “Description of
      Business – Background and Recent Developments, Change in Business from Wine
      Distribution to VoIP Techology – P&S Spirit Subscription Agreement,”
and in Item 5, “Market for Common Equity and Related Stockholder Matters and
      Small Business Issuer Purchases of Equity Securities – Recent Sales of
      Unregistered Securities.”





**Relationship
      and Transactions with BOS**





As
      a
      result of our acquisition on December 31, 2005 of certain assets of BOS, BOS
      became a principal stockholder of the Company.  Reference is made to
      the description of related party transactions with BOS in Item 1, “Description
      of Business – BOS Debt Conversion,” and in Item 5, “Market for Common Equity and
      Related Stockholder Matters and Small Business Issuer Purchases of Equity
      Securities – Recent Sales of Unregistered Securities.”





**Corporate
      Governance**





Based
      on
      our adoption of the NASDAQ definition of independence, as of December 31, 2006
      two of our directors, M. David Kamrat and Noah Kamrat, were not considered
      independent as a result of their status as employees and officers of the
      Company, but our third director, Jacob Schorr, was considered
      independent.  However, effective as of March 30, 2007, the date of the
      P&S Loan Agreement, Jacob Schorr may no longer be considered an independent
      director as a result of his ownership interest in P&S Spirit.




**ITEM 13.**
              ****EXHIBITS****


Exhibits
      required to be attached by Item 601 of Regulation S-B are listed in this Form
      10-KSB’s Exhibit Index, which is incorporated herein by reference.





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


**Fees
      Paid to Independent Registered Public Accounting Firms**





The
      following table sets forth, for each of the years indicated, the aggregate
      fees
      paid to our independent registered public accounting firms and the percentage
      of
      each of the fees out of the total amount paid to the accountants:





12
                    month period ended:May
                    31, 2006
                
                
                Dec.
                    31, 2006**Services
                    Rendered**
                
                **Fees**
                
                
                **Percentages**
                
                
                **Fees**
                
                
                **Percentages**Audit
                    (1)
                
                $
                36,267
                
                
                
                100
                %
                
                $
                105,659
                
                
                
                100
                %Audit-Related
                    Fees (2)
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Tax
                    Fees (3)
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -All
                    other fees
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Total
                
                $
                36,267
                
                
                
                100
                %
                
                $
                105,659
                
                
                
                100
                %





(1)
            Audit
                fees consist of services that would normally be provided in connection
                with statutory and regulatory filings or engagements, including services
                that generally only the independent accountant can reasonably
                provide.





(2)
            Audit-related
                fees relate to assurance and associated services that traditionally
                are
                performed by the independent accountant, including: attest services
                that
                are not required by statute or regulation; accounting consultation
                and
                audits in connection with mergers, acquisitions and divestitures;
                employee
                benefit plans audits; and consultation concerning financial accounting
                and
                reporting standards.





(3)
            Tax
                fees relate to services performed by the tax division for tax compliance,
                planning, and advice.





**Pre-Approval
      Policies and Procedures**





Our
      Board
      has adopted a policy and procedures for the pre-approval of audit and non-audit
      services rendered by our independent public accountants, Berenfeld, Spritzer,
      Shechter & Sheer.  The policy generally pre-approves certain
      specific services in the categories of audit services, audit-related services,
      and tax services up to specified amounts, and sets requirements for specific
      case-by-case pre-approval of discrete projects, those which may have a material
      effect on our operations or services over certain amounts. Pre-approval may
      be
      given as part of the Board’s approval of the scope of the engagement of our
      independent auditor or on an individual basis. The pre-approval of services
      may
      be delegated to one or more of the Board members, but the decision must be
      presented to the full Board at its next scheduled meeting. The policy prohibits
      retention of the independent public accountants to perform the prohibited
      non-audit functions defined in Section 201 of the Sarbanes-Oxley Act or the
      rules of the SEC, and also considers whether proposed services are compatible
      with the independence of the public accountants.





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            57 of 61
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**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.





NEW
                  WORLD BRANDS, INC.Date:  April
                    17, 2007
                By:
                /s/
                    M. David KamratM.
                    David Kamrat, Chief Executive
                    Officer








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








SIGNATURE
              
              TITLE
              DATE/s/
                  M. David Kamrat
              
              Chief
                  Executive Officer and
              April
                  17, 2007M.
                  David Kamrat
              
              Chairman
                  of the Board/s/
                  Noah Kamrat
              
              President
                  and Director
              April
                  17, 2007Noah
                  Kamrat/s/
                  Shehryar Wahid
              
              Chief
                  Financial Officer
              April
                  17, 2007Shehryar
                  Wahid/s/
                  Ian T. Richardson
              
              General
                  Counsel
              April
                  17, 2007Ian
                  T. Richardson




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**EXHIBIT
      INDEX**


Exhibit
                      
                      Document2.1
                      
                      Asset
                          Purchase Agreement dated June 22, 2006, by and between
                          New World Brands,
                          Inc. and Qualmax, Inc.    (1)2.2
                      
                      Stock
                          Purchase Agreement dated June 22, 2006, by and among International
                          Spirits, LLC, New World Brands, Inc. and International
                          Importers,
                          Inc.    (1)2.3
                      
                      Amendment
                          No. 1 to Asset Purchase Agreement, dated as of August 28,
                          2006, by and
                          between New World Brands, Inc. and Qualmax,
                          Inc.     (2)2.4
                      
                      Amendment
                          No. 1 to Stock Purchase Agreement, dated as of August 28,
                          2006, by and
                          among International Spirits, LLC, New World Brands, Inc.
                          and International
                          Importers, Inc.     (2)2.5
                      
                      Merger
                          Agreement by and among Oak Tree Medical Systems, Inc.,
                          Oak Tree Spirits,
                          Inc., International Importers, Inc., Marvin Ribotsky, Allen
                          Salzman and
                          Harvey Bronstein dated as of October 16,
                          2001     (10)2.6
                      
                      Purchase
                          Agreement by and between Acorn Corf I, Inc. and Oak Tree
                          Medical Systems,
                          Inc., dated as of February 6,
                          1997     (11)2.7
                      
                      Asset
                          Purchase Agreement, dated July 9, 1999, by and among the
                          Seller,
                          Stockholders, Oak Tree Medical Systems, Inc., and Oak Tree
                          Medical Systems
                          Practice Management, Inc.   (17)2.8
                      
                      Stock
                          Purchase Agreement, dated December 10, 1999, by and among
                          Northeast
                          Medical Management, Inc., Stockholders, Oak Tree Medical
                          Systems, Inc.,
                          and Oak Tree Medical Systems Practice Management,
                          Inc.   (17)
  2.9
                        
                        Agreement
                            for Purchase and Sale of Stock by and among New World
                            Brands, Inc., Marvin
                            Ribotsky and Selvin Passen, and/or assigns (19)2.10
                        
                        Amendment
                            No. 1 to Agreement for Purchase and Sale of Stock by
                            and among New World
                            Brands, Inc., Marvin Ribotsky and Selvin Passen, and/or
                            assigns
                            (19)
  3.1
                      
                      Certificate
                          of Incorporation     (3)3.2
                      
                      Certificate
                          of Incorporation Amendments dated August 1,
                          1994     (4)3.3
                      
                      By-Laws     (3)4.1
                      
                      Form
                          of Common Stock
                          Certificate     (5)4.2
                      
                      Certificate
                          of Designation, Preferences and Rights of Series A Convertible
                          Preferred
                          Stock of New World Brands,
                          Inc.      (6)4.3
                      
                      Certificate
                          of Amendment to the Certificate of Designation, Preferences
                          and Rights of
                          Series A Convertible Preferred Stock of New Worlds Brands,
                          Inc.     (7)10.1
                      
                      Term
                          Loan and Security Agreement by and between New World Brands,
                          Inc.
                          and  P&S Spirit, LLC dated as March 30,
                          2007     (8)10.2
                      
                      Term
                          Note by and between New World Brands, Inc. and  P&S Spirit,
                          LLC dated as March 30, 2007    (8)10.3
                      
                      Guaranty
                          by Qualmax, Inc. dated as of March 30,
                          2007     (8)






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            59 of 61
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10.4
                  
                  Limited
                      Guaranty by M. David Kamrat dated as of March 30,
                      2007     (8)10.5
                  
                  Collateral
                      Pledge Agreement made by Qualmax, Inc. dated as of March 30,
                      2007
                      (8)10.6
                  
                  Letter
                      Agreement by and among New World Brands, Inc., Qualmax, Inc.,
                      IP Gear,
                      Ltd., P&S Spirit, LLC and B.O.S. Better Online Solutions Ltd., dated
                      December 31, 2006     (9)10.7
                  
                  Amended
                      and Restated Stock Subscription and Share Transfer Agreement,
                      by and among
                      New World Brands, Inc., P&S Spirit, LLC, M. David Kamrat and Noah
                      Kamrat, dated as of December 29,
                      2006     (7)10.8
                  
                  Amended
                      and Restated Escrow Agreement, by and among New World Brands,
                      Inc.,
                      P&S Spirit, LLC and the Escrow Agent (as defined therein), dated
                      as of
                      December 29, 2006 (7)10.9
                  
                  Amended
                      and Restated Lock-Up Agreement, by and among New World Brands,
                      Inc.,
                      P&S Spirit, LLC, M. David Kamrat, Noah Kamrat and certain other
                      stockholders party thereto, dated as of December 29,
                      2006     (7)10.10
                  
                  Amended
                      and Restated Voting Agreement, by and among New World Brands,
                      Inc.,
                      P&S Spirit, LLC, M. David Kamrat, Noah Kamrat and certain other
                      stockholders party thereto, dated as of December 29,
                      2006     (7)10.11
                  
                  Agreement
                      dated as of December 29, 2006 to Purchase Shares of Series
                      A Preferred
                      Stock     (7)10.12
                  
                  Officer
                      and Director Compensation Plan, dated October 26, 2000, by
                      Oak Tree
                      Medical Systems, Inc. for Various Officers and
                      Directors    (15)10.13
                  
                  Employee
                      and Consultant Services Plan, dated April 14, 2001, by Oak
                      Tree Medical
                      Systems, Inc. for Various Employees and Consultants Designated
                      by the
                      Board    (16)10.14
                  
                  Consultant
                      Services Plan, dated January 7, 2000, by Oak Tree Medical Systems,
                      Inc.
                      for Various Employees and Consultants Designated by the
                      Board    (18)
  10.15
                    
                    Promissory
                        Note dated as of December 26, 1996 by and among Oak Tree
                        Medical
                        Management, Inc., as Borrower and Maple Health, Inc., Northern
                        Professionals Inc., Southern Professionals, Inc., Mark A.
                        Gentile, James
                        O’Neill, Robert Einemann and Bernard Posner, as Lenders
                        (20)10.16
                    
                    Security
                        Agreement dated as of December 11, 1996 by and among Oak Tree Medical
                        Management, Inc. and Maple Health Inc, Southern Professional
                        Associates
                        Inc., and Northern Professional Associates, Inc. (20)10.17
                    
                    Agreement
                        of Sale dated December 11, 1996 by and among Oak Tree Medical
                        Management,
                        Inc., and Maple Health, Inc., Northern Professional Associates,
                        Inc.,
                        Southern Professional Associates, Inc., Mark A. Gentile,
                        James O’Neill,
                        Robert Einemann, Bernard Posner and Steven Rotwein (20)10.18
                    
                    Agreement
                        of Sale dated as of December 11, 1996 by and between Steven
                        Rotwein and
                        New Medical Practice, P.C. (20)10.19
                    
                    Modification
                        of Agreement of Sale dated as of December 11, 1996, by and
                        among
                        Oak
                      Tree
                        Medical Management, Inc. and Southern Professional Associates,
                        Inc.,
                        Northern Professional Associates, Inc., Maple Health, Inc.,
                        Mark Gentile,
                        James O'Neill, Robert Einemann and Bernard Posner (20)10.20
                    
                    Stock
                        Option Agreement dated as of October 2, 1998 by and between
                        the Oak Tree
                        Medical Systems, Inc. and Henry Dubbin (21)10.21
                    
                    Agreement
                        dated as of March 15, 1999 by and between Oak Tree Medical
                        Systems, Inc.
                        and Richards Healthcare, Inc. (21)10.22
                    
                    Stock
                        Option Agreement dated as of June 1, 1998 by and between
                        Oak Tree Medical
                        Systems, Inc. and Progressive Planning Associates, Inc.
                        (22)10.23
                    
                    Agreement
                        of Sale dated as of November 2, 1998, by and between Rehabilitation
                        Medicine Practice of N.Y., P.L.L.C. and Oak Tree Medical
                        Management, Inc.
                        (23)10.24
                    
                    Agreement
                        of Sale dated as of November 2, 1998, by and between Rehabilitation
                        Medicine Practice of N.Y., P.L.L.C. and Oak Tree Medical
                        Practice, P.C.
                        (23)10.25
                    
                    Agreement
                        of Sale dated as of December 23, 1998, by and between Oak
                        Tree Medical
                        Practice, P.C. and Rehabilitation Medicine Practice of N.Y.,
                        P.L.L.C.
                        (23)10.26
                    
                    Agreement
                        dated as of November 27, 1998, by and between Oak Tree Medical
                        Systems,
                        Inc. and Bouchard Friedlander & MaloneyHuss, P.A.
                        (24)10.27
                    
                    Agreement
                        dated as of April 24, 1998 by and between Oak Tree Medical
                        Systems, Inc.
                        and William Kedersha (25)
  10.28
                    
                    Agreement
                        of Sale dated as of July 16, 1998, by and among Oak Tree
                        Medical
                        Management, Inc., Oak Tree Medical Practice, P.C. and Nesconset
                        Sports,
                        Inc. (26)10.29
                    
                    Consulting
                        Agreement dated as of July 17, 1998, by and between Oak Tree
                        Medical
                        Systems, Inc. Irwin Bosh Stack (27)10.30
                    
                    Settlement
                        Agreement dated as of September 3, 1997, by and between Oak
                        Tree Medical
                        Systems, Inc. and William Kedersha (28)10.31
                    
                    Agreement
                        dated as of August 1997, by and between Oak Tree Medical
                        Systems, Inc. and
                        Progressive Planning Associates, Inc. (28)10.32
                    
                    Financial
                        Advisory Agreement dated as of July 15, 1996, by and between
                        Oak Tree
                        Medical Systems, Inc. and Westcap Corp. (29)10.33
                    
                    Stipulation
                        and Order dated as of December 30, 1998, by and between Oak
                        Tree Medical
                        Systems, Inc. and Westcap Corp. (29)10.34
                    
                    Purchase
                        Agreement dated as of July 23, 1997 by and between Oak Tree
                        MedicalPractice, P.C. and PFS VI, Inc. (30)10.35
                    
                    Employment
                        Agreement dated as of October 1, 1996, by and between New
                        MedicalPractice,
                        P.C. and Gary Danziger (30)10.36
                    
                    Agreement
                        of Sale, dated as of July 16, 1997, by and between Oak Tree
                        MedicalPractice, P.C. and Peter B. Saadeh, M.D. (30)10.37
                    
                    Consulting
                        Agreement dated as of August 29, 1997, by and between Oak
                        Tree Medical
                        Systems, Inc. and Burton Dubbin (30)10.38
                    
                    Executive
                        Employment Agreement dated as of December 3, 1996, by and
                        between OakTree
                        Medical Systems, Inc. and William Kedersha (31)10.39
                    
                    Stock
                        Option Agreement dated as of December 3, 1996, by and between
                        Oak Tree
                        Medical Systems, Inc. and Burton Dubbin (31)10.40
                    
                    Public
                        Relations Consulting Letter Agreement dated as of December
                        20,1996, by and
                        between Oak Tree Medical Systems, Inc. and Gotham City Corporate
                        Relations
                        Group, Inc. (31)10.41
                    
                    Financial
                        Advisor Consulting Letter Agreement dated December 20, 1996,
                        by and
                        between Oak Tree Medical Systems, Inc. and Anthony Palmigiano
                        (31)10.42
                    
                    Letter,
                        dated January 14, 1997, in respect of modification of Agreement
                        of Sale,
                        dated December 11, 1996, by and between Oak Tree Medical
                        Management, Inc.
                        Maple Health, Inc., Northern Professional, Inc., Southern
                        Professional,
                        Inc., Mark A. Gentile, James O’Neill, Robert Einemann and Bernard Posner
                        (31)10.43
                    
                    Term
                        Loan Agreement dated as of September 30, 1996, by and between
                        FirstUnion
                        National Bank and Oak Tree Medical Management, Inc.
                        (32)10.44
                    
                    Security
                        Agreement dated as of September 30, 1996, by and between
                        Oak Tree Medical
                        Management, Inc. and First Union National Bank (32)10.45
                    
                    Promissory
                        Note and Promissory Note dated as of September 30, 1996,
                        by and between
                        Oak Tree Medical Management, Inc. and First Union National
                        Bank
                        (32)
 10.46
                    
                    Unconditional
                        Guaranty dated as of September 30, 1996, by and between Oak
                        Tree Medical
                        Management, Inc., Oak Tree Medical Systems, Inc. and First
                        Union National
                        Bank (32)10.47
                    
                    Health
                        Care Receivables Loan and Security Agreement dated as of
                        September 16,
                        1996, by and between Oak Tree Receivables, Inc. and Sam Fund
                        I, L.P.
                        (32)10.48
                    
                    Agreement
                        of Sale by and between Orthopedic & Sports Therapy Services of Queens,
                        L.P., Parkside of Queens, Inc. and Oak Tree Medical Management,
                        Inc.
                        (32)10.49
                    
                    Agreement
                        of Sale by and between Parkside Physical Therapy Services,
                        P.C. and New
                        Media Practice, P.C.10.50
                    
                    Agreement
                        of Sale between Gary Danziger, PTSR, Inc. and Oak Tree Medical
                        Management,
                        Inc. (32)10.51
                    
                    Agreement
                        dated as of November 30, 1995, by and between Oak Tree Medical
                        Systems,
                        Inc. and Donald Stiffler (33)
  14.1
                  
                  Codeof
                    Ethics(*)16.1
                  
                  Letter,
                      dated March 13, 2007, regarding a change in the certifying
                      accountant for
                      New World Brands, Inc.    (13)16.2
                  
                  Letter,
                      dated November 16, 2006, regarding a change in the certifying
                      accountant
                      for New World Brands, Inc.    (14)31.1
                  
                  Certification
                      of Chief Executive Officer pursuant to Section 302 of the Sarbanes
                      Oxley
                      Act of 2002     (*)31.2
                  
                  Certification
                      of Chief Financial Officer pursuant to Section 302 of the Sarbanes
                      Oxley
                      Act of 2002     (*)32.1
                  
                  Certification
                      of Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
                      as adopted
                      pursuant to Section 906 of the Sarbanes Oxley Act of
                      2002     (*)32.2
                  
                  Certification
                      of Chief Financial Officer pursuant to 18 U.S.C., Section 1350,
                      as adopted
                      pursuant to Section 906 of the Sarbanes Oxley Act of
                      2002      (*)99.1
                  
                  Stock
                      Subscription Agreement by and between New World Brands, Inc.
                      and Oregon
                      Spirit, LLC dated August 28,
                      2006     (12)


Page
            60 of 61
 (*)
                        
                        Filed
                            herewith.(1)
                        
                        Incorporated
                            by reference to New World Brands, Inc.’s Form 8-K, filed with the SEC on
                            June 23, 2006.(2)
                        
                        Incorporated
                            by reference to New World Brands, Inc.’s Form 8-K, filed with the SEC on
                            August 29, 2006.(3)
                        
                        Incorporated
                            by reference to New World Brands, Inc.’s Registration Statement on Form
                            S-18, filed with the SEC on August 20, 1986.(4)
                        
                        Incorporated
                            by reference to New World Brands, Inc.’s Annual Report on Form 10-KSB
                            for the fiscal year ended May 31, 1995.(5)
                        
                        Incorporated
                            by reference to New World Brands, Inc.’s Annual Report on Form 10-KSB
                            for the fiscal year ended May 31, 1994.(6)
                        
                        Incorporated
                            by reference to New World Brands, Inc.'s Form 10-QSB,
                            filed with the SEC
                            on October 16, 2006.(7)
                        
                        Incorporated
                            by reference to New World Brands, Inc.’s Form 8-K, filed with the SEC on
                            January 8, 2007.(8)
                        
                        Incorporated
                            by reference to New World Brands, Inc.’s Form 8-K, filed with the SEC on
                            April 5, 2007.(9)
                        
                        Incorporated
                            by reference to New World Brands, Inc.’s Form 8-K, filed with the SEC on
                            January 10, 2007.(10)
                        
                        Incorporated
                            by reference to Oak Tree Medical Systems Inc.’s Form 8-K, filed with the
                            SEC on November 20, 2001.(11)
                        
                        Incorporated
                            by reference to Oak Tree Medical Systems Inc.’s Form 8-K, filed with the
                            SEC on February 27, 1997.(12)
                        
                        Incorporated
                            by reference to New World Brands, Inc.’s Form 8-K, filed with the SEC on
                            September 8, 2006.(13)
                        
                        Incorporated
                            by reference to New World Brands, Inc.’s Form 8-K/A, filed with the SEC on
                            March 14, 2007.(14)
                        
                        Incorporated
                            by reference to New World Brands, Inc.’s Form 10-QSB, filed with the SEC
                            on November 20, 2006.(15)
                        
                        Incorporated
                            by reference to Oak Tree Medical Systems, Inc.’s Form S-8, filed with the
                            SEC on May 10, 2001.(16)
                        
                        Incorporated
                            by reference to Oak Tree Medical Systems, Inc.’s Form S-8, filed with the
                            SEC on May 18, 2001.(17)
                        
                        Incorporated
                            by reference to Oak Tree Medical Systems, Inc.’s Form 10-KSB, filed with
                            the SEC on September 13, 2000.(18)
                        
                        Incorporated
                            by reference to Oak Tree Medical Systems, Inc.’s Form S-8, filed with the
                            SEC on January 24,
                            2000.
 (19)
                  
                  Incorporated
                      by reference to New World Brands, Inc.’s Form 8-K, filed with the SEC on
                      May 26, 2004.(20)
                  
                  Incorporated
                      by reference to Oak Tree Medical Systems, Inc.’s Form 8-K, filed with the
                      SEC on December 26, 1996.(21)
                  
                  Incorporated
                      by reference to Oak Tree Medical Systems, Inc.’s Form S-8, filed with the
                      SEC on June 30, 1999.(22)
                  
                  Incorporated
                      by reference to Oak Tree Medical Systems, Inc.’s Form S-8, filed with the
                      SEC on April 13, 1999.(23)
                  
                  Incorporated
                      by reference to Oak Tree Medical Systems, Inc.’s Form 10-QSB, filed with
                      the SEC on January 14, 1999.(24)
                  
                  Incorporated
                      by reference to Oak Tree Medical Systems, Inc.’s Form S-8, filed with the
                      SEC on December 4, 1998.(25)
                  
                  Incorporated
                      by reference to Oak Tree Medical Systems, Inc.’s Form S-8, filed with the
                      SEC on November 19, 1998.(26)
                  
                  Incorporated
                      by reference to Oak Tree Medical Systems, Inc.’s Form 10-KSB, filed with
                      the SEC on August 31, 1998.(27)
                  
                  Incorporated
                      by reference to Oak Tree Medical Systems, Inc.’s Form S-8, filed with the
                      SEC on August 17, 1998.(28)
                  
                  Incorporated
                      by reference to Oak Tree Medical Systems, Inc.’s Form S-8, filed with the
                      SEC on March 16, 1998.(29)
                  
                  Incorporated
                      by reference to Oak Tree Medical Systems, Inc.’s Form S-8, filed with the
                      SEC on March 2, 1998.(30)
                  
                  Incorporated
                      by reference to Oak Tree Medical Systems, Inc.’s Form 10-KSB, filed with
                      the SEC on February 2, 1998.(31)
                  
                  Incorporated
                      by reference to Oak Tree Medical Systems, Inc.’s Form 10-KSB, filed with
                      the SEC on January 21, 1997.(32)
                  
                  Incorporated
                      by reference to Oak Tree Medical Systems, Inc.’s Form 10-Q, filed with the
                      SEC on October 21, 1996.(33)
                  
                  Incorporated
                      by reference to Oak Tree Medical Systems, Inc.’s Form S-8, filed with the
                      SEC on August 30, 1996.


Page
        61 of
        61













**NEW
        WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **CONSOLIDATED
        FINANCIAL STATEMENTS**
 
 **DECEMBER
        31, 2006**
 
 
  **NEW
        WORLD BRANDS, INC. AND SUBSIDIARY**
 **TABLE
        OF CONTENTS**
 **DECEMBER
        31, 2006**
 
 
 PageReport
                            of independent registered public accounting firm
                        F-1Financial
                            statements:Consolidated
                            balance sheet
                        F-2Consolidated
                            statements of comprehensive income (loss)
                        F-4Consolidated
                            statements of changes in stockholders' equity
                        F-5Consolidated
                            statements of cash flows
                        F-7Notes
                            to consolidated financial statements
                        F-9
  
 
 **REPORT
          OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 To
          the
          Audit Committee and Stockholders
 New
          World
          Brands, Inc. and Subsidiary
 Eugene,
          Oregon
 
 We
          have
          audited the accompanying consolidated balance sheet of New World Brands,
          Inc.
          and Subsidiary as of December 31, 2006 and the related consolidated statements
          of income, changes in stockholders’ equity and cash flows for the years ended
          December 31, 2006 and 2005.  These consolidated financial statements
          are the responsibility of the Company's management.  Our
          responsibility is to express an opinion on the consolidated financial statements
          based on our audit.
 
 We
          conducted our audits in accordance with the standards of the Public Company
          Accounting Oversight Board (United States).  Those standards require
          that we plan and perform the audit to obtain reasonable assurance about
          whether
          the financial statements are free of material misstatement.  The
          company is not required to have, nor were we engaged to perform, an audit
          of its
          internal control over financial reporting.  Our audit included
          consideration of internal control over financial reporting as a basis for
          designing audit procedures that are appropriate in the circumstances, but
          not
          for the purpose of expressing an opinion on the effectiveness of the company’s
          internal control over financial reporting.  Accordingly, we express no
          such opinion.  An audit also includes examining, on a test basis,
          evidence supporting the amounts and disclosures in the financial statements,
          assessing the accounting principles used and significant estimates made
          by
          management, as well as evaluating the overall financial statement
          presentation.  We believe that our audits provide a reasonable basis
          for our opinion.
 
 In
          our
          opinion, the consolidated financial statements referred to above present
          fairly,
          in all material respects, the consolidated financial position of New World
          Brands, Inc. and Subsidiary as of December 31, 2006, and the consolidated
          results of its operations and its cash flows for the years ended December
          31,
          2006 and 2005 in conformity with accounting principles generally accepted
          in the
          United States of America.
 
 **BERENFELD,
          SPRITZER, SHECHTER & SHEER**
 
 April
          14,
          2007
 F-1
 
 **NEW
        WORLD BRANDS, INC. AND SUBSIDIARY**
 **CONSOLIDATED
        BALANCE SHEET**
 **DECEMBER
        31, 2006**
 
 
 **ASSETS****Current
                              Assets:**Cash
                              and cash equivalents
                          
                          $
                          3,396,617Accounts
                              receivable, net
                          
                          
                          1,496,865Inventories,
                              net
                          
                          
                          1,817,824Prepaid
                              expenses
                          
                          
                          175,367Income
                              tax refund receivable
                          
                          
                          403,995Other
                              current assets
                          
                          
                          220,802Total
                              Current Assets
                          
                          
                          7,511,470**Property
                              and Equipment, net**
                          
                          
                          5,839,651**Other
                              Assets:**Deposits
                              and other assets
                          
                          
                          153,411**Total
                              Assets**
                          
                          $
                          13,504,532
  The
        accompanying notes are an integral part of these consolidated financial
        statements.
 F-2
 
 **NEW
        WORLD BRANDS, INC. AND SUBSIDIARY**
 **CONSOLIDATED
        BALANCE SHEET**
 **DECEMBER
        31, 2006**
 
 **LIABILITIES
                                      AND STOCKHOLDERS' EQUITY****Current
                                      Liabilities:**Note
                                      payable, current portion
                                  
                                  $
                                  984,323Capital
                                      lease obligations, current portion
                                  
                                  
                                  169,202Accounts
                                      payable
                                  
                                  
                                  1,238,551Accrued
                                      expenses
                                  
                                  
                                  1,196,746Customer
                                      deposits
                                  
                                  
                                  59,625Advances
                                      from shareholders
                                  
                                  
                                  53,665Total
                                      Current Liabilities
                                  
                                  
                                  3,702,112**Long-Term
                                      Liabilities:**Capital
                                      lease obligations, net of current portion
                                  
                                  
                                  175,147Other
                                  
                                  
                                  53,411Total
                                      Long-Term Liabilities
                                  
                                  
                                  228,558**Total
                                      Liabilities**
                                  
                                  
                                  3,930,670**Commitments
                                      and Contingencies****Stockholders'
                                      Equity:**Preferred
                                      stock, $.01 par value, 1,000 shares authorized,   200
                                      shares designated as Series A preferred stock
                                  
                                  
                                  -Series
                                      A preferred stock, $.01 par value, 200 shares
                                      authorized   116.666974 shares issued and
                                      outstanding
                                  
                                  
                                  1Common
                                      stock, $.01 par value, 50,000,000 shares
                                      authorized,   44,303,939 shares issued and
                                      outstanding
                                  
                                  
                                  443,040Additional
                                      paid-in capital
                                  
                                  
                                  36,462,218Accumulated
                                      other comprehensive loss
                                  
                                  
                                  (49,295
                                  )Accumulated
                                      deficit
                                  
                                  
                                  (27,282,102
                                  )Total
                                      Stockholders' Equity
                                  
                                  
                                  9,573,862**Total
                                      Liabilities and Stockholders' Equity**
                                  
                                  $
                                  13,504,532
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
 
 F-3
 
 **NEW
        WORLD BRANDS, INC. AND SUBSIDIARY**
 **CONSOLIDATED
        STATEMENTS OF COMPREHENSIVE INCOME (LOSS)**
 **FOR
        THE YEARS ENDED DECEMBER 31, 2006 AND 2005**
 
 
 **2006**
                                                    
                                                    
                                                    **2005****Net
                                                        sales:**Resale
                                                        and proprietary hardware
                                                    
                                                    $
                                                    8,800,437
                                                    
                                                    
                                                    $
                                                    9,810,314Wholesale
                                                        carrier service
                                                    
                                                    
                                                    11,330,034
                                                    
                                                    
                                                    
                                                    8,227,22220,130,471
                                                    
                                                    
                                                    
                                                    18,037,536**Cost
                                                        of sales:**Resale
                                                        and proprietary hardware
                                                    
                                                    
                                                    (7,508,726
                                                    )
                                                    
                                                    
                                                    (8,126,649
                                                    )Wholesale
                                                        carrier service
                                                    
                                                    
                                                    (10,382,726
                                                    )
                                                    
                                                    
                                                    (7,411,035
                                                    )(17,891,452
                                                    )
                                                    
                                                    
                                                    (15,537,684
                                                    )**Gross
                                                        profit on sales**
                                                    
                                                    
                                                    2,239,019
                                                    
                                                    
                                                    
                                                    2,499,852**Selling
                                                        general and administrative
                                                        expenses**
                                                    
                                                    
                                                    (7,880,960
                                                    )
                                                    
                                                    
                                                    (2,286,127
                                                    )**Income
                                                        (loss) from operations**
                                                    
                                                    
                                                    (5,641,941
                                                    )
                                                    
                                                    
                                                    213,725**Other
                                                        income and expenses:**Interest
                                                        and other income
                                                    
                                                    
                                                    64,286
                                                    
                                                    
                                                    
                                                    232,340Interest
                                                        and other expenses
                                                    
                                                    
                                                    (320,924
                                                    )
                                                    
                                                    
                                                    (123,831
                                                    )(256,638
                                                    )
                                                    
                                                    
                                                    108,509**Income
                                                        (loss) before income taxes**
                                                    
                                                    
                                                    (5,898,579
                                                    )
                                                    
                                                    
                                                    322,234**Benefit
                                                        (provision) for income taxes**
                                                    
                                                    
                                                    472,905
                                                    
                                                    
                                                    
                                                    (118,229
                                                    )**Net
                                                        income (loss)**
                                                    
                                                    $
                                                    (5,425,674
                                                    )
                                                    
                                                    $
                                                    204,005**Basic
                                                        earnings (loss) per share**
                                                    
                                                    $
                                                    (0.04
                                                    )
                                                    
                                                    $
                                                    0.00**Diluted
                                                        earnings (loss) per share**
                                                    
                                                    $
                                                    (0.04
                                                    )
                                                    
                                                    $
                                                    0.00**Weighted
                                                        average shares outstanding:**Basic
                                                    
                                                    
                                                    125,192,000
                                                    
                                                    
                                                    
                                                    166,861,000Diluted
                                                    
                                                    
                                                    125,192,000
                                                    
                                                    
                                                    
                                                    250,387,000**Comprehensive
                                                        income (loss):**Net
                                                        income (loss)
                                                    
                                                    $
                                                    (5,425,674
                                                    )
                                                    
                                                    $
                                                    204,005Loss
                                                        on foreign currency translation,
                                                        net of income tax benefit
                                                    
                                                    
                                                    (49,295
                                                    )
                                                    
                                                    
                                                    -Comprehensive
                                                        income (loss)
                                                    
                                                    $
                                                    (5,474,969
                                                    )
                                                    
                                                    $
                                                    204,005
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
 
 F-4
 
 **NEW
        WORLD BRANDS, INC. AND SUBSIDIARY**
 **CONSOLIDATED
        STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY**
 **FOR
        THE YEARS ENDED DECEMBER 31, 2006 AND 2005**
 
 
 **Accumulated**
                                      
                                      
                                      **Retained****Series
                                          A**
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      **Additional**
                                      
                                      
                                      **Other**
                                      
                                      
                                      **Earnings**
                                      
                                      
                                      **Total****Preferred
                                          Stock**
                                      
                                      
                                      **Common
                                          Stock**
                                      
                                      
                                      **Paid-in**
                                      
                                      
                                      **Comprehensive**
                                      
                                      
                                      **(Accumulated**
                                      
                                      
                                      **Stockholders'****Shares**
                                      
                                      
                                      **Amount**
                                      
                                      
                                      **Shares**
                                      
                                      
                                      **Amount**
                                      
                                      
                                      **Capital**
                                      
                                      
                                      **Loss**
                                      
                                      
                                      **Deficit)**
                                      
                                      
                                      **Equity****Balances
                                          at January 1, 2005**
                                      
                                      
                                      -
                                      
                                      
                                      $
                                      -
                                      
                                      
                                      
                                      107,767,034
                                      
                                      
                                      $
                                      1,077,670
                                      
                                      
                                      $
                                      (1,077,670
                                      )
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      860,642
                                      
                                      
                                      $
                                      860,642Issuances
                                          of stock - 2005Exercise
                                          of stock options in exchange for existing  common stock
                                          shares
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      79,827,423
                                      
                                      
                                      
                                      798,274
                                      
                                      
                                      
                                      (798,274
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Exercise
                                          of stock option
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      1,995,686
                                      
                                      
                                      
                                      19,957
                                      
                                      
                                      
                                      (3,622
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      16,335Issuance
                                          of common stock for cash
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      1,995,686
                                      
                                      
                                      
                                      19,957
                                      
                                      
                                      
                                      85,043
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      105,000Issuance
                                          of stock for equipment
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      7,982,742
                                      
                                      
                                      
                                      79,827
                                      
                                      
                                      
                                      170,173
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      250,000Issuance
                                          of common stock from recapitalization
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      17,105,876
                                      
                                      
                                      
                                      171,059
                                      
                                      
                                      
                                      (171,059
                                      )
                                      
                                      
                                      -Issuance
                                          of common stock resulting from dilutive  provisions of
                                          recapitalization
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      7,127,449
                                      
                                      
                                      
                                      71,274
                                      
                                      
                                      
                                      (71,274
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Issuance
                                          of common stock for cash
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      2,075,214
                                      
                                      
                                      
                                      20,752
                                      
                                      
                                      
                                      165,244
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      185,996Issuance
                                          of common stock for asset acquisition
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      45,554,731
                                      
                                      
                                      
                                      455,547
                                      
                                      
                                      
                                      4,044,453
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      4,500,000Return
                                          of capital in settlement of related
                                          party  receivables
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (10,223
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (10,223
                                      )Net
                                          income - 2005
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      204,005
                                      
                                      
                                      
                                      204,005**Balances
                                          at December 31, 2005**
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      271,431,841
                                      
                                      
                                      
                                      2,714,317
                                      
                                      
                                      
                                      2,332,791
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      1,064,647
                                      
                                      
                                      
                                      6,111,755Issuances
                                          of stock - 2006Additional
                                          common stock issued in consideration  of asset
                                          acquisition
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      5,806,633
                                      
                                      
                                      
                                      58,066
                                      
                                      
                                      
                                      594,321
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      652,387Issuance
                                          of common stock for cash
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      13,315,856
                                      
                                      
                                      
                                      133,159
                                      
                                      
                                      
                                      1,206,841
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      1,340,000Issuance
                                          of common stock in exchange for partial  repayments of principal
                                          on note payable
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      5,981,070
                                      
                                      
                                      
                                      59,811
                                      
                                      
                                      
                                      540,189
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      600,000Issuance
                                          of stock for equipment
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      2,138,235
                                      
                                      
                                      
                                      21,382
                                      
                                      
                                      
                                      193,118
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      214,500Recapitalization
                                          of Qualmax common stock as a result  of the reverse
                                          acquisition
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (298,673,635
                                      )
                                      
                                      
                                      (2,986,735
                                      )
                                      
                                      
                                      2,986,735
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
 
 F-5
 
 **NEW
        WORLD BRANDS, INC. AND SUBSIDIARY**
 **CONSOLIDATED
        STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY**
 **FOR
        THE YEARS ENDED DECEMBER 31, 2006 AND 2005**
 
 
 **Accumulated**
                                
                                
                                **Retained****Series
                                    A**
                                
                                
                                
                                
                                
                                
                                
                                
                                **Additional**
                                
                                
                                **Other**
                                
                                
                                **Earnings**
                                
                                
                                **Total****Preferred
                                    Stock**
                                
                                
                                **Common
                                    Stock**
                                
                                
                                **Paid-in**
                                
                                
                                **Comprehensive**
                                
                                
                                **(Accumulated**
                                
                                
                                **Stockholders'****Shares**
                                
                                
                                **Amount**
                                
                                
                                **Shares**
                                
                                
                                **Amount**
                                
                                
                                **Capital**
                                
                                
                                **Loss**
                                
                                
                                **Deficit)**
                                
                                
                                **Equity**Issuances
                                    of stock - 2006 (continued)Recapitalization
                                    of New World Brands as a result of  the reverse
                                    acquisition
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                44,303,939
                                
                                
                                
                                443,040
                                
                                
                                
                                24,278,035
                                
                                
                                
                                -
                                
                                
                                
                                (22,921,075
                                )
                                
                                
                                1,800,000Issuance
                                    of Series A preferred stock as a result of  the reverse
                                    acquisition
                                
                                
                                100
                                
                                
                                
                                1
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (1
                                )
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Issuance
                                    of Series A preferred stock for cash
                                
                                
                                11.160454
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                3,000,000
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                3,000,000Cost
                                    of raising capital
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (150,000
                                )
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (150,000
                                )Issuance
                                    of Series A preferred stock in exchange for  partial repayment
                                    of note payable, accrued royalties  and outsourcing expenses,
                                    and release of obligations  from operating
                                    agreements
                                
                                
                                5.50652
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                1,480,189
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                1,480,189Net
                                    loss - 2006
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (5,425,674
                                )
                                
                                
                                (5,425,674
                                )Loss
                                    on foreign currency translation, net of tax benefit
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                (49,295
                                )
                                
                                
                                
                                
                                
                                
                                (49,295
                                )116.666974
                                
                                
                                $
                                1
                                
                                
                                
                                44,303,939
                                
                                
                                $
                                443,040
                                
                                
                                $
                                36,462,218
                                
                                
                                $
                                (49,295
                                )
                                
                                $
                                (27,282,102
                                )
                                
                                $
                                9,573,862
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
 
 F-6
 
 **NEW
        WORLD BRANDS, INC. AND SUBSIDIARY**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 **FOR
        THE YEARS ENDED DECEMBER 31, 2006 AND 2005**
 
 
 **2006**
                                      
                                      **2005****Cash
                                          flows from operating activities:**Net
                                          income (loss)
                                      
                                      $
                                      (5,425,674
                                      )
                                      $
                                      204,005Adjustments
                                          to reconcile net income (loss) to net cashused
                                          in operating activities:Depreciation
                                          and amortization
                                      
                                      
                                      2,164,602
                                      
                                      
                                      182,097Issuance
                                          of stock for royalties and outsourcing
                                          expenses
                                      
                                      
                                      356,817
                                      
                                      
                                      -Changes
                                          in operating assets and liabilities:-
                                          Accounts receivable
                                      
                                      
                                      59,894
                                      
                                      
                                      (1,114,127
                                      )-
                                          Inventories
                                      
                                      
                                      663,672
                                      
                                      
                                      (1,131,040
                                      )-
                                          Prepaid expenses
                                      
                                      
                                      112,919
                                      
                                      
                                      (240,669
                                      )-
                                          Income tax refund receivable
                                      
                                      
                                      (403,995
                                      )
                                      
                                      --
                                          Deferred tax asset
                                      
                                      
                                      45,467
                                      
                                      
                                      --
                                          Other current assets
                                      
                                      
                                      (158,605
                                      )
                                      
                                      (39,097
                                      )-
                                          Deposits and other assets
                                      
                                      
                                      229,788
                                      
                                      
                                      (358,199
                                      )-
                                          Accounts payable
                                      
                                      
                                      266,341
                                      
                                      
                                      348,374-
                                          Accrued expenses
                                      
                                      
                                      541,484
                                      
                                      
                                      530,006-
                                          Customer deposits
                                      
                                      
                                      (23,712
                                      )
                                      
                                      83,337-
                                          Income taxes payable
                                      
                                      
                                      -
                                      
                                      
                                      (301,776
                                      )- Deferred
                                          income
                                          taxes
                                      
                                      
                                      (111,540
                                      )
                                      
                                      (11,588
                                      )-
                                          Other liabilities
                                      
                                      
                                      53,411
                                      
                                      
                                      (2,500
                                      )**Net
                                          cash used in operating activities**
                                      
                                      
                                      (1,629,131
                                      )
                                      
                                      (1,851,177
                                      )**Cash
                                          flows from investing activities:**Acquisition
                                          of property and equipment
                                      
                                      
                                      (1,277,327
                                      )
                                      
                                      (385,004
                                      )Net
                                          cash acquired from the reverse acquisition
                                      
                                      
                                      1,800,000
                                      
                                      
                                      -**Net
                                          cash provided by (used in) investing activities**
                                      
                                      
                                      522,673
                                      
                                      
                                      (385,004
                                      )**Cash
                                          flows from financing activities:**Proceeds
                                          from notes payable
                                      
                                      
                                      -
                                      
                                      
                                      3,444,323Payments
                                          of principal on notes payable
                                      
                                      
                                      (1,460,000
                                      )
                                      
                                      (551,711
                                      )Payments
                                          of principal on capital lease obligations
                                      
                                      
                                      (141,153
                                      )
                                      
                                      (5,298
                                      )Net
                                          repayment of advances from shareholders
                                      
                                      
                                      (75,245
                                      )
                                      
                                      100,972Sales
                                          of common and preferred stock
                                      
                                      
                                      4,190,000
                                      
                                      
                                      290,996Exercise
                                          of stock options
                                      
                                      
                                      -
                                      
                                      
                                      16,335**Net
                                          cash provided by financing activities**
                                      
                                      
                                      2,513,602
                                      
                                      
                                      3,295,617**Net
                                          increase in cash and cash equivalents**
                                      
                                      
                                      1,407,144
                                      
                                      
                                      1,059,436**Cash
                                          and cash equivalents, beginning of year**
                                      
                                      
                                      1,989,473
                                      
                                      
                                      930,037**Cash
                                          and cash equivalents, end of year**
                                      
                                      $
                                      3,396,617
                                      
                                      $
                                      1,989,473
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
 
 F-7
 
 **NEW
        WORLD BRANDS, INC. AND SUBSIDIARY**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 **FOR
        THE YEARS ENDED DECEMBER 31, 2006 AND 2005**
 
 
 **2006**
                                                            
                                                            
                                                            **2005****Supplemental
                                                                disclosures of cash
                                                                flow information:****Cash
                                                                paid during the year
                                                                for:**-
                                                                Income taxes
                                                            
                                                            $
                                                            -
                                                            
                                                            
                                                            $
                                                            469,573-
                                                                Interest
                                                            
                                                            $
                                                            178,168
                                                            
                                                            
                                                            $
                                                            123,831**Non-cash
                                                                investing and financing
                                                                activities:**Issuance
                                                                of common stock for
                                                                asset acquisition-
                                                                Inventories
                                                            
                                                            
                                                            79,179
                                                            
                                                            
                                                            $
                                                            800,000-
                                                                Property and equipment
                                                            
                                                            
                                                            573,208
                                                            
                                                            
                                                            
                                                            3,700,000-
                                                                Additional paid-in
                                                                capital
                                                            
                                                            
                                                            (652,387
                                                            )
                                                            
                                                            
                                                            (4,500,000
                                                            )$
                                                            -
                                                            
                                                            
                                                            $
                                                            -Issuance
                                                                of stock for payment
                                                                of note payable-
                                                                Note payable
                                                            
                                                            $
                                                            600,000
                                                            
                                                            
                                                            $
                                                            --
                                                                Additional paid-in
                                                                capital
                                                            
                                                            
                                                            (600,000
                                                            )
                                                            
                                                            
                                                            -$
                                                            -
                                                            
                                                            
                                                            $
                                                            -Issuance
                                                                of common stock for
                                                                property and equipment-
                                                                Fair value of property
                                                                and equipment acquired
                                                            
                                                            $
                                                            214,500
                                                            
                                                            
                                                            $
                                                            250,000-
                                                                Additional paid-in
                                                                capital
                                                            
                                                            
                                                            (214,500
                                                            )
                                                            
                                                            
                                                            (250,000
                                                            )$
                                                            -
                                                            
                                                            
                                                            $
                                                            -Issuance
                                                                of preferred stock
                                                                for partial repayment
                                                                of note payable,
                                                                accrued
                                                                royalties and outsourcing
                                                                expenses, and release
                                                                of obligations from
                                                                operating agreements-
                                                                Note payable
                                                            
                                                            $
                                                            400,000
                                                            
                                                            
                                                            $
                                                            --
                                                                Royalties and outsourcing
                                                                expenses
                                                            
                                                            
                                                            356,817-
                                                                Property and equipment
                                                            
                                                            
                                                            723,372
                                                            
                                                            
                                                            
                                                            --
                                                                Additional paid-in
                                                                capital
                                                            
                                                            
                                                            (1,480,189
                                                            )
                                                            
                                                            
                                                            -$
                                                            -
                                                            
                                                            
                                                            $
                                                            -Acquisition
                                                                of property and equipment
                                                                through capital lease
                                                                obligations-
                                                                Fair value of property
                                                                and equipment acquired
                                                            
                                                            $
                                                            387,384
                                                            
                                                            
                                                            $
                                                            103,416-
                                                                Capital lease obligations
                                                                incurred
                                                            
                                                            
                                                            (387,384
                                                            )
                                                            
                                                            
                                                            (103,416
                                                            )$
                                                            -
                                                            
                                                            
                                                            $
                                                            -Reclassification
                                                                of related party
                                                                transactions-
                                                                Advances from shareholders
                                                            
                                                            $
                                                            -
                                                            
                                                            
                                                            $
                                                            (10,223
                                                            )-
                                                                Additional paid-in
                                                                capital
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            10,223$
                                                            -
                                                            
                                                            
                                                            $
                                                            -
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
 
 F-8
 **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 **NOTE
                    A    –**
                **ORGANIZATION,
                    CAPITALIZATION AND SUMMARY OF SIGNIFICANT **ACCOUNTING
                    POLICIES****
  **Organization
          and Basis of Presentation**
 
 New
          World
          Brands, Inc. (“***New World Brands***”, the
“***Company***”, “***we***”,
          “***us***” or “***our***”) is a Delaware
          corporation that until September 15, 2006 was an importer of wine and spirits
          beverages for sale and distribution throughout the United States.  On
          September 15, 2006, we sold our wine and spirits business, and, by way
          of a
          reverse acquisition, acquired all of the assets and assumed all of the
          liabilities of Qualmax, Inc., a Delaware corporation
          (“***Qualmax***” and the reverse acquisition the
“***Reverse Acquisition***”).
 
 As
          a
          result of the Reverse Acquisition we are no longer in the wine and spirits
          business, and instead we are now a telecommunications research and development,
          sales, and service company, focusing on products and services utilizing
          voice
          over internet protocol (“***VoIP***”)
          technology.  We develop, manufacture and sell our own line of VoIP
          technology products through our wholly owned subsidiary, IP Gear, Ltd.,
          an
          Israeli corporation (“***IP Gear, Ltd.***”).  We
          are also a reseller of VoIP related telecommunications equipment, and a
          reseller
          of wholesale VoIP telephony service.
 
 Our
          acquisition of Qualmax and its wholly owned subsidiary IP Gear, Ltd. was
          accounted for as a reverse acquisition.  Although New World Brands was
          the company that made the acquisition, Qualmax was treated as the surviving
          company for accounting purposes.  As a result, the accompanying
          financial statements reflect the results of operations and cash flows of
          Qualmax
          and IP Gear, Ltd. prior to September 15, 2006, and the financial position,
          results of operations, and cash flows of New World Brands, Qualmax, and
          IP Gear,
          Ltd. from and after September 15, 2006.
 
 All
          inter-company accounts and transactions have been eliminated in
          consolidation.
 
 On
          September 15, 2006 the Company changed its fiscal year end from May 31
          to
          December 31, which is Qualmax’s fiscal year end.  The change in fiscal
          year results from the acquisition of Qualmax and IP Gear, Ltd., which was
          accounted for as a reverse acquisition.
 
 **Reverse
          Acquisition Accounting**
 
 In
          June
          2006, New World Brands determined to change its business plan by selling
          its
          wine and spirits business for the sum of $500,000 (the “***Sale
          Transaction***”), issuing 7,500,000 shares of common stock for
          $1,500,000 (the “***Private Equity Investment***”), and
          merging with Qualmax and its wholly owned subsidiary IP Gear, Ltd. under
          the Reverse Acquisition.  The Sale Transaction and Private Equity
          Investment each took place on September 14, 2006, after which New World
          Brands
          assets consisted solely of cash in the
 
 F-9
 
 **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    A    –**
                **ORGANIZATION,
                    CAPITALIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
                    (CONTINUED)**
  amount
          of
          $2,000,000, and certain contract rights under the Reverse Acquisition agreement
          with Qualmax.  The Reverse Acquisition was completed on September 15,
          2006, subject to shareholder ratification and certain filings and amendments
          that are necessary to finalize the merger.
 
 Pursuant
          to the Reverse Acquisition, New World Brands issued 100 shares of its Series
          A
          Convertible Preferred Stock (the “***Preferred Stock***”) to
          Qualmax.  The preferred stock was issued because New World Brands did
          not have sufficient authorized and available common stock shares to issue
          on
          September 15, 2006 when the Reverse Acquisition was consummated.  The
          Preferred Stock represented, as of September 15, 2006, the right to vote
          approximately eighty-six percent (86%) of the issued and outstanding shares
          of
          our capital stock, calculated under the premise that the Preferred Stock
          had
          been converted to the appropriate number of shares of our common stock
          (meaning,
          on an “as-converted” basis).
 
 The
          Boards of Directors of New World Brands and Qualmax (the
“***Boards***”) have each agreed that Qualmax will be merged
          with the Company (the “***Merger***”), after which the
          separate corporate existence of Qualmax shall cease.
 
 The
          Boards have agreed that the following events (the “***Merger
          Events***”) must occur in order to complete the Merger.
  1.
                Any
                    filings that may be necessary to complete the
                    Merger.
  2.
                The
                    stockholders of New World Brands and Qualmax must approve the
                    Merger.  Qualmax, in its capacity as the holder of Preferred
                    Stock currently holding (as of the date of these financial statements)
                    the
                    right to vote approximately seventy-six percent (76%) of the
                    issued and
                    outstanding shares of our capital stock, calculated on an as-converted
                    basis, has agreed to vote its shares in favor of the Merger,
                    and Qualmax
                    will cease to exist once the Merger is
                    completed.
  The
          acquisition of Qualmax resulted in a change of control of New World
          Brands.  As a result of the reverse acquisition accounting treatment,
          Qualmax is deemed to be the acquiring company for accounting
          purposes.  Effective on the acquisition date of September 15, 2006,
          New World Brands’ consolidated balance sheet included the assets and liabilities
          of Qualmax and its wholly owned subsidiary IP Gear, Ltd. and its consolidated
          equity accounts were recapitalized to reflect the combined equity of New
          World
          Brands, Qualmax and IP Gear, Ltd. Consolidated financial statements for
          the year
          ended December 31, 2005 are those of Qualmax and IP Gear, Ltd.
          only.
 
 F-10
 
 **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    A    –**
                **ORGANIZATION,
                    CAPITALIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
                    (CONTINUED)**
  **Basis
          of Accounting and Revenue Recognition**
 
 The
          accompanying consolidated financial statements have been prepared using
          the
          accrual method of accounting.  Revenues from our VoIP telephony
          services division have been recognized as services are
          rendered.  Revenue from the sale of products from our own line of VoIP
          equipment or reseller equipment is recognized as our customers take delivery
          of
          our products.  Any amounts received from our customers in advance are
          recorded as customer deposits and classified as other current
          liabilities.
 
 **Use
          of Estimates**
 
 The
          preparation of consolidated 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 disclosure of contingent assets and liabilities
          at
          the date of the consolidated financial statements and the reported amounts
          of
          revenues and expenses during the reporting period.  Accordingly,
          actual results could differ from those estimates.
 
 **Cash
          and Cash Equivalents**
 
 The
          Company considers all highly liquid investments in debt instruments purchased
          with original maturities of three months or less to be cash
          equivalents.
 
 **Accounts
          Receivable**
 
 Accounts
          receivable are presented at net realizable value, which is comprised of
          total
          accounts receivable less any allowances for uncollectible
          accounts.  The Company provides an allowance for potentially
          uncollectible accounts based upon a periodic review and analysis of outstanding
          accounts receivable balances.  The resulting estimate of uncollectible
          receivables is charged to an allowance for doubtful
          accounts.  Recoveries of accounts previously written off are used to
          offset the allowance account in the periods in which the recoveries are
          made.  Accordingly, as of December 31, 2006 and 2005, accounts
          receivable has been written down to its estimated net realizable value,
          and
          results of operations for the year ended December 31, 2006 and 2005 include
          corresponding charges of approximately $437,000 and $144,000,
          respectively.  The allowance for doubtful accounts as of December 31, 2006
          was approximately $143,000.
 
 F-11
 
 **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    A    –**
                **ORGANIZATION,
                    CAPITALIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
                    (CONTINUED)**
  **Inventories**
 
 Inventories
          are valued at the lower of cost or market. Cost is determined on a
          first-in, first-out basis.  Market represents the lower of replacement
          cost or net realizable value on inventories as a whole.  Inventories
          are made up primarily of high technology telephone switching and VoIP routing
          equipment and their parts.  Some of these inventories are manufactured
          and may include finished goods, work in process or unassembled
          components.  The majority of inventories are finished goods for resale
          that were purchased from other manufacturers.  Due to rapid
          technological advancements in the industry, inventories may, from time
          to time,
          be subject to impairment and obsolescence.  We record an allowance for
          slow-moving and obsolete inventories based upon a periodic review and analysis
          of inventories on hand.  During 2006, we segregated our obsolete and
          slow-moving inventories, which were comprised of outdated telephone switching
          and VoIP routing equipment.  Accordingly, the allowance for obsolete
          inventories as of December 31, 2006 was approximately $246,000.
 
 **Concentration
          of Credit Risk**
 
 From
          time
          to time, the Company has cash in financial institutions in excess of federally
          insured limits.  However, the Company has not experienced any losses
          in such accounts and believes it is not exposed to any significant credit
          risk
          on its cash balances.  Cash exceeding federally insured limits
          amounted to approximately $3,170,000 as of December 31, 2006.
 
 **Business
          Concentrations**
 
 We
          did
          not have any single supplier that represented more than ten percent of
          purchases
          or any single customer that represented more than ten percent of sales
          during
          the year ended December 31, 2006.  We had three major suppliers that
          accounted for 48% of our purchases but no single customer that represented
          more
          than ten percent of sales during the year ended December 31, 2005.
 
 **Impairment
          of Long-Lived Assets and Long-Lived Assets Subject to
          Disposal**
 
 We
          review
          our long-lived assets for impairment whenever events or changes in circumstances
          indicate that the carrying amount of an asset may not be recoverable, in
          accordance with Statement of Financial Accounting Standards
          (“***SFAS***”) No. 144.  Recoverability of assets
          to be held and used is measured by a comparison of the carrying
 
 F-12
 
 **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    A    –**
                **ORGANIZATION,
                    CAPITALIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
                    (CONTINUED)**
  **Impairment
          of Long-Lived Assets and Long-Lived Assets Subject to Disposal
          (Continued)**
 
 amount
          of
          an asset to future undiscounted cash flows expected to be generated by
          the
          asset.  If such assets are considered to be impaired, the impairment
          to be recognized is measured by the amount by which the carrying amount
          of the
          assets exceeds its fair value.  Assets subject to disposal are
          reported at the lower of the carrying amount or fair value less costs to
          sell.  We had no impairment of our long-lived assets during the years
          ended December 31, 2006 or 2005.
 
 **Property
          and Equipment**
 
 Property
          and equipment are recorded at cost.  For financial statement purposes,
          depreciation of software, furniture and equipment is computed using the
          straight-line method over their estimated useful lives of the assets while
          leasehold improvements are amortized over the shorter of their estimated
          useful
          lives or the terms of their respective leases.  Expenditures for
          replacements, maintenance and repairs that do not extend the lives of the
          assets
          are charged to operations as the expenses are incurred.  When assets
          are retired, sold or otherwise disposed of, their costs and related accumulated
          depreciation are removed from the accounts and resulting gains or losses
          are
          reflected in the year of disposal.
 
 **Stock
          Options**
 
 Effective
          January 1, 2006, we adopted the fair value method of accounting for awards
          of
          employee stock and options in accordance with SFAS No. 123, “Accounting for
          Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for
          Stock-Based Compensation, Transition and Disclosure,” and SFAS No. 123R,
“Share-Based Payment.” These standards require the cost associated with employee
          services in exchange for equity instruments based on the grant date fair
          value
          of the award, be recognized over the period during which the employee is
          required to provide services in exchange for the award. No compensation
          cost is
          recognized for awards for which employees do not render the requisite service.
          Because the Company changed its method of accounting from the intrinsic
          method
          as per APB Opinion No. 25, upon adoption, the grant date fair value of
          employee
          share options was estimated using the Black-Scholes model. Compensation
          cost for
          the unvested portion of equity awards granted prior to January 1, 2006,
          will be
          recognized over the remaining vesting periods. Due to the prospective adoption
          of SFAS No. 123R, results of operations for prior periods have not been
          restated.
 
 Prior
          to
          2006, the Company applied the intrinsic-value-based method of accounting
          prescribed by Accounting Principles Board (APB) Opinion No. 25, *Accounting
          for stock*
 
 F-13
 
 **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    A    –**
                **ORGANIZATION,
                    CAPITALIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
                    (CONTINUED)**
  **Stock
          Options (Continued)**
 
 *issued
          to Employees,* and related interpretations including FASB Interpretation No.
          44, *Accounting for Certain Transactions involving Stock Compensation—an
          interpretation of APB Opinion No. 25,* issued in March 2000, to account for
          its fixed-plan stock options. Under this method, compensation expense was
          recorded on the date of grant only if the current market price of the underlying
          stock exceeded the exercise price. SFAS No. 123, *Accounting for Stock-Based
          Compensation,* established accounting and disclosure requirements using a
          fair-value-based method of accounting for stock-based employee compensation
          plans. As allowed by SFAS No. 123, the Company elected to continue to apply
          the
          intrinsic-value-based method of accounting described above, and had adopted
          only
          the disclosure requirements of SFAS No. 123. See Note G, Stock Option
          Plans.
 
 **Software
          Costs**
 
 Certain
          computer software development costs are capitalized in the accompanying
          consolidated balance sheet in accordance with SFAS No. 86, *Accounting for
          the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed*.
          Capitalization of computer software development costs begins upon the
          establishment of technological feasibility. Capitalization ceases and
          amortization of capitalized costs begins when the software product is
          commercially available for general release to customers. Amortization of
          capitalized computer software development costs is included in general
          and
          administrative expenses and is provided using the straight-line method
          over the
          remaining estimated economic life of the product, not to exceed three
          years.  Net unamortized software costs as of December 31, 2006
          amounted to approximately $4,080,000.  Amortization of software costs
          for the years ended December 31, 2006 and 2005 was approximately $1,815,000
          and
          $0, respectively.
 
 **Segment
          Information**
 
 Our
          business consists of three operating segments: (i) proprietary hardware,
          which
          is our VoIP technology development and equipment manufacturing subsidiary
          that
          is located in Israel, IP Gear, Ltd.; (ii) resale hardware, which is the
          sale and
          distribution of VoIP and other telephony equipment and related professional
          services via our U.S.-based business operated under the name "IP Gear";
          and
          (iii) wholesale carrier services, which is telephony service resale and
          direct
          call routing via our U.S.-based VoIP service business operated under the
          name
          "IP Gear Connect".  See Note P – Business Segment
          Reporting.
  F-14
 
 **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    A    –**
                **ORGANIZATION,
                    CAPITALIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
                    (CONTINUED)**
  **Fair
          Value of Financial Instruments**
 
 Our
          financial instruments consist primarily of cash, certificates of deposit,
          accounts receivable, accounts payable, accrued liabilities and notes
          payable.  The carrying amounts of such financial instruments
          approximate their respective estimated fair values due to the short-term
          maturities and approximate market interest rates of these
          instruments.  The estimated
          fair values are not necessarily indicative of the amounts we would realize
          in a
          current market exchange or from future earnings or cash flows.
 
 **Earnings
          per Share**
 
 Net
          income per share is computed in accordance with SFAS No. 128, “Earnings per
          Share.” Basic net income per share is based upon the weighted average number of
          common shares outstanding during the period. Diluted net income per share
          is
          based upon the weighted average number of common shares outstanding and
          dilutive
          common stock equivalents outstanding during the period. Common stock equivalents
          are options and warrants granted by the Company and are calculated under
          the
          treasury stock method. Common equivalent shares from unexercised stock
          options
          and warrants are excluded from the computation when there is a loss as
          their
          effect is antidilutive, or if the exercise price of such options and warrants
          is
          greater than the average market price of the stock for the
          period.  See Note F for the computation of basic and diluted
          share data.
 
 **Income
          Taxes**
 
 We
          account for income taxes in accordance with SFAS No. 109 *“Accounting for
          Income Taxes”*,**which requires recognition of deferred tax
          assets and liabilities for expected future tax consequences of events that
          have
          been included in the consolidated financial statements or tax
          returns.  Under this method, deferred tax assets and liabilities are
          determined based on the difference between the financial statement and
          tax bases
          of assets and liabilities using enacted tax rates in effect for the year
          in
          which the differences are expected to reverse.  Valuation allowances
          are established when necessary to reduce deferred tax assets amounts expected
          to
          be realized.  IP Gear, Ltd. files an individual income tax return in
          Israel.  U.S. income taxes are not provided on undistributed earnings,
          which are expected to be permanently reinvested by the foreign subsidiary,
          unless the earnings can be repatriated in a tax-free or cash-flow neutral
          manner.
 
 F-15
 
 **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    A    –**
                **ORGANIZATION,
                    CAPITALIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
                    (CONTINUED)**
  **Advertising
          and Promotional Costs**
 
 We
          expense advertising and promotional costs as incurred.  Advertising
          and promotional expenses amounted to approximately $283,000 and $88,000
          for the
          years ended December 31, 2006 and 2005, respectively.
 
 **Leases**
 
 We
          account for leases in accordance with SFAS No.13 *“Accounting for
          Leases”*, under which we perform a review of each newly acquired lease to
          determine as whether it should be treated either as a capital or an operating
          lease.  A capital lease asset is capitalized and depreciated over the
          term of the initial lease.  A liability equal to the present value of
          the aggregated lease payments is recorded utilizing the stated lease interest
          rate.  If an interest rate is not stated, we will determine our
          estimated incremental borrowing rate.
 
 **Foreign
          Currency Translation**
 
 IP
          Gear,
          Ltd.’s functional currency is the New Israeli Shekel, which is its local
          currency. Accordingly, balance sheet accounts are translated at the exchange
          rate in effect at the end of the year and income statement accounts are
          translated at the average exchange rate for the year.  Translation
          gains and losses are included as a separate component of stockholders’ equity as
          cumulative translation adjustments.  Foreign currency transaction
          gains and losses are included in operations as other income and
          expenses.  For the years ended December 31, 2006 and 2005, foreign
          currency transaction losses were approximately $30,000 and $0,
          respectively.
 
 **Comprehensive
          Income (Loss)**
 
 Comprehensive
          income is comprised of net income and other comprehensive income. Other
          comprehensive income includes certain changes in equity that are excluded
          from
          net income.  As of December 31, 2006, the Company’s net accumulated
          other comprehensive loss of approximately $49,000 was comprised of the
          cumulative foreign currency translation loss in the amount of approximately
          $79,000 less deferred tax benefit on the foreign currency translation loss
          of
          approximately $30,000.  As of December 31, 2005, there were no
          components of comprehensive income other than net income.
 
 F-16
 
 **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    A    –**
                **ORGANIZATION,
                    CAPITALIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
                    (CONTINUED)**
 
 **Recent
          Accounting Pronouncements**
 
 In
          February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS
          No. 159, *The Fair Value Option for Financial Assets and Financial
          Liabilities*.  SFAS No. 159 permits entities to choose to
          measure eligible financial instruments at fair values.  The unrealized
          gains and losses on items for which the fair value option has been elected
          should be reported in earnings.  The decision to elect the fair value
          options is determined on an instrument by instrument basis, should be applied
          to
          an entire instrument, and is irrevocable.  Assets and liabilities
          measured at fair values pursuant to the fair value option should be reported
          separately in the balance sheet from those instruments measured using other
          measurement attributes.  SFAS No. 159 is effective as of the
          beginning of the first
          fiscal year that begins after November 15, 2007.  We are
          currently analyzing the potential impact of adoption of SFAS No. 159 on our
          consolidated financial statements.
 
 In
          September 2006, the Securities and Exchange Commission (“SEC”) issued Staff
          Accounting Bulletin (“SAB”) No. 108, *Considering the Effects of Prior
          Year Misstatements when Quantifying Misstatements in Current Year Financial
          Statements*.  SAB 108 provides guidance on the consideration of
          effects of the prior year misstatements in quantifying current year
          misstatements for the purpose of a materiality assessment.  The SEC
          staff believes registrants must quantify errors using both a balance sheet
          and
          income statement approach and evaluate whether either approach results
          in
          quantifying a misstatement that, when all relevant quantitative and qualitative
          factors are considered, is material.  SAB 108 was effective for the
          first annual period ending after November 15, 2006 with early application
          encouraged.  We adopted the provisions of SAB 108 in 2006 and the
          impact of adoption was not material to our consolidated financial
          statements.
 
 In
          September 2006, the FASB issued SFAS No. 157, *Fair Value
          Measurements*.  SFAS No. 157 defines fair value, establishes a
          framework for measuring fair value in generally accepted accounting principles
          and expands disclosures about fair value measurements. SFAS No. 157 is
          effective
          for financial statements issued for fiscal years beginning after
          November 15, 2007 and interim periods within those fiscal
          years.  We do not anticipate that the adoption of this standard will
          have a material impact on our consolidated financial statements.
 
 In
          June
          2006, the FASB issued Interpretation No. 48, *Accounting for Uncertainty
          in Income Taxes-an interpretation of SFAS 109,* (“FIN 48”).  FIN
          48 provides interpretive guidance for the financial statement recognition
          and
          measurement of a tax position taken or expected to be taken in a tax
          return.  FIN 48 is effective for fiscal years beginning after
          December 15, 2006.  We are reviewing the impact of adopting FIN
          No. 48, but we do not anticipate that the impact will be material to our
          consolidated financial statements.
 
 F-17
 
 **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    A    –**
                **ORGANIZATION,
                    CAPITALIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
                    (CONTINUED)**
 
 **Recent
          Accounting Pronouncements (Continued)**
 
 In
          March
          2006, the FASB issued SFAS No. 156, *Accounting for Servicing of
          Financial Assets*, which will be effective for fiscal years that begin after
          December 15, 2006.  This statement amends SFAS No. 140,
*Accounting for Transfers and Servicing of Financial Assets and
          Extinguishments of Liabilities, a replacement of FASB Statement 125,* or
          SFAS No. 140*,* regarding (1) the circumstances under which a
          servicing asset or servicing liability must be recognized, (2) the initial
          and subsequent measurement of recognized servicing assets and liabilities,
          and
          (3) information required to be disclosed relating to servicing assets and
          liabilities.  We do not anticipate that the adoption of this standard
          will have a material impact on our consolidated financial
          statements.
 
 In
          February 2006, the FASB issued SFAS No. 155, *Accounting for Certain
          Hybrid Financial Instruments,* or SFAS No. 155, which will be effective for
          fiscal years that begin after December 15, 2006.  This statement
          amends SFAS No. 133, *Accounting for Derivative Instruments and Hedging
          Activities*, to narrow the scope exception for interest-only and
          principal-only strips on debt instruments to include only such strips
          representing rights to receive a specified portion of the contractual interest
          or principal cash flows.  SFAS No.****155 also
          amends SFAS No.****140 to allow qualifying special-purpose
          entities to hold a passive derivative financial instrument pertaining to
          beneficial interests that are derivative financial instruments.  We do
          not anticipate adoption of this standard will have a material impact on
          our
          consolidated financial statements.
 
 In
          May
          2005, the FASB issued SFAS No. 154, *Accounting Changes and Error
          Corrections,* which was adopted effective January 1,
          2006.  This statement addresses the retrospective application of such
          changes and corrections and will be followed if and when necessary. Adoption
          of
          this standard did not have a material impact on our consolidated financial
          statements.
 
 F-18
 
 **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    B    –**
                **INVENTORIES**
 
 Inventories
          as of December 31,2006
          consisted
          of the following:
 
 Resale
                                    Hardware
                                  
                                  
                                  Proprietary
                                    Hardware
                                  
                                  
                                  TotalRaw
                                      materials
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  313,200
                                  
                                  
                                  $
                                  313,200Work-in
                                      progress
                                  
                                  
                                  -
                                  
                                  
                                  
                                  145,221
                                  
                                  
                                  
                                  145,221Finished
                                      goods
                                  
                                  
                                  979,727
                                  
                                  
                                  
                                  625,316
                                  
                                  
                                  
                                  1,605,043Total
                                      inventories
                                  
                                  
                                  979,727
                                  
                                  
                                  
                                  1,083,737
                                  
                                  
                                  
                                  2,063,464Less
                                      allowance for obsolete inventories
                                  
                                  
                                  (93,975
                                  )
                                  
                                  
                                  (151,665
                                  )
                                  
                                  
                                  (245,640
                                  )Inventories,
                                      net
                                  
                                  $
                                  885,752
                                  
                                  
                                  $
                                  932,072
                                  
                                  
                                  $
                                  1,817,824
 
 **NOTE
                    C    –**
                **PROPERTY
                    AND EQUIPMENT**
  As
          of
          December 31,2006,
          our
          property and equipment consisted of the following:
 
 Useful
                                        Lives
                                      (In
                                        Years)Operating
                                        equipment
                                    
                                    $
                                    1,483,898
                                    
                                    
                                    
                                    5Rental
                                        equipment
                                    
                                    
                                    101,056
                                    
                                    
                                    
                                    5Leasehold
                                        improvements
                                    
                                    
                                    232,519
                                    
                                    
                                    
                                    15Computer
                                        software
                                    
                                    
                                    6,297,206
                                    
                                    
                                    
                                    3
                                        -
                                        5Furniture
                                        and fixtures
                                    
                                    
                                    62,206
                                    
                                    
                                    
                                    5
                                        -
                                        10Other
                                    
                                    
                                    4,100
                                    
                                    
                                    
                                    5Total
                                        property and equipment
                                    
                                    
                                    8,180,985Less
                                        accumulated depreciation and amortization
                                    
                                    
                                    2,341,334Property
                                        and equipment, net
                                    
                                    $
                                    5,839,651Operating
                                        equipment acquired under capital leases
                                    
                                    $
                                    489,007Less
                                        accumulated amortization
                                    
                                    
                                    (82,527
                                    )$
                                    406,480
 
 Depreciation
          and amortization expense amounted to approximately $2,165,000 and $182,000
          for
          the years ended December 31, 2006 and 2005,
          respectively.  Amortization of
 
 F-19
 
 **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    C    –**
                **PROPERTY
                    AND EQUIPMENT
                    (CONTINUED)**
 
 leased
          equipment, which has been included in depreciation expense on the accompanying
          financial statements, was approximately $77,000 and $6,000 for the years
          ended
          December 31, 2006 and 2005, respectively.
 
 
 **NOTE
                    D    –**
                **NOTES
                    PAYABLE**
 
 **Bank
          of America, N.A.**
 
 We
          maintained a line of credit facility with Bank of America, N.A. (“***B
          of A***”) during 2006.  In September 2006, the line of
          credit was converted into a term loan in the amount of approximately $985,000
          that was due on March 31, 2007.  Interest only was payable monthly at
          B of A’s prime rate (B of A prime was 8.25% at December 31, 2006) plus
          3%.  As of December 31, 2006, the outstanding principal balance on the
          note payable was $984,323.
 
 The
          loan
          was secured by the assets of the Company, and as a condition of the note
          payable, ***B of A***required us to maintain a current
          assets to current liabilities ratio of at least 1.2 to 1 and a total liabilities
          to tangible net worth ratio that is not to exceed 2.5 to 1.  For the
          year ended December 31, 2006, the Company was in compliance with these
          ratios,
          and with all other terms of the loan.
 
 The
          entire principal balance was subsequently paid on March 30, 2007, in a
          transaction described in more detail in Note L, Subsequent Events and Other
          Matters, under the heading “Term Loan and Repayment of Line of Credit with B of
          A.”
 
 Total
          maturities of notes payable as of December 31, 2006 were as
          follows:
 
 2007
                              
                              $
                              984,323Total
                                  notes payable
                              
                              
                              984,323Notes
                                  payable, current portion
                              
                              
                              984,323Notes
                                  payable, net of current portion
                              
                              $
                              -
 
 Interest
          expense on the notes payable was approximately $142,000 and $109,000 for
          the
          years ended December 31, 2006 and 2005, respectively.
 
 **B.O.S.
          Better Online Systems Ltd.**
 
 In
          December 2005, we acquired certain assets of Better Online Solutions
          Ltd.
 
 F-20
 
 **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    D    –**
                **NOTES
                    PAYABLE (CONTINUED)**
 
 **B.O.S.
          Better Online Systems Ltd. (Continued)**
 
 (“***BOS***”)
          and contributed them into our wholly owned Israeli subsidiary, IP Gear,
          Ltd.  As a condition of the acquisition by Qualmax of the BOS VoIP and
          GSM product lines and related technology, BOS agreed to lend to the Company
          a
          total of $1,000,000 on December 31, 2005 (the “***BOS
          Loan***”).  The entire principal and interest balance of
          the BOS Loan was repaid during 2006 in three portions, each by the issuance
          of
          capital stock.  The first two such issuances, as payment of principal
          in the amounts of $350,000 on June 30, 2006 and $250,000 on July 31, 2006,
          were
          of the common stock of Qualmax.  The final such issuance, in the
          principal amount of $400,000 and all remaining unpaid interest, effective
          December 31, 2006, was of the Preferred Stock of the Company, and as of
          December
          31, 2006 the Company was no longer indebted to BOS in any amount.  The
          December 31, 2006 issuance of Preferred Stock in exchange for release from
          the
          BOS Loan and other obligations is discussed in more detail in Note F,
          Stockholders’ Equity, under the heading “Preferred Stock.”
 
 **NOTE
                    E    –**
                **CAPITAL
                    LEASE OBLIGATIONS**
 
 We
          currently lease equipment pursuant to seven capital lease
          agreements.  In conjunction therewith, the Company has capitalized the
          cost of the equipment in the amount of $489,000, which is the present value
          of
          the lease payments.    Interest expense on the capital lease
          obligations amounted to approximately $36,000 and $1,700 for the years
          ended
          December 31, 2006 and 2005, respectively.  Future minimum lease
          payments required under the capital leases as of December 31, 2006 were
          as
          follows:
 
 2007
                                    
                                    $
                                    194,0492008
                                    
                                    
                                    176,5662009
                                    
                                    
                                    7,027Total
                                    
                                    
                                    377,642Less:
                                        amounts representing interest
                                    
                                    
                                    (33,293
                                    )Present
                                        value of net minimum lease payments
                                    
                                    
                                    344,349Capital
                                        lease obligations, current portion
                                    
                                    
                                    169,202Capital
                                        lease obligations, net of current portion
                                    
                                    $
                                    175,147
  F-21
 
 **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    F    –**
                **STOCKHOLDERS’
                    EQUITY**
 
 **Capitalization**
 
 The
          Company’s authorized capital stock consists of 50,000,000 shares of common
          stock, $.01 par value per share, and 1,000 shares of preferred stock, $.01
          par
          value.  There were 44,303,939 shares of common stock and 116.666974
          shares of Series A Convertible Preferred Stock outstanding as of December
          31, 2006.
 
 The
          board
          of directors has the authority, without action by the Company’s stockholders, to
          provide for the issuance of preferred stock in one or more classes or series
          and
          to designate the rights, preferences and privileges of each class or series,
          which may be greater than the rights of the common stock.
 
 **Common
          Stock**
 
 As
          of
          December 31, 2006, our total number of authorized common stock, $.01 par
          value,
          was 50 million shares, with 44,303,909 shares issued and
          outstanding.  On February 1, 2007 our board acted to increase the
          number of authorized common stock to 600 million shares. The additional
          common
          stock shares will become available upon the effectiveness, by shareholder
          action, of an amendment to our certificate of incorporation. Upon
          authorization of the additional common shares, all Series A Convertible
          Preferred Shares will automatically convert to common shares at a ratio
          of
          2,986,736 common shares for every one preferred share.
 
 Stockholders’
          equity transactions prior to the New World Brands/Qualmax, Inc. merger
          date have
          been retroactively restated for the equivalent number of shares received
          in the
          merger after giving effect to any difference in par value of the issuer’s and
          acquirer’s stock with an offset to paid-in capital.
 
 **Preferred
          Stock**
 
 As
          of
          December 31, 2006, we had 1,000 shares of authorized preferred stock, $.01
          par
          value.  In connection with the transactions contemplated by the
          Reverse Acquisition, the Board authorized the creation and issuance of
          shares of
          voting preferred stock designated as “Series A Convertible Preferred Stock” (the
“***Preferred Stock***”).  The terms, rights,
          preferences and privileges of the Preferred Stock are set forth in a Certificate
          of Designation filed with the Secretary of State of the State of Delaware
          on
          August 30, 2006, as amended on January 8, 2007 to increase the authorized
          number
          of shares of Preferred Stock from 100 to 200 (the “***Certificate of
          Designation***”).  Pursuant to the Reverse Acquisition, the
          Company issued 100 shares of Preferred Stock to Qualmax, which shares of
          Preferred Stock are convertible into 298,673,634 shares of Common Stock
          and
          which represent more than a majority of the voting power of the Company’s issued
          and
 
 F-22
 
 **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    F    –**
                **STOCKHOLDERS’
                    EQUITY (CONTINUED)**
 
 **Preferred
          Stock (Continued)**
 
 outstanding
          shares of capital stock (on an as-converted basis).  Pursuant to the
          Certificate of Designation, the shares of Preferred Stock will be automatically
          converted into shares of Common Stock upon the filing of the Charter Amendments
          described below.
 
 During
          2006, we issued 116.666974 shares of our Series A Convertible Preferred
          Stock,
          as follows:
 
 Pursuant
          to the Reverse Acquisition, New World Brands issued 100 shares of Preferred
          Stock, convertible into 298,673,634 shares of our common stock, to
          Qualmax.
 
 Effective
          December 29, 2006, the Company entered into an Amended and Restated Stock
          Subscription and Share Transfer Agreement (the “***Subscription
          Agreement***”) with P&S Spirit,
          LLC, a Nevada limited liability company (“***P&S
          Spirit***”) pursuant to which P&S Spirit agreed to invest between
          $3 million and $5 million by purchasing shares of the Company’s Series A
          Convertible Preferred stock in three stages, at a price of $268,806.27
          per share
          of Preferred Stock (equivalent to $0.09 per share of common stock, par
          value
          $0.01 per share (the “***Common Stock***”), on an
          as-converted basis): (i) on December 29, 2006, an investment
          of $3,000,000 by purchase of 11.160454 shares of Preferred Stock of the
          Company,
          convertible into 33,333,333 shares of Common Stock; and (ii) after the
          second
          fiscal quarter of 2007, subject to certain conditions set forth in the
          Subscription Agreement and summarized below, an additional investment of
          $1,000,000 (the “***Second Tranche***”) by purchase of
          3.720151 shares of Preferred Stock, convertible into 11,111,111 shares
          of Common
          Stock; and (iii) after the third fiscal quarter of 2007, subject to certain
          conditions set forth in the Subscription Agreement and summarized below,
          an
          additional investment of $1,000,000 (the “***Third
          Tranche***”) by purchase of 3.720151 shares of Preferred Stock,
          convertible into 11,111,111 shares of Common Stock.
 
 The
          Second Tranche is only payable by P&S Spirit in the event that the Company’s
          consolidated unaudited financial statements as filed on Form 10-QSB (or,
          Form
          10-Q, if applicable) for the second quarter ending June 30, 2007 reflect
          EBITDA
          of: (A) $543,000 or greater for the three month period ending June 30,
          2007; or
          (B) $618,000 or greater for the six month period ending June 30,
          2007.  Therefore, if the foregoing conditions are met, the Second
          Tranche payment could be required no sooner than 5 days after the filing
          of the
          Company’s quarterly report on Form 10-QSB for the quarter ending June 30,
          2007.
 
 The
          Third
          Tranche is only payable by P&S Spirit in the event the Company’s
          consolidated unaudited financial statements as filed on Form 10-QSB (or,
          Form
          10-Q, if applicable) for the third quarter ending September 30, 2007 reflect
          EBITDA of: (A) $885,000 or greater for the three month period ending September
          30, 2007; or (B) $1,503,000 or greater for the nine month period ending
          September 30, 2007.  Therefore, if the foregoing conditions
          are
 
 F-23
 
 **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    F    –**
                **STOCKHOLDERS’
                    EQUITY (CONTINUED)**
 
 **Preferred
          Stock (Continued)**
 
 met,
          the
          Third Tranche payment could be required no sooner than 5 days after the
          filing
          of the Company’s quarterly report on Form 10-QSB for the quarter ending
          September 30, 2007.  Also, if the Second Tranche is not payable at the
          time the Third Tranche becomes payable, the Second Tranche payment must
          be made
          simultaneously with the Third Tranche payment.
 
 Effective
          December 31, 2006 we entered into an agreement with Better Online Solutions,
          Ltd. (“***BOS***”) (the “***BOS
          Agreement***”).  Under the terms of the BOS Agreement, we
          converted outstanding obligations under the BOS agreement in the amount
          of
          $1,480,189 into 5.50652 shares of Preferred Stock at a common stock equivalent
          price of $.09 per share, which was the prevailing market price of our common
          stock on the date of the BOS Agreement.  The Preferred Stock held by
          BOS is automatically convertible into 16,446,544 shares of our common stock,
          as
          noted below.  The total amount converted consisted of the remaining
          principal and accrued interest on our note payable to BOS, accrued royalties
          and
          outsourcing expenses incurred, and the release of any other obligations
          under
          the terms of the BOS Operating Agreements.  In addition, BOS granted
          to us, contingent upon certain conditions, the right to purchase up to
          thirty
          percent (30%) of all of BOS’s shares of our Series A Preferred Stock or our
          common stock, at a price ranging from $0.12 to $0.24 per share on a common
          stock
          equivalent basis.
 
 Conversion
          of Series A Convertible Preferred Stock into shares of our common stock
          will
          take place automatically upon the effectiveness of an amendment to our
          certificate of incorporation authorizing an increase in the number of
          outstanding shares of our common
 stock
          from 50 million shares to 600 million shares, which we expect to occur
          during
          the second quarter of 2007.  Each share of Series A Preferred Stock
          will convert into 2,986,736.34 shares of our common stock.
 
 **Common
          Stock Warrants**
 
 No
          warrants for the purchase of our common stock were granted during the 12
          months
          ending December 31, 2006.
  F-24
 
 **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    F    –**
                **STOCKHOLDERS’
                    EQUITY (CONTINUED)**
 
 **Common
          Stock Warrants (Continued)**
 
 Common
          stock warrant activity for the year was as follows:
 Warrants
                            
                            
                            Weighted
                              Average
                              Exercise
                                PriceBalance
                                granted at December 31, 2005
                            
                            
                            2,320,000
                            
                            
                            $
                            0.49Granted
                                in 2006
                            
                            
                            -
                            
                            
                            $
                            -Exercised
                                in 2006
                            
                            
                            -
                            
                            
                            $
                            -Balance
                                granted at December 31, 2006
                            
                            
                            2,320,000
                            
                            
                            $
                            0.49
 
 **Preferred
          Stock Warrants**
 
 Effective
          December 29, 2006, we issued two warrants, one jointly to M. David Kamrat
          and
          Noah Kamrat, each of whom are directors and officers of the Company, and
          one to
          P&S Spirit.  Each warrant will allow for the purchase of up to a
          total of 9.300378 shares of our Series A Preferred Stock at $268,806.27
          per
          share.  The warrants expire on December 31, 2011.
 
 Upon
          the
          automatic conversion of our Series A Preferred Stock to common stock, the
          warrants, if not previously exercised, will be cancelled and we will issue
          two
          new warrants, one jointly to M. David Kamrat and Noah Kamrat, and one to
          P&S
          Spirit, that each will allow for the purchase of up to 27,777,778 shares
          of our
          common stock at $.09 per share.
 
 Preferred
          stock warrant activity for the year was as follows:
 
 Warrants
                                  
                                  
                                  Weighted
                                    Average
                                    Exercise
                                      PriceBalance
                                      granted at December 31, 2005
                                  
                                  
                                  -
                                  
                                  
                                  $
                                  -Granted
                                      in 2006
                                  
                                  
                                  18.600756(as
                                      converted to common shares)
                                  
                                  
                                  55,555,548
                                  
                                  
                                  $
                                  0.09Balance
                                      granted at December 31, 2006
                                  
                                  
                                  18.600756(as
                                      converted to common shares)
                                  
                                  
                                  55,555,548
                                  
                                  
                                  $
                                  0.09
 
 F-25
 
 **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    F    –**
                **STOCKHOLDERS’
                    EQUITY (CONTINUED)**
 
 **Computation
          of Basic and Diluted Share Data**
 
 The
          following tables set forth the computation of basic and diluted share data
          for
          2006 and 2005 (rounded to the nearest thousand):
 
 Weighted
                                  average number of shares outstanding during 2005:Basic
                                  (common)
                              
                              
                              166,861,000Effect
                                  of dilutive securitiesCommon
                                  - options and warrants
                              
                              
                              86,526,000Weighted
                                  average number of shares outstanding - diluted
                              
                              
                              253,387,000Weighted
                                  average of options and warrantes not included
                                  above  (anti-dilutive)
                              
                              
                              1,530,000
 
 Weighted
                                              average number of shares outstanding
                                              during 2006:Basic
                                              (common)
                                          
                                          
                                          39,044,000Preferred
                                              (as converted to common)
                                          
                                          
                                          86,148,000Total
                                          
                                          
                                          125,192,000Effect
                                              of dilutive securitiesCommon
                                              - options and warrants
                                          
                                          
                                          -Preferred
                                              - options and warrants
                                          
                                          
                                          -Total
                                          
                                          
                                          -Weighted
                                              average number of shares outstanding
                                              - diluted
                                          
                                          
                                          125,192,000Weighted
                                              average of options and warrantes not
                                              included
                                              above  (anti-diluted):Basic
                                              (common)
                                          
                                          
                                          4,478,000Preferred
                                              (as converted to common)
                                          
                                          
                                          55,556,000Total
                                          
                                          
                                          60,034,000
 
 The
          basic
          and diluted share data for 2005 have been adjusted retroactively in a manner
          similar to a stock split to reflect the recapitalization of the
          Company.
 
 F-26
 
 **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    F    –**
                **STOCKHOLDERS’
                    EQUITY (CONTINUED)**
 
 **Lock-Up
          Agreement**
 
 In
          connection with the transactions contemplated by the Subscription Agreement,
          the
          Company, the Kamrats, P&S Spirit and certain affiliates of the Kamrats and
          P&S Spirit entered into an Amended and Restated Lock-Up Agreement (the
“***Lock-Up Agreement***”), pursuant to which each such
          party agreed to certain restrictions on transfer on certain shares of capital
          stock (and securities convertible into share of capital stock) of the Company
          on
          the terms set forth therein. A copy of the Amended and Restated Lock-Up
          Agreement is filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K
          filed with the SEC on January 8, 2007.  In particular, the parties
          agreed to restrict their ability to transfer shares of capital stock in
          the
          Company for up to two years without the prior approval of the other stockholders
          party thereto (meaning, both the Kamrats and P&S Spirit must seek the
          consent of the other to sell subject shares during the term of the Lock- Up
          Agreement).  Also, in connection with the transactions contemplated by
          the BOS Agreement BOS agreed to be subject to the Lock-Up Agreement, restricting
          the ability of BOS to transfer shares of capital stock in the Company and
          Qualmax for up to two years without the prior approval of the other stockholders
          party thereto.
 
 **Conversion
          of BOS Debt to Qualmax Common Stock**
 
 In
          connection with the acquisition of the BOS VoIP and GSM product lines and
          related technology (Note D), we entered into a $1,000,000 loan
          agreement.  During 2006, we entered into the following separate
          agreements with BOS through which the following amounts owed by us to BOS
          were
          converted into Qualmax pre-merger common shares:
 
 ·
                In
                    April 2006 we converted $350,000 of our note payable to BOS into
                    244,755
                    shares of Qualmax common stock (3,488,958 shares of New World
                    Brands
                    common stock on an as-converted basis) at a price of $1.43 per
                    common
                    share.
 ·
                In
                    June 2006 we converted $250,000 of our note payable to BOS into
                    174,825
                    shares of Qualmax common stock (2,492,112 shares of New World
                    Brands
                    common stock on an as-converted basis) at a price of $1.43 per
                    common
                    share.
 
 **Merger
          and Share Exchange Agreement with Bench Group, Inc**
 
 On
          June
          24, 2005, Qualmax entered into an agreement and plan of share exchange
          with
          Bench Group, Inc. (“Bench”), a Delaware corporation.  Bench was a
          non-operating publicly traded company, in existence since 1983.  Under
          the agreement, Bench acquired all of Qualmax’s stock from the Qualmax
          stockholders (the “*Original Qualmax stockholders*”) in exchange for
          14,000,000 newly issued shares (the “*Bench Exchange Shares*”) of Bench’s
          Common Stock (the “*Share Exchange*”).  The Bench Exchange
          Shares were issued to the
 
 F-27
 
 **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    F    –**
                **STOCKHOLDERS’
                    EQUITY (CONTINUED)**
 
 **Merger
          and Share Exchange Agreement with Bench Group, Inc
          (Continued)**
 
 original
          Qualmax stockholders on a pro rata basis, in proportion to the ratio of
          the
          number of Qualmax shares held by each original Qualmax stockholder to the
          total
          number of Qualmax shares held by all original Qualmax stockholders as of
          the
          closing date.
 
 At
          the
          closing, Qualmax became a wholly-owned subsidiary of
          Bench.  Immediately following the closing, Bench filed an Agreement
          and Plan of Merger whereby Qualmax merged with and into Bench, with Bench
          as the
          surviving entity (“the Upstream Merger”).  Although Bench was the
          surviving corporation in the Upstream Merger, the Share Exchange and Upstream
          Merger were accounted for as a “reverse acquisition” for accounting and
          financial reporting purposes, wherein Qualmax was deemed the
          surviving
 entity
          for such purposes.  The Bench Exchange shares were known as “new
          Qualmax stock”.
 
 The
          original stockholders of Bench retained their ownership interests in the
          surviving entity, and received an equivalent number of shares of new Qualmax
          common stock as a result of the Share Exchange and the Upstream
          Merger.
 
 The
          share
          exchange agreement contained a dilutive provision whereby additional shares
          of
          new Qualmax stock were issued to prevent the dilutive effect of stock
          transactions that took place between the date of the agreement and final
          closing
          (“the delay stock transactions”).  There was a significant delay
          between the agreement date and the final closing, so an addendum to the
          share
          exchange agreement was established and agreed to upon which an additional
          991,673 shares of new Qualmax stock was issued to the original Qualmax
          stockholders to prevent the dilutive effect of the delay stock
          transactions.  The 991,673 shares were allocated to the original
          Qualmax stockholders based on the proportion of their original pre-merger
          stockholdings to total Qualmax shares outstanding prior to the merger agreement
          date.
 
 **NOTE
                    G    –**
                **STOCK
                    OPTION PLANS**
 
 **Performance
          Equity Plan**
 
 We
          have a
          Performance Equity Plan (the “***Performance Equity
          Plan***”) under which we may grant incentive and nonqualified stock
          options, stock appreciation rights, restricted stock awards, deferred stock,
          stock reload options, and other stock-based awards to purchase up to 600,000
          shares of Common Stock to officers, directors, key employees, and consultants.
          The Company may not grant any options with a purchase price less than fair
          market value of Common Stock as of the date of grant.  No options or
          other stock-based rights were issued under the Performance Equity Plan
          during
          2006, and none were exercised or exercisable during 2006.
 
 F-28
 
 **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    G    –**
                **STOCK
                    OPTION PLANS
                    (CONTINUED)**
 
 **Stock
          Option Plan**
 
 In
          October 2001, we adopted a stock option plan (the “***2001 Option
          Plan***”) whereby we have reserved 5,000,000 shares of its Common
          Stock for purposes of granting options to purchase such shares pursuant
          to the
          2001 Stock Option Plan.  Options are granted to officers and employees
          of the Company by the Board of Directors and to members of the Board on
          a
          non-discretionary basis, provided that the exercise price of the options
          is
          equal or greater than the fair market price of our Common Stock on the
          date the
          option is granted. The 2001 Stock Option Plan terminates 10 years from
          its
          effective date.  A total of 2,945,000 of options (“the New World
          Brands options”), granted under the 2001 Option Plan to purchase our Common
          Stock in exchange for services rendered, were vested and exercisable as
          of
          December 31, 2006.  The employees and consultant performed services
          related to product promotion, general business, financing, and public/investor
          relations.   These options were granted prior to September 15,
          2006.
  Employee
          compensation expense for the New World Brands stock options was not recognized
          in 2006 in the accompanying consolidated statements of income as the options
          were granted and fully exercisable on September 14, 2006, prior to the
          merger
          date. The consolidated statements of income include the results of operations
          of
          New World Brands from the date of the merger, September 15, 2006, to December
          31, 2006.  As of December 31, 2006, there was approximately $41,610 of
          total unrecognized compensation cost related to unvested stock options
          granted
          under our stock option plan. That cost is expected to be recognized over
          a
          weighted average of 4 years. There are 1,755,000 shares of common stock
          available for future issuance, as of December 31, 2006.  The following
          table summarizes stock option plan as of December 31, 2006:
 
 Exercise
                                        Price
                                      
                                      Options
                                        Outstanding
                                      
                                      Weighted
                                          Average
                                        Remaining
                                          Contratual
                                        Life
                                          (in Years)
                                      
                                      Options
                                        Exercisable****$               0.18
                                      
                                      1,000,000
                                      
                                      4.9
                                      
                                      1,000,000$               0.18
                                      
                                      1,000,000
                                      
                                      4.9
                                      
                                      1,000,000$               0.18
                                      
                                      250,000
                                      
                                      4.9
                                      
                                      250,000$               0.18
                                      
                                      100,000
                                      
                                      4.9
                                      
                                      100,000$               0.18
                                      
                                      100,000
                                      
                                      4.9
                                      
                                      100,000$               0.18
                                      
                                      100,000
                                      
                                      4.9
                                      
                                      100,000$               0.50
                                      
                                      300,000
                                      
                                      3.5
                                      
                                      -$               0.25
                                      
                                      325,000
                                      
                                      1.75
                                      
                                      325,000$               0.10
                                      
                                      70,000
                                      
                                      5.5
                                      
                                      70,0003,245,000
                                      
                                      
                                      
                                      2,945,000
 
 F-29
 
 **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    H    –**
                **INCOME
                    TAXES**
 
 Income
          tax consisted of the following for the years ended December 31, 2006 and
          2005:
 
 2006
                                
                                2005Federal:Current
                                
                                $
                                403,995
                                
                                $
                                (107,423
                                )Deferred
                                
                                
                                579,475
                                
                                
                                9,676State:Current
                                
                                
                                -
                                
                                
                                (22,394
                                )Deferred
                                
                                
                                51,130
                                
                                
                                1,912Subtotal
                                
                                
                                1,034,600
                                
                                
                                (118,229
                                )Change
                                    in valuation allowance
                                
                                
                                (561,695
                                )
                                
                                -Benefit
                                    (provision) for income taxes
                                
                                $
                                (472,905
                                )
                                $
                                (118,229
                                )
  The
          effective tax rate varies from the federal statutory maximum rate for the
          year
          ended December 31, 2006 and 2005 principally due to the following:
 
 2006
                              
                              2005Federal
                                  tax rate
                              
                              
                              34
                              %
                              
                              34
                              %Loss
                                  from foreign subsidiary
                              
                              
                              -19
                              %
                              
                              -Benefit
                                  of net operating loss carryback
                              
                              
                              -7
                              %
                              
                              -State
                                  tax rate, net of federal tax benefit
                              
                              
                              1
                              %
                              
                              3
                              %Other
                              
                              
                              -1
                              %
                              
                              -Total
                              
                              
                              8
                              %
                              
                              37
                              %
 
 F-30
 
 **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    H    –**
                **INCOME
                    TAXES (CONTINUED)**
 
 Significant
          portions of the deferred tax assets and liabilities results from the tax
          effects
          of temporary differences, which of December 31, 2006, were as
          follows:
 
 Deferred
                                          tax assets (short-term):Allowance
                                          for doubtful accounts receivable
                                      
                                      $
                                      10,930Allowance
                                          for inventory obsolescence
                                      
                                      
                                      48,033Net
                                          operating loss carryforwards
                                      
                                      
                                      538,825597,788Deferred
                                          tax assets (long-term):Foreign
                                          currency translation adjustment
                                      
                                      
                                      29,741Total deferredtax
                                        assets
                                      
                                      
                                      627,529Deferred
                                          tax liabilities (long-term):Depreciation
                                      
                                      
                                      (65,834
                                      )Net
                                          Deferred taxes assets before valuation
                                          allowance
                                      
                                      
                                      561,695Valuation
                                        allowance
                                      
                                      
                                      (561,695
                                      )Net
                                        deferredtax
                                        assetafter
                                        valuation
                                      
                                      $
                                      -
 
 As
          of
          December 31, 2006, the Company had net operating losses approximately $1,400,000
          that can be carried forward for up to twenty years and deducted against
          future taxable income.  The net operating loss carryforward expires in
          2026.
 
 **NOTE
                    I    –**
                **RELATED
                    PARTY TRANSACTIONS**
 
 **Advances
          from Shareholders**
 
 The
          Company received and repaid advances from its shareholders during 2006,
          and as
          of December 31, 2006 there was $53,665 in loans from shareholders payable
          by the
          Company.  During 2006, approximately $65,000 were repaid to these
          shareholders.
 
 **Management
          Agreement**
 
 The
          Company entered into an agreement with a related party to provide management
          and
          financial services.  Management fees paid to this related party for
          the years ended December 31, 2006 and 2005 amounted to $71,785 and $95,017,
          respectively.
 
 F-31
 
 **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    I    –**
                **RELATED
                    PARTY TRANSACTIONS
                    (CONTINUED)**
 
 **Investment
          in Qualmax**
 
 Dr.
          Selvin Passen (“***Passen***”) and Oregon Spirit, LLC
          (“***Oregon Spirit***”) invested a total of $1,250,000 in
          Qualmax in three tranches prior to September 15, 2006, $500,000 on January
          30,
          2006, $500,000 on March 22, 2006, and $250,000 on June 22, 2006, in exchange
          for
          shares of Qualmax's common stock.
 
 On
          April
          10, 2006, Qualmax acquired certain assets of the CLP Group, LLC, a New
          York
          limited liability company, valued by the parties at $225,000, in exchange
          for
          shares of Qualmax's common stock.
 
  **NOTE
                    J    –**
                **COMMITMENTS
                    AND CONTINGENCIES**
 
 **Operating
          Leases**
 
 We
          have
          entered into various operating leases for our facilities and transportation
          equipment.  The future minimum annual rental payments due on these
          operating leases as of December 31, 2006 for each of the next 5 years are
          as
          follows:
 
 Year
                              ending December 31:2007
                          
                          $
                          265,0002008
                          
                          
                          144,0002009
                          
                          
                          110,0002010
                          
                          
                          104,0002011
                          
                          
                          18,000$
                          641,000
 
 Rent
          expense for the years ended December 31, 2006 and 2005 was approximately
          $143,000 and $68,000, respectively.
 
 F-32
 
 **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    J    –**
                **COMMITMENTS
                    AND CONTINGENCIES
                    (CONTINUED)**
 
 **The
          Former Employee Litigation**
 
 We
          are a
          defendant in a lawsuit filed by a former employee who has made claims for
          unpaid
          salary and for certain previously granted stock options.  Via
          mediation on February 7, 2007, we have settled this lawsuit, and as part
          of the
          settlement, we agreed that Mr. Singer holds options to purchase up to 70,000
          shares of the Company’s Common Stock at a price of $0.10 per share, which
          options were issued to Mr. Singer during his association with the Company
          prior
          to 2002.  As of the time of the filing of this Report we have not received
          final documentation dismissing the lawsuit and settling and releasing claims,
          but we expect to conclude final settlement documentation within a matter
          of
          weeks.
 
 **The
          MPI Litigation**
 
 As
          a
          result of the Reverse Acquisition the Company assumed the liabilities of
          Qualmax.  Qualmax was named as a defendant in certain litigation filed
          in France before the Trade Tribunal of Nanterre against BOS by Media Partners
          International (“***MPI***,” and the “***MPI
          Litigation***”), a former distributor of BOS, whose contract with BOS
          allegedly related to certain distribution rights for the product division
          Qualmax purchased from BOS on December 31, 2005.  Pursuant to the
          asset purchase agreement between Qualmax and BOS, BOS agreed to indemnify
          and
          hold Qualmax harmless from liability, without limitation, arising from
          the
          claims raised in the MPI Litigation, and BOS has undertaken defense of
          Qualmax
          at BOS’s expense.  The litigation remains in its early stages, and at
          last report from counsel the French court had not yet made definitive rulings
          on
          defendant’s motion to change venue and jurisdiction from France to
          Israel.  Initial hearings on the motion for change of venue were
          concluded in February, 2007, and we are advised that final hearing will
          be
          conducted in late April, 2007, and a decision likely rendered in May,
          2007.  If venue is in fact moved to Israel that decision may have a
          material impact on the plaintiff’s willingness to continue the litigation, due
          to increased expense, but the outcome of the venue hearings, and the impact
          of
          that outcome on plaintiff’s claims, is purely speculative at this
          point.  At present, based upon the limited progress in the matter and
          without the benefit of completion of factual discovery, management believes
          this
          litigation does not pose a significant financial risk to the
          Company.
 
 **The
          Blackstone Litigation**
 
 Qualmax
          was named as a defendant in a lawsuit entitled Capital Securities, LLC
          and
          Blackstone Communications Company v. Carlos Bertonnatti, Worldwide PIN
          Payment
          Corp. and Qualmax, Inc., Case No. 2006-15824-CA-01, in the Circuit Court
          of the
          11th Judicial
          Circuit in and for Miami-Dade County, Florida, filed August 10,
          2006.  The facts underlying the proceeding relate to a contract
          between defendant Worldwide PIN Payment Corp. and plaintiffs, and a third
          party,
          to plaintiff’s allegations of misappropriation of trade secrets and corporate
          opportunity, and to claims that defendants, or some of them,
 
 F-33
 
 **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    J    –**
                **COMMITMENTS
                    AND CONTINGENCIES
                    (CONTINUED)**
 
 **The
          Blackstone Litigation (Continued)**
 
 tortiously
          interfered with plaintiffs’ contract with a third party.  Plaintiffs’
seek monetary damages.  Management believes it is not entirely clear
          from the pleadings filed to date whether plaintiffs claim that Qualmax
          misappropriated trade secrets, or tortiously interfered with a third party
          contract, or is liable under some other theory.
 
 On
          March
          29, 2007, the first deposition in this matter was conducted, of a non-party
          witness who is one of the principal creators of certain intellectual property
          owned, or controlled, by Worldwide PIN Payment Corp.
          (“***WPP***”), and the deposition will be continued but
          a
          continuation has not been scheduled as of the time of filing of this
          Report.  The first formal discovery request was made of the Company on
          March 27, 2007, followed by a second request on April 10, 2007.  The
          Company has not yet been required to file any responsive pleadings, and
          has not
          provided materials responsive the plaintiff’s discovery requests.
 
 Co-defendants
          have answered and filed counterclaims and third party claims, but none
          of the
          claims of co-defendants are against Qualmax nor do they allege wrongdoing
          by
          Qualmax as a defense to claims against them by plaintiffs.  The
          Company is still investigating the claims against it, and the facts surrounding
          the claims against co-defendants, but that investigation is in its early
          stages
          and is incomplete.  Based on the limited information available to
          management at this point, management does not believe Qualmax or the Company
          is
          liable for any wrongdoing, act or omission, in relation to the litigation,
          and
          management believes that Qualmax is not properly a party to the
          litigation.  However, management does not have sufficient information
          to provide a meaningful assessment of all the facts and circumstances relating
          to the claims against Qualmax and co-defendants nor to determine how costly
          and
          time-consuming defense of the matter may be regardless of the merits of
          the
          Company’s defense.  In addition, the Company believes it has viable
          claims for indemnification and damages against co-defendants but has not
          yet
          formally raised those claims or made a full determination of their value
          or role
          in the litigation.
 
 
 **NOTE
                    K    –**
                **REGULATORY
                    MATTERS**
 
 The
          telecommunications industry is subject to federal, state and local
          regulation.  Any changes in the regulations or enforcement could
          impact the Company's ability to continue its current operations.
 
 F-34
 
 **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    L    –**
                **SUBSEQUENT
                    EVENTS AND OTHER
                    MATTERS**
 
 **Term
          Loan and Repayment of Note Payable with B of A**
 
 On
          and
          effective March 30, 2007, we entered into a term loan and security agreement
          with P&S Spirit (the “***P&S
          Loan***”).  The principal amount of the P&S Loan is
          $1,000,000.  Monthly payments of interest only at two percent over the
          Wall Street Journal Prime Rate payable in arrears are due commencing on
          May 1,
          2007.  The principal balance of the P&S Loan and any unpaid
          accrued interest thereon becomes due in full on January 2, 2009.  The
          P&S Loan includes certain covenants, including a financial reporting
          requirement which is due forty-five days after the close of a calendar
          quarter,
          and requirements that we maintain a ratio of current assets to current
          liabilities of at least 1.2 to 1 and a total liabilities to tangible net
          worth
          ratio not exceeding 2.5 to 1.
 
 The
          P&S Loan also grants P&S Spirit a first position security interest with
          respect to all of the Company’s assets.  The P&S Loan is also
          backed by a guaranty by Qualmax (which, pending completion of the contemplated
          merger of Qualmax into the Company, holds a controlling interest in the
          Company), a security interest in the assets of Qualmax (consisting solely
          of 100
          shares of series A convertible preferred stock of the Company, par value
          $0.01
          per share, which stock is convertible into 298,673,634 shares of the Company’s
          common stock, par value $0.01 per share), and by the personal guaranty
          of M.
          David Kamrat, Chairman of the Board of Directors and Chief Executive Officer
          of
          the Company, and a director and executive officer of Qualmax.  M.
          David Kamrat’s personal Guaranty is limited to the sum of $1,000,000, although
          the guaranteed obligations include indemnification for certain claims against
          P&S Spirit relating to the P&S Loan.
 
 The
          Loan
          proceeds were used by the Company to repay all outstanding principal, interest
          and fees due on our note payable with B of A (Note D), and to pay certain
          professional fees associated with preparation and negotiation of the P&S
          Loan.
 
 The
          principals of P&S Spirit include Dr. Selvin Passen, who is a director and
          shareholder of the Company, as well as its former Chief Executive Officer,
          and
          Dr. Jacob Schorr, who is a director of the Company
 
 **Credit
          facility with Pacific Continental Bank**
 
 The
          company entered into an agreement for the use of various credit services
          with
          Pacific Continental Bank in February 2007.  The conditions of this
          agreement require the deposit of $250,000 with the bank as security for
          the
          services.
  
 F-35
 
 **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    L    –**
                **SUBSEQUENT
                    EVENTS AND OTHER MATTERS
                    (CONTINUED)**
 
 **Amendment
          to Certificate of Incorporation**
 
 On
          January 31, 2007 we filed an Information Statement with the Securities
          and
          Exchange Commission on Schedule 14C, to provide information with respect
          to the
          approval of the actions set forth below that were approved by the board
          of
          directors of the Company and by written consent of the Company’s stockholders
          (the “***Written Consent***”) in lieu of a special meeting
          of stockholders:
 
 **ACTION
          ONE:**  Approval of the amendment and restatement of our
          Certificate of Incorporation to: (i) increase our authorized number of
          shares of
          Common Stock by five hundred fifty million (550,000,000) shares; (ii) implement
          a staggered board of directors with three classes; and (iii) make such
          other
          changes to the
 Certificate
          of Incorporation as are necessary and incidental to the foregoing (the
          “***Charter Amendments***”); and
 
 **ACTION
          TWO:** Approval of the appointment of Noah R. Kamrat as a Class II
          director and the appointment of M. David Kamrat and Jacob Schorr, Ph.D.
          as Class
          III directors (the “***Election of
          Directors***”).
 
 The
          Written Consent was executed by the holders of at least a majority of the
          issued
          and outstanding shares of (i) preferred stock, (ii) common stock and (iii)
          the
          issued and outstanding shares of capital stock of the Company entitled
          to vote
          on the matters set forth herein.  The actions approved by the Written
          Consent, if not revoked or terminated, will not become effective until
          twenty
          (20) calendar days after April 2, 2007, the date we first sent a definitive
          Information Statement to our stockholders.
 
 
 **NOTE
                    M    –**
                **JOINT
                    VENTURE WITH WORLD WIDE PIN PAYMENT,
                    LLC**
 
 On
          February 1, 2006, Qualmax entered into an LLC unit purchase agreement to
          acquire
          51 units of member interest in World Wide Pin Payment, LLC
          (“***WPP***”) (the joint venture “***WPP-TPP
          LLC***”), a Florida limited liability company engaged in the design
          and development of computer software systems, and entered into a related
          software license agreement with WPP-TPP LLC for the WPP-TPP LLC transaction
          platform.  The transaction involved a contingent assumption by Qualmax
          of the obligations of WPP-TPP LLC to perform under an Agreement of Co-operation
          with Siemens S.A.
 
 On
          August
          10, 2006, a lawsuit was filed against both WPP and Qualmax, alleging among
          other
          things that the intellectual property involved in the WPP software was
          in fact
          owned
  
 F-36
 
 **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    M    –**
                **JOINT
                    VENTURE WITH WORLD WIDE PIN PAYMENT, LLC
                    (CONTINUED)**
 
 by
          third
          parties and that we lacked the legal right to use the software, and further
          that
          our involvement with WPP had damaged the third party owners of the software
          (see
          Note J, Commitments and Contingencies, under the heading “The Blackstone
          Litigation”).  As a result, the joint venture agreement with WPP, and
          all other related agreements were terminated (including without limitation
          any
          Agreement of Co-Operation with Siemens S.A., which was rescinded), and
          the joint
          venture dissolved, and each of WPP and the Company retained their respective
          assets previously used in connection with the joint venture.  We
          believe the Company has no further obligations relating to the joint venture,
          other than obligations that may arise in relation to the Blackstone
          Litigation.
 
 
 **NOTE
                    N    –**
                **ASSET
                    PURCHASE AGREEMENT, CAPITALIZATION OF
                    WHOLLY-OWNED**
 **SUBSIDIARY,
          AND ROYALTY PAYMENT AGREEMENT**
 
 Effective
          December 31, 2005, the Company acquired certain assets of BOS. The purchased
          assets were used to capitalize IP Gear, Ltd., an Israeli company and
          wholly-owned subsidiary of the Company.  The BOS purchase agreement
          called for certain contingent obligations affecting the Company, including:
          (i)
          a royalty initially equal to 4% of the sales generated by the IP Gear,
          Ltd.
          business (the “***BOS Royalty***”); (ii) a loan in the
          principal amount of $1 million (the “***BOS Loan***”); (iii)
          an outsourcing agreement by which BOS provided certain services to IP Gear,
          Ltd.
          during a period of transition (including, for example, office space, office
          equipment, and certain personnel) (the “***Outsourcing
          Agreement***”); and (iv) an obligation of BOS to pay certain third
          party royalties and related amounts on behalf of IP Gear, Ltd.
 
 Payments
          of BOS Loan principal totaling $600,000 were made on June 30, 2006, and
          July 31,
          2006, in the amounts of $350,000 and $250,000, respectively, by issuance
          of the
          stock of Qualmax.
 
 Effective
          December 31, 2006, the entire remaining BOS Loan balance (including principal,
          interest, and any fees), the entire remaining obligation to pay the BOS
          Royalty,
          and all then-outstanding amounts payable under the Outsourcing Agreement
          or as
          reimbursement for payment of third party royalties, totaling $1,480,189,
          was
          repaid, retired and released by the issuance of 5.50652 shares of Preferred
          Stock (convertible into 16,446,544 shares of our common stock) at a common
          stock
          equivalent price (as-converted) of $.09 per share.
  
 F-37
 
 **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    O    –**
                **DEFINED
                    CONTRIBUTION PLAN**
 
 In
          May
          2005, we adopted a Savings Incentive Match Plan for Employees (SIMPLE)
          (the
“Plan”) for the benefit of our employees who are reasonably expected to receive
          at least $5,000 in compensation during a calendar year.  We have
          elected to contribute to each eligible employee’s simple individual retirement
          account a matching contribution equal to the employee’s elective salary
          reduction contributions, up to a limit of three percent of the employee’s
          compensation for the calendar year.  Total expense for the years ended
          December 31, 2006 and 2005 was approximately $11,000 and $6,000,
          respectively.
 
 
 **NOTE
                    P    –**
                **BUSINESS
                    SEGMENT REPORTING**
 
 The
          following presents our segmented financial information by business line
          for the
          years ended December 31, 2006 and 2005.  We are currently focused on
          three principal lines of businesses: (i) proprietary hardware, which is
          our VoIP
          technology development and equipment manufacturing subsidiary that is located
          in
          Israel, IP Gear, Ltd.; (ii) resale hardware, which is the sale and distribution
          of VoIP and other telephony equipment and related professional services
          via our
          U.S.-based business operated under the name "IP Gear"); and (iii) wholesale
          carrier services, which is telephony service resale and direct call routing
          via
          our U.S.-based VoIP service business operated under the name "IP Gear
          Connect".
 
 2006
                                        
                                        
                                        2005Net
                                            sales:Wholesale
                                            carrier service
                                        
                                        $
                                        11,230,284
                                        
                                        
                                        $
                                        8,227,222Resale
                                            hardware
                                        
                                        
                                        6,307,644
                                        
                                        
                                        
                                        9,810,314Proprietary
                                            hardware
                                        
                                        
                                        2,592,543
                                        
                                        
                                        
                                        -20,130,471
                                        
                                        
                                        
                                        18,037,536Cost
                                            of sales:Wholesale
                                            carrier service
                                        
                                        
                                        10,382,726
                                        
                                        
                                        
                                        7,411,035Resale
                                            hardware
                                        
                                        
                                        5,317,852
                                        
                                        
                                        
                                        8,126,649Proprietary
                                            hardware
                                        
                                        
                                        2,190,874
                                        
                                        
                                        
                                        -17,891,452
                                        
                                        
                                        
                                        15,537,684
 F-38
 
 **NEW
          WORLD BRANDS, INC. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2006 AND 2005**
 
 
 **NOTE
                    P    –**
                **BUSINESS
                    SEGMENT REPORTING
                    (CONTINUED)**
 
 2006
                                  
                                  
                                  2005Gross
                                      profit:Wholesale
                                      carrier service
                                  
                                  
                                  847,558
                                  
                                  
                                  
                                  1,683,665Resale
                                      hardware
                                  
                                  
                                  989,792
                                  
                                  
                                  
                                  816,187Proprietary
                                      hardware
                                  
                                  
                                  401,669
                                  
                                  
                                  
                                  -2,239,019
                                  
                                  
                                  
                                  2,499,852Sales,
                                      general and administrative expenses:Wholesale
                                      carrier service
                                  
                                  
                                  1,650,493
                                  
                                  
                                  
                                  780,635Resale
                                      hardware
                                  
                                  
                                  1,113,611
                                  
                                  
                                  
                                  1,077,946Proprietary
                                      hardware
                                  
                                  
                                  3,519,489
                                  
                                  
                                  
                                  -Unallocated
                                      corporate overhead
                                  
                                  
                                  1,597,367
                                  
                                  
                                  
                                  427,5467,880,960
                                  
                                  
                                  
                                  2,286,127Income
                                      (loss) from operations:Wholesale
                                      carrier service
                                  
                                  
                                  (802,935
                                  )
                                  
                                  
                                  903,030Resale
                                      hardware
                                  
                                  
                                  (123,819
                                  )
                                  
                                  
                                  (261,759
                                  )Properietary
                                      hardware
                                  
                                  
                                  (3,117,820
                                  )
                                  
                                  
                                  -Unallocated
                                      corporate overhead
                                  
                                  
                                  (1,597,367
                                  )
                                  
                                  
                                  (427,546
                                  )$
                                  (5,641,941
                                  )
                                  
                                  $
                                  213,725
     F- 39