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**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,DC 20549**

 

**FORM 10-K**

 

**(Mark One)**

 
| **x**      | ** ** | **Annual report under  Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|------------|------------|-----------------------------------------------------------------------------------------------|
|       |       |                                                                                          |
| ** ** | ** ** | **for  the fiscal year ended December 31, 2008**                                         |

 

**OR**

 
| **o**      | ** ** | **Transition  report pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934** |
|------------|------------|----------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                     |
| ** ** | ** ** | **For the transition period from to**                                                                    |

 

**Commission file number 033-91432**

 

**NEW WORLD BRANDS, INC.**

(Exact Name of Registrant as Specified in Its Charter)

 

| **Delaware**                              | ** ** | **02-0401674**      |
|-------------------------------------------|------------|---------------------|
| (State or Other Jurisdiction of           |       | (I.R.S. Employer    |
| Incorporation or Organization)            |       | Identification No.) |
|                                      |       |                |
| **340 West Fifth Avenue, Eugene, Oregon** | ** ** | **97401**           |
| (Address of Principal Executive Offices)  |       | (Zip Code)          |

 

**(541) 868-2900**(Registrant’s TelephoneNumber, Including Area Code)

 

**Not applicable**(Former Name,Former Address and Former Fiscal Year, if Changed Since Last Report)

 

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule405 of the Securities Act.  Yes o  Nox

 

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section15(d) of this Act.  Yes o  No x

 

Note — Checking the boxabove will not relieve any registrant required to file reports pursuant to Section13 or 15(d) of the Exchange Act from their obligations under those Sections.

 

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed by Section13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days. Yes x     No  o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes x     No  o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

| Large accelerated filero                       |   | Accelerated filero         |
|------------------------------------------------|--------|----------------------------|
|                                           |   |                       |
| Non-accelerated filero                         |   | Smaller reporting companyx |
| (Do not check if a smaller reporting company.) |   |                       |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). Yes o     No  x

 

Basedon the closing price of $0.04 per share on June 30, 2008, as reported for suchdate on the Over the Counter Bulletin Board, the aggregate market value of ourvoting and non-voting common stock held by non-affiliates was $16,739,187.

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the last practicable date: As of April 15, 2009, there were411,879,673 shares of the issuer’s common stock, $0.01 par value per share,outstanding.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

None.

 

 

 

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**TABLE OF CONTENTS**

 
| **Part I**                                                                                           |
|-----------------------------------------------------------------------------------------------------------|
|                                                                                                      |   |
| Item 1. Description of Business                                                                           | 4 |
| Item 1A. Risk Factors                                                                                     | 12 |
| Item  2. Description of Property                                                                          | 22 |
| Item  3. Legal Proceedings                                                                                | 22 |
| Item 4. Submission of Matters to a Vote of Security  Holders                                              | 23 |
|                                                                                                      |   |
| **Part II**                                                                                          |
|                                                                                                      |   |
| Item 5. Market for Common Equity, Related Stockholder  Matters, and Issuer Purchases of Equity Securities | 24 |
| Item  6. Selected Financial Data                                                                          | 26 |
| Item 7. Management’s Discussion and Analysis of  Financial Conditions and Results of Operations      | 27 |
| Item 8. Financial Statements and Supplementary Data                                                       | 41 |
| Item 9. Changes in and Disagreements With Accountants  on Accounting and Financial Disclosure        | 41 |
| Item 9A(T). Controls and Procedures                                                                       | 41 |
| Item  9B. Other Information                                                                               | 42 |
|                                                                                                      |   |
| **Part III**                                                                                         |
|                                                                                                      |   |
| Item 10.  Directors, Executive Officers, and Corporate Governance                                         | 43 |
| Item 11. Executive  Compensation                                                                          | 45 |
| Item 12. Security Ownership of Certain Beneficial Owners  and Management and Related Stockholder Matters  | 47 |
| Item 13. Certain Relationships and Related  Transactions, and Director Independence                       | 50 |
| Item 14. Principal Accountant Fees and Services                                                           | 51 |
|                                                                                                      |   |
| **PART IV**                                                                                          |
|                                                                                                      |   |
| Item 15.  Exhibits and Financial Statement Schedules                                                      |   |
| Signatures                                                                                                | 52 |

 

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**PART I**

 

**General**

 

Referencesin this Annual Report on Form 10-K (the “***Report***”) to the “***Company***,” “we,” “us,” “our” and similar words are toNew World Brands, Inc., commencing with the acquisition of Qualmax, Inc., aDelaware corporation (“***Qualmax***”), and,with respect to prior historical financial information, to Qualmax. The resultsof operations of the company’s former subsidiary, IP Gear, Ltd. (“***IP Gear, Ltd***.”) are reported as discontinued operations,as a result of our sale of IP Gear, Ltd. effective July 1, 2007.

 

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

 

**Disclosure Regarding Forward-LookingStatements - Cautionary Statement**

 

Wecaution readers that this Report contains “forward-looking statements” withinthe meaning of the Private Securities Litigation Reform Act of 1995.Forward-looking statements, written, oral or otherwise, are based on theCompany’s current expectations or beliefs rather than historical factsconcerning 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,” “budgeted”,  or “will” and similar words or phrases orcomparable terminology. Forward-looking statements involve risks anduncertainties. The Company cautions that these statements are further qualifiedby important economic, competitive, governmental and technological factors thatcould cause the Company’s business, strategy, or actual results or events todiffer 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 assurancethat any forward-looking statement contained herein, or otherwise made by theCompany, will prove to be accurate. The Company assumes no obligation to updatethe forward-looking statements.

 

TheCompany has a relatively limited operating history compared to others in thesame business and is operating in a rapidly changing industry environment, andits ability to predict results or the actual effect of future plans orstrategies, based on historical results or trends or otherwise, is inherentlyuncertain. While we believe that these forward-looking statements arereasonable, they are merely predictions or illustrations of potential outcomes,and they involve known and unknown risks and uncertainties, many beyond ourcontrol, that are likely to cause actual results, performance, or achievementsto be materially different from those expressed or implied by suchforward-looking statements. Factors that could have a material adverse affecton the operations and future prospects of the Company on a condensed basisinclude those factors discussed under Item 1A “Risk Factors” and Item 7, “Management’sDiscussion and Analysis of Financial Conditions and Results of Operations” inthis report, and include, but are not limited to, the following:

 
| · |   | A  downturn in the market for, or supply of, our core products and services,  could reduce our revenue and gross profit margin by placing downward pressure  on prices and sales volume, and we may not accurately anticipate changing  supply and demand conditions;                               |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                |
| · |   | We  have a limited backlog, or “pipeline,” of product and services sales, and we  do not control the manufacturing of the core products we distribute and sell,  exposing our future revenues and profits to fluctuations and risks of supply  interruptions or rapid declines in demand; |
|   |   |                                                                                                                                                                                                                                                                                                |
| · |   | We  have recurring quarterly and annual losses and continuing negative cash flow,  which may continue, potentially requiring us to either raise additional  capital or reduce costs relative to gross margins;                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                |
| · |   | We  may not be able to raise necessary additional capital, and may not be able to  reduce costs sufficiently to reverse our negative cash flow, absent  additional capital;                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                |
| · |   | If  we are successful in raising additional capital, it will likely dilute  current shareholders’ ownership;                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                |
| · |   | We  may not be able to effectively contain corporate overhead and other costs,  including the costs of operating a public company, relative to our profits  and cash; and                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                |
| · |   | Changes  in laws or regulations, or regulatory practices, in the United States and  internationally, may increase our costs or may prohibit continued operations  or entry into some areas of business.                                                                                             |

 

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**ITEM 1.            DESCRIPTIONOF BUSINESS**

 

**Overview of Business**

 

We area telecommunications sales and service company, focusing on products andservices utilizing Voice over Internet Protocol (“***VoIP***”) technology. As a result of thesale of our former subsidiary, IP Gear, Ltd. effective July 1, 2007, we are nolonger in the VoIP equipment research and development (“***R&D***”) andmanufacturing business, and instead currently focus on two principal lines ofbusiness: (i) resale and distribution of VoIP and other telephony equipment,and related professional services, particularly as the exclusive North Americandistributor of products manufactured by TELES AG Informationstechnologien (“***TELES***”); and (ii) telephonyservice resale, direct call routing and carrier support services. OurVoIP-related telecommunications equipment distribution and resale business,formerly operated under the divisional name “IP Gear,” is now operated underthe divisional name “***NWBNetworks***.” Our wholesale international VoIP service business,formerly operated under the name “IP Gear Connect,” is now operated under thedivisional name “***NWBTelecom***.” Both NWB Networks and NWB Telecom are based in Eugene,Oregon.

 

Thefollowing are certain key industry or technical terms used throughout thisReport in describing the Company’s current business and in discussing itsprospects in the VoIP equipment and services market:

 

“***VoIP***,” or Voice overInternet Protocol, also called IP Telephony, Internet Telephony, BroadbandTelephony, Broadband Phone, Voice over Broadband or Voice over Packet Networks,is the routing of voice conversations over the Internet or through any otherinternet protocol (“***IP***”)based network. “***GSM***”is an acronym for Global System for Mobile Communications, a leading digitalcellular system using narrowband TDMA (time division multiple access) that hasbecome a cellular standard in Europe and Asia.

 

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

 

“***IP telephony***” uses anIP network to perform voice communications that have traditionally beenconducted by conventional private branch exchange ( ***PBX***) telephonesystems, or “key systems” primarily used in smaller telephone systems, used byenterprises and by the public switched telephone network (PSTN). IP telephonyuses IP network infrastructure, such as a local area network (LAN) or a widearea network (WAN), to replace the telephony functions performed by anorganization’s PBX telephone system. “***IP communications***” is a term generally usedto describe data, voice, and video communications using an IP network. “***Convergence***” is aterm generally used to describe the manner in which voice and videocommunications technology is converging with data communications technologyonto the IP network.

 

*Overviewof the NWB Networks Division (TELES product sales, VoIP equipment resale,refurbishing and distribution)*.

 

TheCompany’s NWB Networks division was historically operated under the names “Qualmax”and “Qualmax Professional Services,” as well as “IP Gear,” as a distributor andvalue added reseller (“***VAR***”)of new, used, and refurbished IP communications equipment made by manufacturerssuch as Cisco, Quintum, Adtran and other telephony industry leaders. Resale ofthird-party IP communications equipment was Qualmax’s core legacy business, andthe Company’s VAR business continues to be a core revenue component. However,we have refocused our distribution, sales and support efforts on equipmentmanufactured by TELES. We continue to sell other manufacturers’ equipment, butprimarily in support of or complimentary to the sale of TELES equipment.

 

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Since July1, 2007, the Company has been the exclusive distributor of TELES products incertain North American markets (the United States, Canada, Mexico, allCaribbean nations, Guatemala and Honduras) pursuant to an exclusivedistribution agreement. The Company currently promotes and distributes TELESproducts in those markets, sells directly to large end-user customers andprovides support and training services under the assumed business name “***TELES USA***.” Thedistribution rights include those products previously manufactured by theCompany under the IP Gear name (including the Claro and Quasar brands). TELESUSA is part of the NWB Networks division, but because TELES sales represent asubstantial and growing part of our equipment reseller business we report TELESrevenues and gross profits separate from the sale of other products below underItem 7 “Management’s Discussion and Analysis of Financial Conditions and Resultsof Operations.”

 

*Overviewof the NWB Telecom Division (VoIP Telephony service provider)*.

 

TheCompany’s NWB Telecom division is a wholesale provider of VoIP terminationservice, connecting carrier-level buyers and sellers of VoIP service, currentlyfocused on international call routing. We receive VoIP traffic from customers(originating carriers) who are interconnected to our network, and we route theVoIP traffic via IP networks to local service providers and terminatingcarriers, in the destination countries, from whom we purchase completion ortermination services. (Our vendors provide the communications service tocomplete the calls within the destination country.) We offer this service on awholesale basis to carriers, VoIP companies, telephony resellers, and othertelecommunication service providers. We are party to a number of reciprocalcarrier agreements, through which we both buy from and sell to a carrier andoffset the parties’ respective fees for termination services. To the extent wesell VoIP equipment (through the NWB Networks division or its subdivision,TELES USA) to our VoIP termination service providers, we may offset accountsreceivable for equipment against accounts payable for communication services.We have call termination agreements with local lower-tier service providers inLatin America, Europe, Asia and Africa.

 

Inaddition, although the Company’s VoIP service business is currently entirelywholesale, management is identifying and evaluating “bundled” VoIP serviceopportunities (“bundled” meaning the offering of both VoIP equipment and VoIPconnectivity service as a turnkey VoIP solution for small to medium sizebusiness entities (“***SMEs***”)).The Company also evaluates a variety of other opportunities in the VoIP serviceand support industry, but to date has remained focused on its existing corebusinesses. As of the date of filing this Report, we consider all suchopportunities to be in the evaluation stage, and their potential effect uponour revenues or profits is too speculative to quantify.

 

**Company History**

 

*Company History Prior to the 2006 Acquisitionof Qualmax, Inc.*

 

NewWorld Brands, Inc. was incorporated in Delaware in May 1986 under the name OakTree Construction Computers, Inc.  From1986 through 1990, we were engaged in the sale of computer systems for theconstruction industry.  For a number ofyears thereafter, we were inactive.  In August1994, the Company changed its name to Oak Tree Medical Systems, Inc.  From January 1995 through May 2000, we wereengaged in the business of operating and managing physical care centers andrelated medical practices.  In October 2001,the Company and its subsidiary, Oak Tree Spirits, Inc., entered into a mergeragreement with International Importers, Inc. (“***Importers***”) and its stockholders whereby Importersmerged with and into the Company, and the Company’s business changed directionto wine and spirits distribution.  Inconjunction with this change in business direction, in December 2001, wechanged our name to New World Brands, Inc.

 

*2006 Reverse Acquisition of Qualmax, Inc.*

 

OnSeptember 15, 2006, we sold our subsidiary, International Importers, Inc., andacquired, by way of reverse acquisition, all of the assets and assumed all ofthe liabilities of Qualmax (the “***Reverse Acquisition***”).  TheReverse Acquisition marked a change in direction for our business, away fromwine and spirits distribution, to the VoIP technology industry.  The Reverse Acquisition was accounted for as areverse acquisition, with Qualmax being the acquiring party for accountingpurposes.  The accounting rules forreverse acquisitions require that beginning with the date of the transaction, September15, 2006, our balance sheet had to include the assets and liabilities of

 

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Qualmax,and our equity accounts had to be recapitalized to reflect the net equity ofNew World Brands, Inc.  Our historicaloperating results will be the operating results of Qualmax. In conjunction withthe Reverse Acquisition, in September 2006, we moved our headquarters fromFlorida to Eugene, Oregon, which was previously the headquarters of Qualmax.

 

*Qualmax, Inc. History.*

 

AsQualmax, we were founded in 2002 as a reseller of VoIP-relatedtelecommunications equipment from companies such as Cisco Systems, Quintum, andAdtran, and as a reseller of VoIP telephony service, primarily sellingwholesale international service to telecom service providers.  In December, 2005, we expanded beyond ourreseller business by acquiring a VoIP technology research and developmentdivision based in Israel, which we reorganized as a wholly-owned subsidiary andrebranded under the name IP Gear, Ltd. From December 31, 2005 through July 1,2007 we developed, manufactured, and sold our own line of VoIP technologyproducts via our Israel-based IP Gear, Ltd. subsidiary, while continuing toresell additional VoIP products of a variety of other manufacturers via ourU.S.-based IP Gear VAR division.

 

*2007 Sale of IP Gear, Ltd. Subsidiary.*

 

EffectiveJuly 1, 2007, we sold our wholly-owned subsidiary, IP Gear, Ltd., an Israelilimited liability company based in Yokneam, Israel, to TELES, as reported inmore detail in the Company’s Current Reports on Form 8-K filed with theSecurities and Exchange Commission (the “***SEC***”) on July20, August 1, and August 9, 2007, and as discussed in more detail below under “RecentDevelopments.” Sale of our IP Gear, Ltd. subsidiary represented a refocusing ofour business plan away from research and development and direct manufacturing,and toward our historical core strengths in sales and service. As a result ofthe sale, we currently base all our operations at our headquarters in Eugene,Oregon.

 

Bythe sale of IP Gear, Ltd. to TELES, we divested ourselves of our manufacturing,research and development activities, and have now rededicated our efforts ondistribution, sale, service and support of VoIP-related telecommunicationsequipment and service. As a part of the sale of IP Gear, Ltd., we became theexclusive distributor for both TELES products and IP Gear, Ltd. products inNorth America and have therefore focused our telecommunications equipment salesand distribution plan on TELES and IP Gear, Ltd. products.

 

**Recent Developments**

 

Thefollowing describes important Company developments which have occurred from2007 to date.

 

*P&S Spirit Term Loan*.

 

Aspreviously reported on the Company’s Current Report on Form 8-K, filed with theSEC on April 5, 2007, the Company entered into a Term Loan and SecurityAgreement (the “***P&STerm Loan Agreement***” and the debt obligation pursuant thereto,the “***P&S Term Loan***”)with P&S Spirit, LLC, a Nevada limited liability company (“***P&S Spirit***”) inthe principal amount of $1,000,000. The P&S Term Loan proceeds were used bythe Company to repay all outstanding principal, interest and fees payable toBank of America, N.A. (“***BoA***”)under the BoA Loan, and to pay certain professional fees associated withpreparation and negotiation of the P&S Term Loan Agreement.

 

Asdiscussed below under Item 1 “Description of Business — Repayment of P&STerm Loan,” the P&S Term Loan was repaid in two payments, the first in theamount of $500,000 in August 2007, and the second in the amount of $500,000 in February2008.

 

Theprincipals of P&S Spirit include Dr. Selvin Passen, who is a director ofthe Company as well as a shareholder of the Company and its former ChiefExecutive Officer, and Dr. Jacob Schorr, who is a director of the Company.

 

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*P&S Spirit Credit Line*.

 

Aspreviously reported on the Company’s Current Report on Form 8-K, filed with theSEC on June 6, 2007, on and effective May 31, 2007, the Company entered into aCredit Line and Security Agreement (the “***P&S Credit Line Agreement***” and the debtobligation pursuant thereto, the “***P&S Credit Line***”) with P&S Spirit.The maximum principal available under the Credit Line is $1,050,000; theinterest rate is 2% over the Prime Rate (as reported in The Wall StreetJournal), payable in relation to the then-outstanding principal; consecutivemonthly payments of interest only (payable in arrears) are required commencing July1, 2007; and all unpaid principal, interest and charges are due upon thematurity date of June 1, 2011. Upon default, the entire P&S Credit Lineamount (including accrued unpaid interest and any fees) will be accelerated,and the Company would be required to pay any costs of collection. The P&SCredit Line Agreement includes certain affirmative covenants, including,without limitation, a financial reporting requirement (quarterly — 45 daysafter the close of a calendar quarter), and a requirement that the Companymaintain a ratio of current assets to current liabilities of at least 1.2:1.0and a total liabilities to tangible net worth ratio not exceeding 2.5:1.0. Bothof these covenants had been met as of December 31, 2008 and continue to be metas of the date of filing this Form 10-K.

 

TheP&S Credit Line Agreement grants P&S Spirit a security interest withrespect to all of the Company’s assets, but was subordinated to the P&STerm Loan. The P&S Credit Line Agreement is also guaranteed by a corporateGuaranty issued by Qualmax (which, pending completion of the contemplatedmerger of Qualmax into the Company, held a controlling interest in theCompany), and a security interest in the assets of Qualmax (consisting solelyof 298,673,634 shares of Common Stock). Copies of the P&S Credit LineAgreement, P&S Credit Line Note, Guaranty of Qualmax, Collateral PledgeAgreement by Qualmax, and the Collateral Pledge Agreement by the Company, wereincluded as Exhibits 10.1, 10.2, 10.3, 10.4, and 10.5, respectively, to theCompany’s Current Report on Form 8-K, filed with the SEC on June 6, 2007.

 

OnFebruary 21, 2008, the Company drew $500,000 in principal on the P&S CreditLine in order to satisfy in full its obligations under the P&S Term LoanAgreement, as discussed in more detail below under “Repayment of P&S TermLoan.”

 

On May 22, 2008 the Company drew $225,000, and on May 23, 2008, theCompany drew an additional $225,000; adding up to a total of $550,000 inprincipal drawn on those dates on the P&S Credit Line, and leaving nofurther amounts available for borrowing by the Company under the P&S CreditLine.

 

*Sale of IP Gear, Ltd. Subsidiary*.

 

Aspreviously reported on the Company’s Current Reports on Form 8-K filed with theSEC on July 20, 2007 and August 9, 2007, effective July 1, 2007 the Companysold its IP Gear, Ltd. subsidiary to TELES pursuant to a Share Sale andPurchase Agreement (the “***FinalAgreement***”), following the execution of a preliminary share saleand purchase agreement (the “***Preliminary Agreement***”), both of which agreements aregoverned by the laws of Germany. The Preliminary Agreement was executed on July18, 2007, and the Final Agreement was approved by the Board and by TELES’supervisory board on July 25, 2007. The closing of the purchase and sale tookplace on July 26, 2007, immediately upon the execution of the Final Agreement.The share sale and purchase has an effective date, for accounting purposes, of July1, 2007.

 

Pursuantto the Final Agreement, the Company agreed to sell all of the outstandingcapital stock of its wholly-owned subsidiary, IP Gear, Ltd., to TELES for apurchase price consisting of: (i) a payment at closing of $1.5 million and (ii)an earn out equal to 10% of TELES’ worldwide revenues (including revenues ofTELES’ affiliates) within TELES’ CPE Product Line (as defined in the FinalAgreement) for a period of four years after closing. The total earn outpayments shall not be less than $750,000 (the “***Minimum Earn Out***”), and shall not besubject to a cap. The Minimum Earn Out shall be paid in quarterly amounts of$46,875, each quarterly payment due within 90 days of the close of the quarter,commencing with the quarter ended September 30, 2007. Inthe event the Minimum Earn Out is exceeded, the differential amount is duewithin 90 days after June 30 on each of 2008, 2009, 2010 and 2011.

 

Withcertain exceptions, commencing on the date of the closing and for a certainperiod of time (as specified in the Final Agreement), the Company agreed notto, or cause any of its affiliates to, engage in any research and developmentor manufacturing activities competitive with those conducted by IP Gear, Ltd.,and not to, or cause any of its affiliates to, engage in the sale,distribution, marketing, and services of products that may compete with certainproducts of TELES. In addition, with certain exceptions, commencing one yearafter the date of closing, and effective for a period of time and withincertain geographic regions relative to the grant of exclusive distribution andsale rights to the Company pursuant to the partner contract described below,the Company agreed

 

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notto, or cause any of its affiliates to, engage in the sale, distribution,marketing and services of products that may compete with products of IP Gear,Ltd.

 

*TELES Distributorship*.

 

Inaccordance with the Final Agreement, the Company and TELES entered into acontract (the “***PartnerContract***”) relating to the promotion, marketing, sale andsupport of certain products of TELES and IP Gear, Ltd., pursuant to which theCompany became the exclusive distributor of TELES and IP Gear, Ltd. products inNorth America (including the United States, Canada, Mexico, all Caribbeannations, Guatemala and Honduras), and a non-exclusive distributor in othermarkets. In connection therewith, TELES granted the Company a marketing subsidyof 5% of total annual purchases and additional marketing support in the amountof $200,000 per year for a period of two years (and for an optional third year,based on revenues, if agreed mutually by the parties), and TELES granted theCompany an inventory credit line in the initial amount of $200,000 (the “***Inventory Credit Line***”),which has been increased based upon subsequent sales performance by theCompany. The Company received the first year’s $200,000 marketing subsidy asfollows; $100,000, received as of March 31, 2008 in the form of a credit memooffset against accounts payable to TELES for inventory purchases and $100,000,received as of December 31, 2007 in the form of a direct cash payment.

 

Inaddition, TELES agreed to grant the Company a loan in the amount of $1,000,000pursuant to a separate loan agreement to be finalized by the parties. For moredetails regarding the TELES loan, see “TELES loan agreement” below.

 

ThePreliminary Agreement was included as Exhibit 10.1 to the Company’s CurrentReport on Form 8-K, filed with the SEC on July 20, 2007. The Final Agreementand the Partner Contract were included as Exhibit 10.1 and Annex 2 to Exhibit 10.1,respectively, to the Company’s Current Report on Form 8-K, filed with the SECon August 1, 2007.

 

*TELES Loan Agreement*.

 

OnFebruary 21, 2008, the Company and TELES entered into a Term Loan and SecurityAgreement, effective February 15, 2008 (the “***TELES Loan Agreement***,” and the loanthereunder, the “***TELESLoan***”), providing the Company a loan of up to the principalamount of $1,000,000 (the “***Commitment***”)pursuant to which, from time to time prior to February 1, 2009 or the earliertermination in full of the Commitment, the Company may obtain advances fromTELES up to the amount of the outstanding Commitment. Amounts borrowed may notbe reborrowed, notwithstanding any payments thereunder. The outstanding balanceof the TELES Loan will be due and payable on or before February 1, 2012. Theoutstanding principal amount of the TELES Loan will be payable in 12approximately equal quarterly installments commencing May 1, 2009. Interest onthe outstanding principal amount of the TELES Loan is payable quarterlycommencing May 1, 2008, at an interest rate equal to 7% per annum, compoundedquarterly (subject to certain adjustments provided therein). The description ofthe TELES Loan Agreement herein is qualified in its entirety by reference tothe full text of such agreement, which is attached as Exhibit 10.1 to theCompany’s Current Report on Form 8-K filed with the SEC on February 27, 2008.

 

Withoutthe prior written consent of TELES, the TELES Loan may not be used, in whole orin part, to make any payment to P&S Spirit with respect to any obligationsof the Company owed to P&S Spirit pursuant to the P&S Credit LineAgreement.

 

Theobligation of TELES to make advances to the Company pursuant to the TELES LoanAgreement is subject to the satisfaction of certain conditions, includingwithout limitation, the following:

 

·                  Complete consummation of the merger ofQualmax with and into the Company;

 

·                  As of the closing date and the date of eachadvance, no default or event of default under the P&S Credit Line Agreementand all related documents thereto shall have occurred and remain outstanding oruncured; and

 

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·                  All obligations of the Company owed toP&S Spirit under the P&S Term Loan Agreement shall have beenirrevocably repaid in full, and the obligations under any related guarantees,stock pledges and other loan documents securing the obligations of the Companyunder the P&S Term Loan Agreement shall have been released (on February 21,2008, effective February 15, 2008, the Company repaid all outstandingobligations under the P&S Term Loan Agreement, in the amount of $500,000).

 

Pursuantto the TELES Loan Agreement, the Company agreed to comply with certainaffirmative covenants, including without limitation, the following:

 

·                  maintaining on a consolidated basis a ratioof current assets to current liabilities of not less than 1.2:1; and

 

·                  maintaining on a consolidated basis a ratioof total indebtedness (with certain exclusions) to tangible net worth of notgreater than 2.5:1.

 

Pursuantto the TELES Loan Agreement, the Company also agreed to comply with certainnegative covenants, including without limitation, the following:

 

·                  issuing or distributing any capital stock orother securities of the Company without giving TELES at least 15 days priorwritten notice; and

 

·                  amending, modifying or waiving any provisionsof the P&S Credit Line Agreement.

 

The TELES Loan Agreement grants TELES a security interest with respectto all of the Company’s assets, subject to the terms of the Inter-creditorAgreement (as defined below).  Thecompany executed on a portion of this agreement in December of 2008 byoffsetting $600,000 of trade payables due to TELES towards the loan facility.In December of 2008 TELES agreed to forgo enforcement of the TELES LoanAgreement provision requiring the completion of the Merger Agreement betweenQualmax and the Company, and further agreed to reduce the TELES Loan interestrate from 7% per annum to 5% per annum. The Company then executed on a portionof the TELES Loan Agreement in December of 2008, by further agreement withTELES, by offsetting $600,000 of trade payables due to TELES and treating theoffset as principal of the TELES Loan. Further, In January of 2009, byagreement with TELES, $400,000 cash was drawn on the TELES Loan, leaving noadditional amounts available to the Company under the TELES Loan Agreement.

 

*TELES — P&S Spirit Inter-Creditor Agreement*.

 

Alsoon February 21, 2008, as contemplated by the TELES Loan Agreement, the Company,TELES and P&S Spirit entered into an Inter-creditor Agreement (the “***Inter-Creditor Agreement***”),relating to the P&S Spirit Credit Line effective February 15, 2008. Thedescription of the Inter-Creditor Agreement herein is qualified in its entiretyby reference to the full text of the agreement, which is set forth in theCompany’s Current Report on Form 8-K filed with the SEC on February 27, 2008.

 

Pursuantto the Inter-Creditor Agreement, P&S Spirit and TELES have agreed to holdequal rights in and to substantially all of the Company’s assets, with theexception of inventory consisting of TELES products purchased by the Companyfrom TELES (during the time that obligations are owed to TELES for suchpurchases under the Inventory Credit Line).

 

*Repayment of P&S Spirit Term Loan*.

 

OnJuly 26, 2007, P&S Spirit executed a consent to the sale of IP Gear, Ltd.by the Company (the “***LenderConsent***”), which was filed with the SEC on August 1, 2007 as Exhibit10.2 to the Company’s Current Report on Form 8-K. Pursuant to the P&S TermLoan Agreement and the P&S Credit Line Agreement (together, the “***P&S Loans***” or “***P&S Loan Agreements***,”as applicable) P&S Spirit had a security interest in all of the Company’sshares of IP Gear, Ltd., and, the sale of the Company’s IP Gear, Ltd. shareswithout P&S Spirit’s consent would have triggered a repayment by theCompany of all outstanding principal under the P&S Loans.

 

Inaccordance with the Lender Consent, the Company agreed to pay to P&S Spiritfrom the proceeds of the closing, as a partial repayment of principal of theP&S Term Loan, the sum of $500,000. In addition, the Company

 

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agreed to pay P&S Spirit the additional sum of$500,000, as a repayment of principal of the P&S Term Loan, which amount isto be provided by P&S Spirit to the Company as a credit line advance to beused by the Company solely to repay the outstanding principal under the P&STerm Loan upon execution of the TELES Loan Agreement. By the Lender Consent,subject to certain terms and conditions, P&S Spirit consented to the saleof IP Gear, Ltd. to TELES in accordance with the Final Agreement, released andterminated P&S Spirit’s security interest in the IP Gear, Ltd. shares, andagreed that the consummation of the sale of IP Gear, Ltd. to TELES shall not bedeemed or give rise to an event of default, penalty, or increase under, ortermination of, the Loan Agreements and shall not, except as otherwise providedin the Lender Consent, accelerate any amounts owing under the Loan Agreementsor trigger any prepayment or give rise to any payment not otherwise requiredunder the Loan Agreements, and shall not require the Company to provide anyadditional security, collateral, reserve, or payment under the Loan Agreements.

 

On February 21, 2008, the Company drew $500,000on the P&S Credit Line for the purpose of repayment in full of the Company’sobligations under the P&S Term Loan Agreement.

 

On May 22, 2008 the Company drew $225,000, and onMay 23, 2008, the Company drew an additional $225,000; adding up to atotal of $550,000 in principal drawn on those dates on the P&S Credit Line,and leaving no further amounts available for borrowing by the Company under theP&S Credit Line.

 

*Redemption of Shares of Company Stock from B.O.S.*

 

As reported in theCompany’s Current Report on Form 8K filed with the SEC on August 22,2008, on August 18, 2008, the Company as purchaser, and B.O.S. BetterOnline Solutions, Ltd. (“***BOS***”),as seller, entered into a Stock Sale and Purchase Agreement (the “***BOS-NWB Agreement***”),effective as of August 17, 2008 (the “***Effective Date***”), pursuant to which theCompany agreed to purchase from BOS up to 35 million shares (the “***BOS Purchase Shares***”)of the Company’s common stock, par value $0.01 per share (the “***NWB Common Stock***”),at a price of $0.025 per share, in installments over a term of up to 31months.  On September 30, 2008 the Company completed its purchase ofthe initial installment of 5,000,000 shares from BOS, and has to date purchased6,600,000 BOSPurchase Shares from BOS under the BOS-NWB Agreement for a totalpurchase price of $165,000.

 

*Execution of Qualmax  Merger Agreement*.

 

On February 18,2008, the Company and Qualmax entered into an agreement by which Qualmax agreedto be merged with and into the Company (the “***Merger Agreement***” and the mergercontemplated thereby, the “***Merger***”).Reference is made to the Company’s Current Report on Form 8-K, filed with the SEC on February 22,2008, and the Company’s Information Statement on Schedule 14C, filed with theSEC on November 6, 2008, for additional information and documentationconcerning the Merger and the Merger Agreement.

 

The Qualmax mergerwas incomplete as of December 31, 2008. After the end of the filingperiod, on January 23, 2009, the Company completed the merger, as reportedon the Company’s Current Report on Form 8-K, filed with the SEC on January 30,2009, which is incorporated herein by reference. Pursuant to a fairness hearingconducted in the State of Oregon on January 23, 2009 (the “FairnessHearing”), the Director of the State of Oregon Department of Consumer andBusiness Services, Division of Finance and Corporate Securities (the “Director”),found that the Merger was fair, just and equitable, and free from fraud. As aresult of the Fairness Hearing, the Company obtained a valid exemption from registrationunder Section 3(a)(10) of the Securities Act of the shares of commonstock of the Company issuable to the stockholders of Qualmax in connection withthe Merger. At a special meeting of the stockholders of Qualmax immediatelyfollowing the Fairness Hearing the stockholders of Qualmax approved the MergerAgreement and the transactions contemplated thereunder.

 

In accordance withthe Merger Agreement, all conditions and prerequisites to the Merger have beenmet and completed, and the Merger Agreement has been consummated effective January 23,2009.There havebeen no amendments, material or otherwise, to the Merger Agreement as effectiveFebruary 18, 2008 and previously disclosed in the Company’s Current Reporton Form 8-K, filed with the SEC on February 22, 2008. Qualmax sharesare in the process of being converted into shares of the Company, at theconversion rate of 13.348308 Company shares for each share of Qualmax stock.

 

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**Employees**

 

As of March 6,2009, we had approximately 26 full-time employees and 1 part-time employee, allbased in our Eugene, Oregon headquarters (including outside sales and remotetechnical support staff reporting to management in Eugene). None of ouremployees is a member of a labor union, and we have never experienced a workstoppage.

 

**Competition**

 

The markets for IP telephony products and services areextremely competitive and subject to rapid change. We are a small company in anindustry dominated by very large companies that are better capitalized and, incomparison to us, have greater sales, marketing, customer support, andtechnical resources, have access to more experienced management, can takeadvantage of larger economies of scale, and have much greater name recognitionand reputation. We have been able to compete in this market due to ouradaptability, the depth of industry experience among our key managers, and therelatively low barriers to entry in the VAR and VoIP service providerbusinesses. We expect that the conditions that have facilitated our entry intothe VoIP industry will allow additional competitors, including large companiesas well as niche operators, to enter the market. The fundamental technology andcomputer hardware component of the IP telephony service solution is readilyavailable. Accordingly, relatively few barriers to entry exist in our businessfor companies with computer and network sales, and distribution and serviceprovider experience. An increase in the number or size of our competitors couldnegatively affect the amount of business that we obtain and the prices that wecan charge.

 

*Competitionamong Resellers*.

 

Our NWB Networks distribution and sales businesscompetes not only with small boutique IT firms that have entered the market dueto reduced costs of entry resulting from various technological advances, butalso with large, global companies, including manufacturers who now compete againstus to sell directly to end users. Although we offer our clients a range ofservices and support in conjunction with a select product line at competitiveprices, increased competition may require us to further reduce prices,potentially reducing profit margins. We believe the current market trend favorslarger, well-capitalized specialty distributors and resellers who can afford totake advantage of cost savings in bulk purchases, foreclosure sales, and otherlarge opportunities, who can afford to warehouse substantial amounts ofinventory until profitable opportunities arise, and who can afford large andskilled product service and support staffs. Nonetheless, new opportunitiescontinue to arise in this business, and we believe that our ability to quickly identifycurrently popular products to sell, and our experience with a diverse market ofequipment buyers and sellers, including resellers and end users, gives us acontinued competitive edge over new competitors in the market.

 

We believe that our exclusive distributionrelationship with TELES may also give us a competitive edge over otherdistributors and resellers. We believe that TELES has well developed R&Dand manufacturing capabilities, and we believe that TELES has demonstrated itswillingness and ability to adapt its products to changing market needs andspecific opportunities, particularly in emerging VoIP markets in the Americas.We hope that, as our sales and support teams continue to work closely withTELES product development teams, we will be able to provide products meetingthe niche opportunities and new technology opportunities that our sales staffand management team identify in emerging markets. However, TELES products facestiff competition from a variety of other manufacturers, and while we considerTELES a well managed technology company, TELES remains a relatively smallplayer in the industry compared to organizations such as Cisco and Siemens. Inaddition, larger telecom service providers, particularly “tier 1” providers andgovernment-sponsored foreign providers, continue to develop their own internalproducts, potentially competing with products they would otherwise buy fromcompanies like TELES, thus competing with sales opportunities for products suchas those manufactured by TELES.

 

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*Competitionamong Wholesale Telecom Service Providers*.

 

Competition in the wholesale VoIP service industry isintense and diverse, including “tier 1” telecom companies in the U.S. andabroad, as well as smaller “tier 2” carriers, and very small niche serviceproviders. The NWB Telecom division does business with very large entities,including foreign tier 1 incumbent providers, as well as a number of smallniche providers in certain foreign markets. As a result of deregulation, growthof the Internet and IP network infrastructure generally, and development ofmore powerful, lower cost VoIP equipment, the price of entry into the VoIPservice business has dramatically decreased. Lower cost of entry has drawn agrowing number of entrepreneurs to the industry and has driven down the cost oftelecom services at both the wholesale and retail levels. As a result, both supplyand demand have skyrocketed, and although we see a growing number of customerand vendor opportunities, we also see a growing number of aggressivecompetitors, declining prices, and declining technological barriers to entry.

 

NWB Telecom competes principally on price and qualityof service. The communications industry, including VoIP, is highly competitive,rapidly evolving, and subject to constant technological change and intensemarketing by providers with similar products and services. We expect that newcompetitors, including the growth of “gray market” operators (potentiallyincluding operators who arrange call termination in a manner that bypasses thelocal telephone company), are likely to enter the communications industry,including the market for VoIP, Internet, and data services. Also, a number oflarge VoIP service providers appear to be aggressively seeking market share viaacquisitions and competitive pricing. We believe the trend in this area is forincreased competition to continue to drive down market prices and profitmargins. Our ability to continue to compete in this market will depend upon ourability to secure more stable vendor relationships, to implement a more stablenetwork infrastructure capable of handling higher call volume and to continueto build long-term customer relationships.

 

**ITEM 1A.**             ****RISK FACTORS**

 

There are a number of important factors that couldcause our business, financial condition, cash flows, and results of operationsto differ materially from historical results or those indicated by anyforward-looking statements, including the risk factors identified below andother factors about which we may or may not yet be aware. Prospective andexisting investors are strongly urged to carefully consider the various cautionarystatements and risks set forth in this Report and our other public filings. **IF ANY OF THE FOLLOWING OCCUR, OUR BUSINESS, FINANCIAL CONDITION,RESULTS OF OPERATION COULD ALL SUFFER.**

 

**RisksAssociated with the Business in General**

 

*OurResults of Operations May Fluctuate.*

 

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

 

*WeFinished Fiscal Year 2008 with a Net Loss, and are Likely to Incur LossesDuring the 2009 Fiscal Year, and Our Future Sales Levels and Ability to AchieveProfitability are Unpredictable.*

 

For the one year period ending December 31, 2008,we experienced a net loss before income taxes of $1,620,037. We may experiencea net operating loss for fiscal year 2009. Our operating history is limited,our business has changed rapidly over the past three years, and we arecompeting in an emerging technology industry. We cannot be assured thatprofitability will be achieved, or if it is achieved that it will continue, inupcoming quarters or years, nor can we be assured that we will be able toimprove operating margins or increase revenues, or adequately control ouroperating expenses.

 

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Generally, the global economic slowdown, combined withunprecedented currency volatility, resulted in a sharp pull back in global telecommunicationsinfrastructure spending in the second half of 2008, particularly in the fourthquarter of 2008. In 2008, NWB’s net sales and profitability were negativelyimpacted by these factors primarily as a result of slowing demand for thetelecommunications equipment sold and distributed by the Company’s NWB Networksdivision. 

 

*We May NeedAdditional Near-Term Capital.*

 

We may need additional capital to continue to pursueour current business model, and there can be no assurance that adequate capitalwill be available to us on acceptable terms as needed. Our business plan callsfor the expansion of sales and support of the IP telephony products andservices we sell, including expansion through acquisitions, to enterprises ingeographical markets where we currently do not operate. If we are not able tosecure adequate capital, we may have to delay the implementation of ourbusiness plan, and potentially discontinue non-profitable business operations.Our ability to obtain additional financing is subject to a number of factors,including general market conditions, our operating performance, our financialcondition, and investor acceptance of our business plan. The economic downturnand the current challenges facing the financial markets may make it difficultfor us to raise capital, or to raise capital on terms acceptable to theCompany. We can provide no assurance that we will be able to obtain necessaryfinancing, or if financing is available that the terms will be favorable toexisting stockholders or acceptable to our Board. If future capital investmentis made available, existing shareholders may experience dilution of their stockownership positions in order for us to secure that additional investment.

 

*We FaceChanging Market Conditions for Products and Services.*

 

The market for VoIP service is still in the relativelyearly stages of development and market acceptance, and is characterized byrapid technological change, evolving industry standards and strong customerdemand for new products, applications, and services. As is typical of a new andrapidly evolving industry, the demand for, and market acceptance of, recentlyintroduced IP telephony products and services are highly uncertain. Wecannot be sure that the delivery of telephone and other communications servicesover IP networks rather than over traditional telephone networks will expand.We cannot be sure that packet-based voice networks will become widespread orthat connections between packet networks and telephone networks will becomecommonplace. The inability to deliver traffic over the Internet withsignificant cost advantages could slow or stop the growth of VoIP technology.The adaptation process of connecting packet networks and telephone networks canbe time consuming and costly. In addition, limitations of VoIP technology, suchas the inability to make a call during a power outage and difficulty inaccessing 911 services, could adversely affect the market for VoIP services. Ifthis market does not develop, or develops more slowly than we expect, we maynot be able to sell our products or offer our services in sufficient volume tomeet our financial goals.

 

*International GovernmentalRegulation and Legal Uncertainties Could Limit Our Ability to Provide CurrentServices or Could Increase Our Costs, or Subject Us to Legal Liability.*

 

Regulatory treatment ofInternet telephony outside the United States varies from country to country. Inmany countries in which we purchase termination services, the status of thelaws or contracts that may relate to our services, including theirinterpretation and enforcement, is unclear. We cannot be certain that ourcustomers, local service providers, or other affiliates are currently incompliance with regulatory or other legal requirements in their respectivecountries, or that they or we will be able to comply with existing or futurerequirements. We provide our services in reliance on local service providersthat may be subject to telecommunications regulations in their home countries. Insome of those countries, licensed telephony carriers, as well as governmentregulators and law enforcement authorities may question the legal authority ofour local service providers and/or our legal authority. Because of ourrelationships with resellers, some countries or local service providers mayassert that we are required to register as a telecommunications carrier in thatcountry. In such case, our failure to do so could subject us to regulatoryaction such as fines or penalties, including asset forfeitures. In addition,some countries are considering subjecting VoIP services to the regulationsapplied to traditional telephone companies. If foreign governments or otherbodies begin to impose related restrictions on VoIP or our other services orotherwise enforce laws or regulations against us, our affiliates, or ourvendors, such actions could have a material adverse effect on our operations.In addition, deregulation of the communications markets in developing foreigncountries may not continue, and incumbent providers, trade unions, and othersmay resist legislation directed toward deregulation and may resist allowing usto interconnect to their network switches. Governments and regulations maychange, resulting in reduced availability of licenses and/or cancellations orsuspensions of licenses, confiscation of equipment, and/or rate increases; theinstability of the regulations applicable to our businesses and theirinterpretation and enforcement in these markets could materially and adverselyaffect our business.

 

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*Domestic Regulatory Changes MaySubject Us to Additional Fees, Taxes, or Tariffs, or Service Restrictions.*

 

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

 

*Dependence on Vendors*

 

Our distribution of TELESproducts, through our exclusive distributorship agreement with TELES for NorthAmerica, the Caribbean, and parts of Central America, with rights to sellelsewhere, forms a significant part of our business. The Company has nomanufacturing capacity, and the majority of telecommunications equipment thatwe sell is manufactured by TELES. In the event that TELES would be unable orunwilling to supply telecommunications equipment to the Company, we would bematerially impacted.

 

*Dependence on Customers*

 

Historically, a substantialportion of our revenue for the NWB Networks division has been derived fromlarge purchases by a small number of network equipment providers, systemsintegrators, and distributors. We do not enter into long-term sales agreementsin 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 fromperiod to period. If we lose a large customer and fail to add new customersthere could be a material adverse effect on our results of operations.  One customer accounted for more than 10% ofNWB Networks revenues during the year ending December 31, 2008 and our top tencustomers accounted for a significant amount of our business. Although wecontinue to do business with these clients, and have no reason to believe wewill cease doing business with any of them in the foreseeable future, the lossof any large client could adversely impact our results of operations if therevenue stream were not replaced by other sales.

 

The NWB Telecom divisionderives a significant amount of revenue from a relatively small number ofclients. If we were to lose one or more of these customers, and the businesswere not replaced, it could have an adverse impact on our results of operationsand financial condition. Two customers accounted for 10% or more of NWB Telecomrevenues during the year ending December 31, 2008, and our top ten customersaccounted for a significant amount of our business. Although we to continue todo business with these clients, and have no reason to believe we will ceasedoing business with any of them in the foreseeable future, the loss of any largeclient could adversely impact our results of operations if the revenue streamwere not replaced by other sales.

 

*Changes inGovernmental Regulations Could Slow the Growth of the VoIP Market.*

 

In the United States, changes in governmentalregulation are being considered that may negatively impact the VoIP telephonymarket. The Federal Communications Commission (the “***FCC***”) is examining the enactment of new regulationsgoverning Internet telephony and the question of whether certain forms oftelephone services over the Internet should be subject to the same FCCregulations as telecommunications services.  Phone companies in the U.S. and abroad areseeking the adoption of regulations to require VoIP providers or users to pay acharge to local service providers. The cost of providing Internet phone servicecould increase as a result of these actions or more aggressive regulation ortaxation of VoIP services by the FCC or foreign governments, which could resultin slower growth and decreased profitability for the industry and potentiallyfor the Company.

 

*We May BeUnable to Manage Our Growth and Multiple Business Lines Effectively.*

 

We have actively expanded our operations in the pastand seek to continue to expand them in the future. In 2007 and 2008, we undertooka series of restructurings of our operations involving, among other things, theexpansion of our workforce and corporate headquarters, the consolidation of ourequipment reseller operations and change of focus to TELES products, and thesale of our Israel-based manufacturing subsidiary, IP Gear, Ltd. The

 

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implementation of these restructurings in 2007 and2008 has placed, and in 2009 will continue to place, a significant strain onour management systems and financial resources. In addition, our businessrequires us to focus on multiple business lines simultaneously. We are a youngcompany with a limited operating history, and our management team regularlyfaces new challenges. None of our senior executives has operated a publicreporting company before. To continue to compete in the highly competitive andrapidly developing IP communications industry we will be forced to quicklyadapt to changing market conditions in multiple areas, such as shifts incapital needs, in fundamental communications technologies, and in product linesand supply sources, and there can be no assurance management can meet thesechallenges.

 

*BusinessAcquisitions, Dispositions, Joint Ventures, or Private Equity TransactionsEntail Risks and May Disrupt our Business, Dilute Stockholder Value orDistract Management Attention.*

 

We have grown in part through the acquisition ofcompanies, products, or technologies. We expect to continue to reviewopportunities to acquire other businesses or technologies that would complementour current products, expand the breadth of our markets, enhance our technicalcapabilities or otherwise offer growth opportunities. Acquisitions areinherently risky, and no assurance can be given that our previous or futureacquisitions will be successful or that they will not materially and adverselyaffect our business, operating results, or financial condition. If we make anyfurther acquisitions, we may issue stock that would dilute our existingshareholders’ percentage of ownership, and we may incur substantial debt,and/or assume contingent or unknown liabilities. In the event of anyequity-based financing transaction, we will need to secure additional capital.Such equity may have rights and preferences superior to the Company’soutstanding Common Stock, and the issuance of such equity by the Company willdilute the ownership percentage of the Company’s existing shareholders.

 

*We RelyUpon Key Personnel, and Must Attract and Retain Additional Qualified Personnel.*

 

We are dependent on the continued efforts of oursenior management team, including our Chairman, President, and Chief ExecutiveOfficer, M. David Kamrat, our Chief Technology Officer, Noah Kamrat, and ourChief Financial and Operations Officer, Secretary, and Treasurer, ShehryarWahid. If these or other key personnel do not continue to be active inmanagement, our business, financial condition, or results of operations couldbe adversely affected. We cannot be certain that we will be able to continue toretain our senior executives or other personnel necessary for the developmentof our business. In addition, at present there is a shortage of qualifiedmanagement, sales, and technical personnel in our industry and we are in directrecruiting competition for these applicants with larger businesses that areable in some cases to offer more competitive compensation. We are also limitedin our recruiting efforts by our primary location in the relatively smallEugene, Oregon market and Pacific Northwest region. We plan to use stockoptions and other forms of equity compensation as key components of ouremployee compensation program in order to align employees’ interests with theinterests of our stockholders, to encourage employee retention, and to providecompetitive compensation. The changing regulatory landscape could make it moredifficult and expensive for us to grant stock options to employees in thefuture. In addition, the use of alternative equity incentives may increase ourcompensation expense and reduce our earnings, and may dilute othershareholders.

 

*We ExtendCredit to Customers for Product Purchases, Creating Bad Debt Risk.*

 

A substantial portion of our receivables result fromcredit extended to customers for purchases of our products and services. Wecannot be sure that we will be able to collect all of these accountsreceivable. Although we have internal credit risk policies to identifycompanies with poor credit histories, we may not effectively manage thesepolicies and may provide services to companies that refuse to pay. The risk iseven greater in foreign countries, where the legal and collection systemsavailable may not be adequate for us to enforce the payment provisions of ourcontracts. Our cash reserves will be reduced and our results of operations willbe materially adversely affected if we are unable to collect amounts from ourcustomers. Although such losses in the past have not been significant, futurelosses, if incurred, could harm our business and have a material adverse effecton our results and financial condition.

 

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*LitigationMay Harm Our Operating Results or Financial Condition.*

 

We are a party to lawsuits in the normal course of ourbusiness. Litigation can be expensive, lengthy, consumptive of management’stime and disruptive to normal business operations. The results of complex legalproceedings are difficult to predict, and expensive to defend or pursue. Anunfavorable resolution of a particular lawsuit could have a material adverseeffect on our business, operating results, or financial condition. Foradditional information regarding certain of the lawsuits in which we areinvolved, see Item 3, “Legal Proceedings.”

 

*OurInternational Operations Subject Us to Additional Risks and Increased Costs.*

 

We intend to continue to pursue international opportunities,both in VoIP service and VoIP equipment sales. International operations aresubject to a number of risks and barriers, including:

 

·                  unexpected changes in foreign regulatory requirements,telecommunications standards, and regulatory and contract enforcement andinterpretation;

 

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

 

·                  difficulty in collecting receivables;

 

·                  difficulty in adapting to changes in foreigntechnological environments;

 

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

 

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

 

·                  foreign political and economic instability,particularly in emerging markets where VoIP growth is robust.

 

We may not be able to overcome some of these barriersand may incur significant costs in addressing others. In addition, foreigncurrency fluctuations may affect the prices of our products. Our prices forTELES products are denominated in Euros, but otherwise our sales prices areprimarily denominated in U.S. Dollars. Our revenues are therefore affected byfluctuations in the Euro/Dollar exchange rate. To the extent that the Dollarloses value relative to the Euro, our pricing strength and gross margins willbe negatively affected: the currency of most of our customers and our fixedcosts (Dollars) would become less valuable relative to the currency of ourprimary equipment vendor, TELES (Euros). In addition, some of our expenses aredenominated in Mexican Pesos. To the extent that the Dollar loses valuerelative to the Peso, our margins could be negatively affected.

 

*We FaceState Tax Uncertainties.*

 

Various states have sought to require the collectionof state and local sales taxes on products shipped to the taxing jurisdiction’sresidents. We cannot predict the level of contact, including electroniccommerce, shipping, and Internet or IP communications activity that might giverise to future or past tax collection obligations based on existing law. Manystates aggressively pursue out-of-state businesses, and legislation that wouldexpand the ability of states to impose sales tax collection obligations onout-of-state businesses has been introduced in Congress on many occasions. Achange in the law could require us to collect sales taxes or similar taxes onsales in states in which we have no presence and could potentially subject usto a liability for prior year sales, either of which could have a materialadverse effect on our business, financial condition, and results of operations.

 

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*OurBusiness Could be Disrupted by Systems Failure*.

 

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

 

*We FaceIncreased Expenses as a Result of Being a Public Company*.

 

The costs of being a public company have increasedsignificantly since the enactment of the Sarbanes-Oxley Act of 2002 (the “***Sarbanes-Oxley Act***”). We expect thatour general and administrative expenses, in particular legal, accounting, andIT systems expenses, will increase as a result of our efforts to comply withapplicable securities laws, in particular with the Sarbanes-Oxley Act. Inaddition, we are in the process of evaluating our existing internal controlsover financial reporting systems, in the effort to make ourselves compliantwith the internal control evaluation and certification requirements of Section 404of the Sarbanes-Oxley Act, in preparation of that being required in the 2009fiscal year. This process will divert internal resources, and may force us toimplement new internal controls and reevaluate our financial reporting, or hireadditional personnel, in order for us to comply with Section 404. If weare unable to effectively implement these changes, it could harm our operationsand financial results, and could result in our being unable to obtain anunqualified report on internal controls from our independent auditors.

 

*We May UndertakeNew Business Ventures and Enter into New Lines of Business.*

 

Management is constantly evaluating new opportunitiesin the VoIP service and equipment industry, including strategic partnerships,joint ventures and acquisitions, or combinations of these entities. Further,there can be no assurances that such opportunities, particularly thoseinvolving acquisitions, will be successful. The Company may finance these newbusiness opportunities through a combination of equity and/or debt. If theCompany determines to finance these opportunities by issuing additional equity,then such equity may have rights and preferences superior to the Company’soutstanding Common Stock, and the issuance of such equity will dilute theownership percentage of the Company’s existing shareholders. If the Companydetermines to finance these opportunities by incurring debt, then such debt maynot be available to the Company on favorable terms, if at all. As of the dateof the filing of this Report, we consider all such opportunities to be in theevaluation stage, and their potential effect upon our gross and net profits istoo speculative to quantify.

 

**Risks MostSpecific to our NWB Networks Division (IP Communications Equipment Resale).**

 

The following are certain risks we consider mostimportant to the NWB Networks division of our business, but these risks shouldbe read in connection with all the other risks described herein (includingthose specific to other divisions).

 

*RapidTechnological Change and Inventory Obsolescence*.

 

The VoIP telecommunication industry is characterizedby rapid technological change and frequent introductions of new or enhancedproducts. To timely meet demand and obtain better purchase pricing, we may berequired to carry significant inventory levels of certain products, whichsubject us to increased risk of inventory obsolescence. We participate infirst-to-market and end-of-life purchase opportunities, both of which carry therisk of inventory obsolescence. Special purchase products are sometimesacquired without return privileges, and there can be no assurance that we willbe able to avoid losses related to such products if the related purchasecontract is not completed. In addition, as illustrated below in Item 7, “Management’sDiscussion and Analysis of Financial Conditions and Results of Operations,” wecurrently sell used or refurbished products, as well as new products.Manufacturers with large market share, particularly Cisco, may release newgenerations of products that make used or refurbished products obsolete orunattractive, and Cisco and other manufacturers may release new generations ortypes of products that make the new products we hold in inventory or otherwisesell or distribute obsolete or unattractive. The risk of rapid technologicalchange is tied to the risk of customer and vendor concentrations: If, as aresult of technological or other change, the demands of our key customers orthe supplies of our key vendors no longer correspond, our revenues may suffer,or we could be forced to seek new customers, new suppliers or both.

 

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*ConcentratedVendor/Product Risk.*

 

Since the sale of our IP Gear, Ltd. subsidiary andentry into an exclusive distribution agreement with TELES, we have been relyingto an increasing degree upon TELES for supply of the VoIP equipment that wedistribute and sell. In fact, nearly all of our profitable equipment salessince the sale of our IP Gear, Ltd. subsidiary have been of TELES equipment. IfTELES is unable to continue to supply high-demand equipment at attractiveprices, our revenues, and/or gross profits will decline. In addition, we aresubject to a risk of supply interruption if TELES’ business suffers or if ourrelationship with TELES suffers. We derive a substantial portion of ourrevenues from sales of the TELES iGate and vGate product lines, and we expectthat these products will continue to account for a significant portion of ourrevenues for the foreseeable future. As a result, factors adversely affectingthe pricing of or demand for these products, such as competition, technologicalchange or a slower than anticipated rate of development or deployment of newproducts, features, and technologies could cause a significant decrease in ourrevenues and profitability. Aside from TELES, one other vendor accounts formore than 10% of NWB Networks’ costs paid to vendors.

 

*Relianceon Market Purchase and Sale Opportunities*.

 

We acquire a significant portion of our non-TELESinventory on secondary markets as used or refurbished product, and we rely uponpurchasing opportunities on the open market. We do not currently rely uponpurchases direct from manufacturers, nor do we purchase primarily from “toptier” distributors of new products (top tier meaning those distributors whopurchase directly from major manufacturers such as Cisco). We do not havelong-term supply or sale contracts for inventory, and we do not participate inlarge buying opportunities, which may offer larger discounts. Termination,interruption, or contraction of our relationships with our vendors, orunavailability on the open market of our core products, could have a materialadverse effect on our business, financial condition, cash flows, or results ofoperations.

 

*HistoricalDependence on a Small Number of Customers (Concentrated Customer Risk), theLoss of, or Reduction in, Purchases by any of which Could Have a MaterialAdverse Effect on our Revenue.*

 

Historically, a substantial portion of our revenue hasbeen derived from large purchases by a small number of network equipmentproviders, systems integrators, and distributors. We do not enter intolong-term sales agreements in which the customer is obligated to purchase a setquantity of our products. Based on our experience, we expect that our customerbase may change from period to period. If we lose a large customer and fail toadd new customers there could be a material adverse effect on our results ofoperations.  One customer representedmore than 10% of NWB Networks’s revenues during the year ending December 31, 2008,and our top ten customers accounted for a significant amount of our business.Although we continue to do business with these clients, and have no reason tobelieve we will cease doing business with any of them in the foreseeablefuture, the loss of any large client could adversely impact our results ofoperations if the revenue stream were not replaced by other sales.

 

The current credit crisis has affected the worldmarkets and has severely restricted access to capital, and has materiallyimpacted the Company’s ability to sell telecommunications hardware. Ourcustomers are, and may continue to be, less willing and able to make capitalinvestments than in the past.

 

With carrier and service-provider customers, this hastranslated into the cancellation and delay of many projects, including majorinfrastructure projects, of which our switching and gateway products are oftena major component.

 

Small business and enterprise customers could benefitfrom the cost savings generated by the installation of TELES equipment. Evenso, many are reluctant to make the investments necessary, or unable to accessthe credit needed, to move such projects forward. To overcome such reluctance,we have increased our marketing efforts and worked diligently with ourdistributors and resellers; encouraging them to provide trade credit, andequipment trials to demonstrate the savings features of our products.Additionally, we have continued to develop our channel sales initiatives tobroaden our distribution, create greater market awareness of our offerings, andaccess new markets.

 

Chief among these markets are the small business spaceand the government space. These efforts are highly dependent on the willingnessand ability of our distributors and resellers to invest in the technical andmarketing skills and methods needed to bring new products to their productlines. Such investment has been noticeably reduced

 

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on their part, and that reduction presents anadditional risk to NWB going forward. We continue to see interest in ourproducts and our channel sales program, but the velocity of adoption has beenslower than expected. The possibility that the velocity of program adoptionwill continue to lag behind projections represents another risk to the Company.

 

**Risks MostSpecific to Our NWB Telecom Division (Wholesale VoIP Service Provider).**

 

The following are certain risks we consider mostimportant to the NWB Telecom division of our business, but these risks shouldbe read in connection with all the other risks described herein (includingthose specific to other divisions).

 

*ConcentratedCustomer Risk.*

 

We derive a significant amount of our revenue from arelatively small number of clients. If we were to lose one or more of thesecustomers, and the business were not replaced, it could have an adverse impacton our results of operations and financial condition. Each of two customersaccounted for 10% or more of NWB Telecom revenues during the year ending December 31,2008, and our top ten customers accounted for a significant amount of NWB Telecomrevenues during the year ending December 31, 2008. Although we continue to dobusiness with these clients, and have no reason to believe we will cease doingbusiness with any of them in the foreseeable future, the loss of any largeclient could adversely impact our results of operations if the revenue streamwere not replaced by other sales.

 

*Potentialfor Key Supplier Interruptions.*

 

We had three vendors who accounted for over 10% of NWBTelecom revenue each in 2008. Furthermore, we do not rely upon or maintain anylong term supply or termination service contracts, and all of our vendoragreements are terminable at will by either party without notice. In addition,our suppliers rely upon short term contracts or arrangements with other localservice providers, including tier 1 service providers, to supply terminationroutes; these contracts or arrangements may also be terminated upon shortnotice. Therefore, our VoIP service business is subject to supply disruptionsthat are not within our control and that could have a material adverse effectupon the NWB Telecom division’s financial results.  In fact, our NWB Telecom division hasexperienced loss or interruption of key suppliers, including suppliers who eachaccounted for over 10% of NWB Telecom revenue during 2008, and the loss orinterruption substantially negatively impacted NWB Telecom’s revenue and grossprofit.

 

In addition, critical issues concerning the commercialuse of the Internet, including security, cost, ease of use and access,intellectual property ownership, and other legal liability issues, remainunresolved and could materially and adversely affect both the growth ofInternet usage generally and our business in particular. Finally, we will notbe able to increase our VoIP service traffic if Internet infrastructure doesnot continue to expand to more locations worldwide, particularly into emergingmarkets and developing nations. The risk of negative impact on our gross profitdue to supply interruptions is increased by our recent reliance on a smallnumber of vendors offering relatively high-margin VoIP termination services inforeign countries.

 

*We Rely onThird-Party Providers of Phone and Data Lines and Other TelecommunicationsServices and Local Communications Service Providers.*

 

Our business model depends on the availability of theInternet and traditional telephone networks to transmit voice and fax calls.Third parties maintain and own these networks, other components that comprisethe Internet, and business relationships that allow telephone calls to beterminated over the public switched telephone network. Some of these third partiesare telephone companies. They may increase their charges for using these linesat any time and thereby increase our expenses. They may also fail to maintaintheir lines properly, fail to maintain

 

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the ability to terminate calls, or otherwise disruptour ability to provide service to our customers. Any such failure that leads toa material disruption of our ability to complete calls or provide otherservices could discourage our customers from using our network. We maintainrelationships with local communications service providers in foreign countries,some of whom own the equipment that translates calls from traditional voicenetworks to the Internet, and vice versa. We rely upon these third parties bothto 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 theseparties rely upon their relationships with local phone companies and the use oflocal PSTN to complete calls at the termination location. There is a risk thatthese third parties may be slow, or may fail, to provide lines, which wouldaffect our ability to complete calls to certain destinations. Because we relyupon entering into relationships with local service providers to expand intoadditional countries, we may not be able to increase the number of countries towhich we provide service. Finally, any technical difficulties that theseproviders suffer, or difficulties in their relationships with companies thatmanage the public switched telephone network, could affect our ability totransmit calls to the countries that those providers help serve, significantly reducingour revenue and cash flows, as well as hurting our reputation.

 

*SinglePoints of Failure on Our Network, or Computer Vandalism, May Make ourBusiness Vulnerable.*

 

We currently operate two principal network operationscenters, one in our Eugene, Oregon facility and one in a leased collocationfacility in New York, New York. In some cases, we have designed redundantsystems, provided for excess capacity, and taken other precautions againstplatform and network failures, as well as facility failures relating to power,air conditioning, destruction, or theft. Nonetheless, some of ourinfrastructure and functionality, including that associated with certaincomponents of our wholesale business, such as switching or routing equipment,operate as a single point of failure, meaning failures of the type describedmay prohibit us from offering services. If the overall performance of theInternet is seriously downgraded by website attacks, failure of serviceattacks, or other acts of computer vandalism or virus infection, our ability todeliver our communication services over the Internet could be adverselyimpacted, which could cause us to have to increase the amount of traffic wemust carry over alternative networks, including the more costly public switchedtelephone network. In addition, our business interruption insurance may notcover losses we could incur because of any such disruption of the Internet.

 

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**RisksAssociated with the Company’s Stock.**

 

*RelativeIlliquidity of Stock; Share Price Fluctuations*.

 

There is relatively limited trading of our stock inthe public markets, and this imposes significant practical limitations on anyshareholder’s ability to achieve liquidity at any particular quoted price.Efforts to sell significant amounts of our stock on the open market mayprecipitate significant declines in the prices quoted by market makers. Themarket price for our ordinary shares and the prices of shares of othertechnology companies have been volatile. Our quarterly and annual operatingresults are difficult to predict and may fluctuate significantly. It is possiblethat we will fail to achieve revenue or profit expectations in the future. Thefollowing factors, many of which are beyond our control, may cause significantfluctuations in the market price of our shares:

 

·                  fluctuations in our quarterly revenues and earnings orthose of our competitors;

 

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

 

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

 

·                  the introduction of new products, changes in productlines, or changes in business models; and

 

·                  market conditions in the industry, and in technologysecurities markets.

 

Our common shares are sporadically and thinly-tradedon the over-the-counter market on the OTC Bulletin Board (the “OTCBB”), meaningthat the number of persons interested in purchasing our Common Stock at or nearask prices at any given time may be relatively small or non-existent. Thissituation is attributable to a number of factors, including the fact that weare a small company that is relatively unknown to stock analysts, stockbrokers, institutional investors, and others in the investment community thatgenerate or influence sales volume, and the fact that even if we came to theattention of such persons, they tend to be risk-averse and would be reluctantto follow a company with an operating history as limited as ours or purchase orrecommend the purchase of our shares until such time as we became more seasonedand viable. As a consequence, there may be periods of several days or more whentrading activity in our shares is minimal or non-existent, as compared to aseasoned issuer, which has a large and steady volume of trading activity thatwill generally support continuous sales without an adverse effect on shareprice. We cannot provide any assurance that a broader or more active publictrading market for our common shares will develop or be sustained, or thatcurrent trading levels will be sustained.

 

*SubstantialShareholders May Sell All or a Substantial Portion of the Shares They Ownor Acquire at any Time in the Future, which Could Cause the Market Price of ourCommon Stock to Decline.*

 

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

 

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*We Do NotAnticipate Declaring any Cash Dividends on Our Ordinary Shares.*

 

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

 

*VotingControl by Principal Stockholders.*

 

As of March 6, 2009, M. David Kamrat and NoahKamrat, father and son, together with their spouses (collectively, the “***Kamrat Family***”), beneficially control approximately 38.3% of ourCommon Stock, largely due to their prior ownership of Qualmax common stock;P&S Spirit, an entity controlled by Dr. Selvin Passen and JacobSchorr, Ph.D., together with Dr. Selvin Passen separately, alsobeneficially controls approximately 41.3% of our Common Stock. Therefore, themembers of Kamrat Family, P&S Spirit, and Dr. Passen collectively areable, indirectly as a result of their influence on matters requiring Companyshareholder vote, to significantly influence the vote on matters requiring ourstockholders’ approval, including the election of directors. For moreinformation regarding stock ownership of principal shareholders see Item 12, “SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters.”   As a result, our directorsand executive officers beneficially own a substantial portion of ouroutstanding common stock.  These holders,if they were to act together, would likely be able to direct the outcome of mattersrequiring approval of the stockholders including the election of new directorsand other corporate actions.  Thesedecisions may conflict with the interests of our other stockholders.

 

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**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 488Lincoln Street. The principal terms and lease payment obligations are discussedin more detail under Item 8, “Financial Statements and Supplementary Data —Note K.”

 

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

 

**MPILitigation**

 

On September 15, 2006, we sold our subsidiary,International Importers, Inc., and acquired, by way of reverseacquisition, all of the assets and assumed all of the liabilities of Qualmax(the “***ReverseAcquisition***”).

 

As a result of theReverse Acquisition, the Company assumed the liabilities of Qualmax.  Pursuant to the asset purchase agreementbetween Qualmax and BOS, BOS agreed to indemnify and hold Qualmax harmless fromliability, without limitation, arising from the claims raised in the MPILitigation, and BOS has undertaken defense of Qualmax at BOS’s expense.  As a part of the Company’s assumption of liabilitiesand indemnification, it assumed the Qualmax litigation styled as S.A.R.L.Bosanova v. S.A.R.L. Media Partners International MPI,  Societe BOS Better Online Solutions Limited,and Qualmax Inc. Case No. R.G. N 07-08379 in which Qualmax was a defendantin such litigation which was filed in 2007 before the Trade Tribunal ofNanterre, France.

 

On or about September 18,2008, the French Tribunal at Versailles overruled a lower Court ruling in thematter; declared the case to be beyond the scope of French jurisdiction; andordered the plaintiffs to pay a nominal sum of 2,000 Euros to BOS. As of March 6,2009, there have been no changes in the status of the subject matter.  At present, management does not believe thatthis matter poses any significant financial risk to the Company.

 

**BlackstoneLitigation**

 

On August 10,2006 Qualmax was named as a defendant in a lawsuit styled as *Capital Securities, LLC and Blackstone CommunicationsCompany v. Carlos Bertonnatti, Worldwide PIN Payment Corp. and Qualmax, Inc.,*Case No. 2006-15824-CA-01, in the Circuit Court of the 11th JudicialCircuit in and for Miami-Dade County, Florida. The Complaint in the matter included causes of action against Qualmaxand Carlos Bertonnatti, Worldwide PINPayment Corp. for misappropriation of trade secrets and corporateopportunity, and tortious interference with plaintiffs’ contract with a thirdparty.  The Company also assumed theliability and indemnification included in this matter.

 

Without admittingany liability or wrongdoing on its part, on April 1, 2008, effective as ofMarch 31, 2008, the Company entered into a settlement agreement in thiscase pursuant to which, the Company paid plaintiffs the sum of $50,000 toward plaintiffs’costs of litigation, and in exchange, plaintiffs released the Company from allclaims asserted by plaintiffs or otherwise arising against the Company. Allclaims against the Company have been

 

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dismissed with prejudice.At present, management does not believe that this matter poses any material orsignificant financial risk to the Company

 

**PiecomTech Litigation**

 

Effective July 1,2007 we sold our subsidiary, IP Gear Ltd., to TELES (“***TELES Agreement***”).   A materialaspect of the TELES Agreement, included a commitment of the Company toindemnify, hold harmless and defend TELES and IP Gear, Ltd. against any liabilitiesarising from the Piecom Tech litigation (herein),  As a part of the consideration for such anobligation, the Company is entitled to the proceeds, if any, of the Piecom Techlitigation.   

 

IPGear was namedas a defendant in a lawsuit styled Piecom Tech. Israel Ltd. v. IPGear Ltd.,Case No, 26-05166-07-5, in the Herzliyah, Israel Regional Court. Piecom Tech.had been a vendor to IP Gear, Ltd and was contracted to provide outsourcedcontract manufacturing services. There is currently a deposit held by Piecom of$214,000 towards the production of equipment not yet delivered and an amount inescrow of $32,000 pending resolution of this matter. Release of the escrowfunds of $32,000 depends upon the outcome of pending litigation between Piecomand IP Gear, Ltd. Neither of these amounts is represented on the balance sheetof the Company. On preliminary motions, argued in May of 2008, the Courtruled in favor of IP Gear, Ltd. A mediation hearing occurred in August of2008 and the mediator was unable to resolve the matter. Management believesthat, at present, this litigation does not pose any material or significantfinancial risk to the Company.

 

**AdditionalDisputes**

 

In addition to thematters discussed above, the Company is involved in various disputes that arisein the ordinary course of business.

 

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

 

As previously disclosed on Current Report on Form 8-Kfiled with the SEC on December 15, 2008, a special meeting of the Company’sstockholders was held December 9, 2008 at the Company’s headquarters at 340 W.5th Avenue, Eugene, OR 97401 (the “***Special Meeting***”).  Aquorum, consisting of stockholders holding greater than a majority of theCompany’s outstanding voting shares entitled to vote on the matter, was presentat the Special Meeting, and the stockholders present at the Special Meetingvoted unanimously to approve (1) the Merger Agreement and the transactionscontemplated thereunder, as described in more detail above under Item 1,“Description of Business – Recent Developments,” and as previouslydescribed  in Definitive Schedule 14Cfiled with the SEC on November 7, 2008, and (2) the 2008 Stock Option Plan, aspreviously described in Definitive Schedule 14C filed with the SEC on November7, 2008.

 

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**PART II**

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

 

**Market forCommon Stock**

 

Our Common Stock is currently traded on the OTCBBunder the symbol “NWBD.OB.” The following table sets forth, for the fiscalquarters indicated, high and low sale prices for the Common Stock on theover-the-counter market, as reported by the National Association of SecuritiesDealers, Inc. (NASD). The information below reflects inter-dealer prices,without retail mark-up, mark-down or commissions, and may not necessarilyrepresent actual transactions.   Therewas little trading in our common stock during the period reflected.

 
| ** **                               | ** ** | **Low Sale** | ** ** | **High Sale** | ** ** |
|------------------------------------------|------------|-------------------|------------|--------------------|------------|
| Fiscal Year Ended December 31, 2008 |       |              |       |               |       |
| First Quarter                            |       | $                 | 0.030      |               | $          | 0.100 |   |
| Second Quarter                           |       | 0.010             |       | 0.060              |       |
| Third Quarter                            |       | 0.020             |       | 0.050              |       |
| Fourth Quarter                           |       | 0.010             |       | 0.040              |       |
|                                     |       |              |       |               |       |
| Fiscal Year Ended December 31, 2007 |       |              |       |               |       |
| First Quarter                            |       | $                 | 0.085      |               | $          | 0.085 |   |
| Second Quarter                           |       | 0.170             |       | 0.200              |       |
| Third Quarter                            |       | 0.050             |       | 0.080              |       |
| Fourth Quarter                           |       | 0.040             |       | 0.050              |       |

 

**Stockholders**

 

As of March 6, 2009, there were approximately1,000 holders of record of our Common Stock.

 

**Dividends**

 

To date, we have not paid any cash dividends on ourCommon Stock and we do not contemplate the payment of cash dividends in theforeseeable future. Our future dividend policy will depend on our earnings, capitalrequirements, financial condition, and other factors considered relevant to ourability to pay dividends.

 

**StockOption Grants**

 

For the twelve months ended December 31, 2008, wegranted no stock options.

 

**EquityCompensation Plan Information**

 

The following table provides information, as of December 31,2008, with respect to all of our compensation plans under which equitysecurities are authorized for issuance:

 

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| ** **                                             | ** ** | ** **                           | ** ** | ** **                        | ** ** | **Number of securities**          | ** **      |
|--------------------------------------------------------|------------|--------------------------------------|------------|-----------------------------------|------------|---------------------------------------------|-----------------|
| ** **                                             | ** ** | ** **                           | ** ** | ** **                        | ** ** | **remaining available**                | ** **      |
| ** **                                             | ** ** | **Number of securities**   | ** ** | ** **                        | ** ** | **for future issuance**           | ** **      |
| ** **                                             | ** ** | **to be issued upon** | ** ** | **Weighted-average**              | ** ** | **under equity**                       | ** **      |
| ** **                                             | ** ** | **exercise of**                 | ** ** | **exercise price of**   | ** ** | **compensation plans**                 | ** **      |
| ** **                                             | ** ** | **outstanding options,**        | ** ** | **outstanding options,**     | ** ** | **(excluding securities**              | ** **      |
| **Plan category**                                 | ** ** | **warrants and rights**    | ** ** | **warrants and rights** | ** ** | **reflected in column (a))** | ** **      |
| ** **                                             | ** ** | **(a)**                              | ** ** | **(b)**                           | ** ** | **(c)**                                     | ** **      |
|                                                   |       |                                 |       |                              |       |                                        |            |
| Equity compensation plans approved by stockholders     |       | —                               |       | —                            |       | 2008: 41,500,000                            |            |
| Equity compensation plans not approved by stockholders |       | 2,920,000                            |       | $                                 | 0.20       |                                        | 2001: 2,080,000 |   |
|                                                        |            |                                      |            |                                   |            |                                             |                 |  |

 

**RecentSales of Unregistered Securities**

 

*P&SSpirit Share Purchase*.

 

As previously reported on the Company’s Current Reporton Form 8-K, filed with the SEC on January 8, 2007, effective December 29,2006, the Company entered into the Subscription Agreement with P&S Spiritand with the Kamrats. On and effective May 31, 2007, the parties to theSubscription Agreement entered into the Amended Subscription Agreement,amending the Subscription Agreement as described herein.

 

Pursuant to the Subscription Agreement, the Companyagreed to sell to P&S Spirit, and P&S Spirit agreed to purchase: (i) onthe date of closing: (A) 11.160454 shares of Preferred Stock of theCompany, par value $0.01 per share, which shares of Preferred Stock areconvertible into 33,333,333 shares of the Company’s Common Stock, par value$0.01 per share, at a price of $268,806.27 per share of Preferred Stock(equivalent to $0.09 per share of Common Stock), for an aggregate purchaseprice of $3,000,000; and (B) a Warrant to purchase an additional 9.300378shares of Preferred Stock at an exercise price of $268,806.27 per share(equivalent to $0.09 per share of Common Stock); (ii) upon thesatisfaction of certain conditions set forth in the Subscription Agreement,Tranche B-1 Shares (i.e., an additional 3.720151 shares of Preferred Stock,convertible into 11,111,111 shares of Common Stock), at a price of $268,806.27per share of Preferred Stock (equivalent to $0.09 per share of Common Stock),for an aggregate purchase price of $1,000,000; and (iii) upon thesatisfaction of certain conditions set forth in the Subscription Agreement, theTranche B-2 Shares (i.e., an additional 3.720151 shares of Preferred Stock,convertible into 11,111,111 shares of Common Stock), at a price of $268,806.27per share of Preferred Stock (equivalent to $0.09 per share of Common Stock),or an aggregate purchase price of $1,000,000. In addition, as part of thetransaction, the Kamrats agreed to transfer a total of 3,827,655 shares ofcommon stock, par value $0.01 per share, of Qualmax to P&S Spirit, and inconsideration of the Kamrats’ agreement the Company agreed to issue warrants tothe Kamrats representing, in the aggregate, the right to purchase 9.300378shares 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 ofCommon Stock on an as-converted basis); the warrants issued to the Kamrats havethe same terms as the warrants issued to P&S Spirit.

 

As discussed above, on April 24, 2007, when theCompany filed its Amended and Restated Certificate of Incorporation with theDelaware Secretary of State, all outstanding shares of the Company’s PreferredStock were automatically converted to shares of Common Stock at a ratio of2,986,736 shares of Common Stock for each share of PreferredStock.  As a result, the Tranche B-1 Shares and Tranche B-2 Shareswere each converted into 11,111,111 shares of Common Stock.

 

Pursuant to the Amended P&S SubscriptionAgreement, P&S Spirit agreed to buy, and the Company agreed to sell, all ofthe Tranche B-1 Shares and Tranche B-2 Shares, as converted into a total of22,222,222 shares of Common Stock, for an aggregate purchase price of$1,000,000, and P&S Spirit agreed to waive certain of the conditionsprecedent to the purchase of the Tranche B-1 Shares and Tranche B-2 Shares asset forth in the Subscription Agreement.  The provisions of theWarrants have not been amended.  Such shares of Common Stock are, orwill be, issued without registration under the Securities Act, in reliance on Section 4(2) ofthe Securities Act and Rule 506 of Regulation D promulgatedthereunder.  A copy of the Amended P&S Subscription Agreement wasincluded as Exhibit 10.6 to the Company’s Current Report on Form 8-K,filed with the SEC on June 6, 2007.

 

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*Redemption of Shares of Company Stock from B.O.S.*

 

As reported in theCompany’s Current Report on Form 8K filed with the SEC on August 22,2008, on August 18, 2008, the Company as purchaser, and B.O.S. BetterOnline Solutions, Ltd. (“***BOS***”),as seller, entered into a Stock Sale and Purchase Agreement (the “***BOS-NWB Agreement***”),effective as of August 17, 2008 (the “***Effective Date***”), pursuant to which theCompany agreed to purchase from BOS up to 35 million shares (the “***BOS Purchase Shares***”)of the Company’s common stock, par value $0.01 per share (the “***NWB Common Stock***”),at a price of $0.025 per share, in installments over a term of up to 31months.  On September 30, 2008 the Company completed its purchase ofthe initial installment of 5,000,000 shares from BOS, and has to date purchaseda total of 6,600,000 Company shares from BOS under this agreement at a totalcost of $165,000.

 

As of the December 31,2008, BOS was the holder of 9,153,466 shares of the Company’s Common Stock (“***BOS’s NWB Stock***”) and3,865,305 shares of the common stock of Qualmax, Inc., a Delawarecorporation (“***Qualmax***”),par value $0.001 per share (“***BOS’s Qualmax Stock***”). (For current BOS shareholdings,see Item 12, note 12 of this Annual Report on Form 10-K)

 

*Qualmax Merger Completion*

 

On January 23,2009, the Company completed its merger with Qualmax, as reported on the Company’sCurrent Report on Form 8-K, filed with the SEC on January 30, 2009,and which is incorporated herein by reference. Pursuant to a fairness hearingconducted in the State of Oregon on January 23, 2009 (the “FairnessHearing”), the Director of the State of Oregon Department of Consumer andBusiness Services, Division of Finance and Corporate Securities (the “Director”),found that the Merger was fair, just and equitable, and free from fraud. As aresult of the Fairness Hearing, the Company obtained a valid exemption fromregistration under Section 3(a)(10) of the Securities Act of theshares of common stock of the Company issuable to the stockholders of Qualmaxin connection with the Merger. At a special meeting of the stockholders ofQualmax immediately following the Fairness Hearing the stockholders of Qualmaxapproved the Merger Agreement and the transactions contemplated thereunder. Inaccordance with the Merger Agreement, all conditions and prerequisites to theMerger have been met and completed, and the Merger Agreement has beenconsummated effective January 23, 2009.There have been no amendments, material or otherwise,to the Merger Agreement. Qualmax shares are in the process of being convertedinto shares of the Company, at the conversion rate of 13.348308 Company sharesfor each share of Qualmax stock.

 

**ITEM 6.**        **SELECTED FINANCIAL DATA**

 

This section is not applicable to the Company.

 

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| **ITEM 7.** | ** ** | **MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION  AND RESULTS OF OPERATIONS** |
|------------------|------------|-------------------------------------------------------------------------------------------------|

 

**Forward-LookingStatements- Cautionary Statement**

 

The following discussion contains “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995. Forward-looking statements, written, oral or otherwise, are based onthe Company’s current expectations or beliefs rather than historical factsconcerning 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,” “budgeted”,  or “will” and similar words or phrases orcomparable terminology. Forward-looking statements involve risks anduncertainties. The Company cautions that these statements are further qualifiedby important economic, competitive, governmental, and technological factorsthat could cause the Company’s business, strategy, or actual results or eventsto differ materially, or otherwise, from those in the forward-lookingstatements. We have based such forward-looking statements on our currentexpectations, assumptions, estimates and projections, and therefore there canbe no assurance that any forward-looking statement contained herein, or otherwisemade by the Company, will prove to be accurate. The Company assumes noobligation to update the forward-looking statements.

 

**Overview**

 

*Qualmax, Inc.History.*

 

As Qualmax, we were founded in 2002 as a reseller ofVoIP-related telecommunications equipment from companies such as Cisco Systems,Quintum, and Adtran, and as a reseller of VoIP telephony service, primarilyselling wholesale international service to telecom serviceproviders.  In December, 2005, we expanded beyond our reseller businessby acquiring a VoIP technology research and development division based inIsrael, which we reorganized as a wholly-owned subsidiary and rebranded underthe name IP Gear, Ltd. From December 31, 2005 through July 1, 2007 wedeveloped, manufactured, and sold our own line of VoIP technology products viaour Israel-based IP Gear, Ltd. subsidiary, while continuing to reselladditional VoIP products of a variety of other manufacturers via our U.S.-basedIP Gear VAR division.

 

*2006Reverse Acquisition of Qualmax, Inc.*

 

On September 15, 2006, we sold our subsidiary,International Importers, Inc., and acquired, by way of reverseacquisition, all of the assets and assumed all of the liabilities of Qualmax(the “***ReverseAcquisition***”).  TheReverse Acquisition marked a change in direction for our business, away fromwine and spirits distribution, to the VoIP technology industry.  TheReverse Acquisition was accounted for as a reverse acquisition, with Qualmaxbeing the acquiring party for accounting purposes.  The accounting rules forreverse 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 NewWorld Brands, Inc.  Our historical operating results will be theoperating results of Qualmax. In conjunction with the Reverse Acquisition, in September 2006,we moved our headquarters from Florida to Eugene, Oregon, which was previouslythe headquarters of Qualmax.

 

*2007 Saleof IP Gear, Ltd. Subsidiary.*

 

Effective July 1, 2007, we sold our wholly-ownedsubsidiary, IP Gear, Ltd., an Israeli limited liability company based inYokneam, Israel, to TELES, as reported in more detail in the Company’s CurrentReports on Form 8-K filed with the Securities and Exchange Commission (the“SEC”) on July 20, August 1, and August 9, 2007, and asdiscussed in more detail below under “Recent Developments.” Sale of our IPGear, Ltd. subsidiary represented a refocusing of our business plan away fromresearch and development and direct manufacturing, and toward our historicalcore strengths in sales and service. As a result of the sale, we currently baseall our operations at our headquarters in Eugene, Oregon.

 

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By the sale of IP Gear, Ltd. to TELES, we divestedourselves of our manufacturing, research, and development activities, and havenow rededicated our efforts on distribution, sale, service and support ofVoIP-related telecommunications equipment and service. As a part of the sale ofIP Gear, Ltd., we became the exclusive distributor for both TELES products andIP Gear, Ltd. products in North America and have therefore focused ourtelecommunications equipment sales and distribution plan on TELES and IP Gear,Ltd. products.

 

**General**

 

The following discussion and analysis providesinformation which management believes is relevant to an assessment andunderstanding of our results of operations and financial operations andfinancial conditions. This discussion should be read in conjunction with theconsolidated financial statements and notes thereto appearing elsewhere herein,and in conjunction with Part I, “Disclosure Regarding Forward-LookingStatements,” and Item 1A, “Risk Factors.”

 

**Results ofOperations**

 

*Company-WideRevenue and Gross Profit.*

 

Company-wide (referring to the Company’s two principallines of business, on a consolidated basis) revenue, gross profit and grossprofit margin for the three month and twelve month periods ended December 31,2007 and December 31, 2008 were as follows:

 
| **Revenue**                                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **Company-Wide**                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **for 3 Months Ending and Year-to-Date** | ** ** | **2007**   | ** ** | **2008**   | ** ** | **Change** | ** ** |
| March 31                                                     |       | $          | 4,099,021  |       | $          | 5,080,949  |       | 23.96 | % |
| June 30                                                      |       | $          | 3,556,769  |       | 6,603,386  |       | 85.66      | % |
| September 30                                                 |       | $          | 4,182,157  |       | 5,818,906  |       | 39.14      | % |
| December 31                                                  |       | $          | 5,263,256  |       | 2,776,933  |       | -47.24     | % |
| Year-to-Date December 31                                     |       | $          | 17,101,203 |       | $          | 20,280,174 |       | 18.59 | % |

 
| **Gross Profit**                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **Company-Wide**                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **for 3 Months Ending and Year-to-Date** | ** ** | **2007**   | ** ** | **2008**   | ** ** | **Change** | ** ** |
| March 31                                                     |       | $          | 570,550    |       | $          | 704,391    |       | 23.46 | % |
| June 30                                                      |       | $          | 422,310    |       | 1,324,944  |       | 213.74     | % |
| September 30                                                 |       | $          | 509,456    |       | 1,994,009  |       | 291.40     | % |
| December 31                                                  |       | $          | 794,234    |       | 226,092    |       | -71.53     | % |
| Year-to-Date December 31                                     |       | $          | 2,296,550  |       | $          | 4,249,436  |       | 75.19 | % |

 
| **Gross Profit Margin**                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **Company-Wide**                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **for 3 Months Ending and Year-to-Date** | ** ** | **2007**   | ** ** | **2008**   | ** ** | **Change** | ** ** |
| March 31                                                     |       | 13.92      | %          | 13.86      | %          | -0.43      | %          |
| June 30                                                      |       | 11.87      | %          | 20.06      | %          | 69.00      | %          |
| September 30                                                 |       | 12.18      | %          | 34.27      | %          | 181.36     | %          |
| December 31                                                  |       | 15.09      | %          | 8.14       | %          | -46.05     | %          |
| Year-to-Date December 31                                     |       | 13.43      | %          | 19.84      | %          | 47.73      | %          |

 

Company-wide revenue and gross profit reflect thegrowth of the company throughout the first three quarters of 2008, followed by challengesin both the NWB Networks and NWB Telecom divisions in the fourth quarter. Thesechallenges are the result of current economic and technical issues respectivelyin each of our divisions.

 

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We note that the following percentages are based uponunaudited financial statements for the three months ended December 31,2008.  The following percentages arebased only upon the operations of the Company’s continuing businesses inequipment distribution and resale, and telephony service:

 
| **3 Months Ended  December 31, 2008** | ** ** | **NWB Networks** | ** ** | **NWB Telecom** | ** ** |
|-----------------------------------------------------------|------------|-----------------------|------------|----------------------|------------|
| Portion of Company-Wide Revenue                           |       | 33.46                 | %          | 66.54                | %          |
| Portion of Company-Wide Gross Profit                      |       | 170.17                | %          | -70.17               | %          |

 
| **12 Months Ended  December 31, 2008** | ** ** | **NWB Networks** | ** ** | **NWB Telecom** | ** ** |
|------------------------------------------------------------|------------|-----------------------|------------|----------------------|------------|
| Portion of Company-Wide Revenue                            |       | 35.31                 | %          | 64.69                | %          |
| Portion of Company-Wide Gross Profit                       |       | 49.90                 | %          | 50.10                | %          |

 

The following discussion of gross profit on aper-business line or divisional basis provides additional information regardingeach line’s performance.

 

*Sale of IPGear, Ltd. Subsidiary.*

 

As described above in Item 1, “Description ofBusiness—Recent Developments—Sale of IP Gear, Ltd. Subsidiary,” effective July 1,2007, the Company sold its IP Gear, Ltd. subsidiary to TELES, a VoIP equipmentdeveloper and manufacturer based in Berlin, Germany.

 

We believe that IP Gear, Ltd.’s losses through thesecond quarter of 2007 reflected a long-term trend in declining VoIP technologyprices, and that to maintain a research and development and manufacturingbusiness and regain profitability would require a lengthy and sustainedcost-cutting effort and substantial interim financing. We did not know how longthat process would take or whether we would ultimately be able to adequatelyadjust our costs in relation to our competitors. Further, during the entireperiod of our ownership of IP Gear, Ltd., even during periods of higher grossmargin, IP Gear, Ltd. experienced substantial operating losses and negativecash flow. Our ability to secure sources of funding for IP Gear, Ltd.’soperating losses was tenuous, and we were not able to identify a source ofadequate additional capital on acceptable terms, in the form of equity or debt,within the time needed for operations. Faced with a rapidly deteriorating cashposition, and limited prospects for securing necessary capital on acceptableterms within the necessary timeframe, we determined that the Company’s interestswould be best served by a sale of our IP Gear, Ltd. subsidiary.

 

We further believed that the sale of IP Gear, Ltd. toTELES provided the Company an opportunity for growth and restructuring beyondthe sale itself, in the form of the Partner Contract granting the Companyexclusive rights (subject to certain limitations) to distribute both TELES andIP Gear, Ltd. products in North America. We recognize that by selling IP Gear,Ltd., we have given up the opportunity to build upon a potentially valuabletechnology asset. However, we believe that the short-term cash flow andoperational benefit to the Company, and the potential long-term valuerepresented by our new Partner Contract with TELES, made the transactionfavorable to the Company.

 

*NWBNetworks Division Revenue and Gross Profit.*

 

Our VoIP and other telephony product distribution andresale business, which formerly operated under the name “IP Gear,” has beenrenamed “***NWB Networks***.” NWB Networks focuses on thedistribution, resale and support of TELES and IP Gear, Ltd. products, and, on amore limited basis, continues to act as a niche reseller of certain additionalmanufacturers’ products.

 

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** **

Revenue,gross profit and gross profit margin for the NWB Networks division for thethree month and twelve month periods ended December 31, 2007 and December 31,2008 were as follows:

 
| **Revenue**                                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **NWB Networks**                                             |       |       |       |       |       |       |       |
| **for 3 Months Ending and Year-to-Date** | ** ** | **2007**   | ** ** | **2008**   | ** ** | **Change** | ** ** |
| March 31                                                     |       | $          | 1,228,024  |       | $          | 2,042,400  |       | 66.32 | % |
| June 30                                                      |       | $          | 966,991    |       | 2,653,742  |       | 174.43     | % |
| September 30                                                 |       | $          | 1,564,525  |       | 1,535,641  |       | -0.18      | % |
| December 31                                                  |       | $          | 1,898,149  |       | 929,243    |       | -51.04     | % |
| Year-to-Date December 31                                     |       | $          | 5,657,689  |       | $          | 7,161,026  |       | 26.57 | % |

 
| **Gross Profit**                                             |       |     |       |     |       |       |       |
|-------------------------------------------------------------------|------------|----------|------------|----------|------------|------------|------------|
| **NWB Networks**                                             |       |     |       |     |       |       |       |
| **for 3 Months Ending and Year-to-Date** | ** ** | **2007** | ** ** | **2008** | ** ** | **Change** | ** ** |
| March 31                                                     |       | $        | 109,015    |     | $          | 374,174    |       | 243.27 | % |
| June 30                                                      |       | $        | 112,398    |     | 757,605    |       | 574.04     | % |
| September 30                                                 |       | $        | 191,555    |     | 603,915    |       | 215.27     | % |
| December 31                                                  |       | $        | 290,340    |     | 384,751    |       | 32.52      | % |
| Year-to-Date December 31                                     |       | $        | 703,308    |     | $          | 2,120,445  |       | 201.50 | % |

 
| **Gross Profit Margin**                                 |       |     |       |     |       |       |       |
|-------------------------------------------------------------------|------------|----------|------------|----------|------------|------------|------------|
| **NWB Networks**                                             |       |     |       |     |       |       |       |
| **for 3 Months Ending and Year-to-Date** | ** ** | **2007** | ** ** | **2008** | ** ** | **Change** | ** ** |
| March 31                                                     |       | 8.88     | %          | 18.32    | %          | 106.31     | %          |
| June 30                                                      |       | 11.62    | %          | 28.55    | %          | 145.70     | %          |
| September 30                                                 |       | 12.24    | %          | 39.33    | %          | 221.06     | %          |
| December 31                                                  |       | 15.29    | %          | 41.40    | %          | 170.80     | %          |
| Year-to-Date December 31                                     |       | 12.43    | %          | 29.61    | %          | 138.21     | %          |

 

As our focus has shiftedtoward the sales of TELES products, sales by our legacy VoIP equipment resalebusiness (VoIP access servers and related equipment, other than TELES and IPGear, Ltd. products) have stabilized, at levels much lower than in 2007 or inthe first quarter of 2008. The higher margin and greater market potential ofTELES products, as well as our exclusive distributorship of TELES products inNorth America, the Caribbean, and parts of Central America, are the primarydrivers of the greater emphasis on the sales of TELES products.

 

We believe that thePartner Contract with TELES has played a key role in improving margins in ourNWB Networks division. In particular, by acquiring IP Gear, Ltd., TELES nowoffers a more comprehensive product line, and TELES products greatly expand thescope of IP Gear, Ltd.’s product line. Our relationship with TELES, includingour geographic exclusivity, has provided an opportunity for the Company to sellthese products at an attractive margin, and to build a support and servicenetwork for end-users and VARs. As our relationship with TELES has matured,other advantageous developments have included greater input by NWB into TELESproduct development. The Company, while maintaining its own geographic exclusivityfor the distribution of TELES equipment, may sell TELES equipment anywhere inthe world without restriction. However, the increased focus on TELES equipmentis not without risk, as may be seen by the greater proportional decrease insales of TELES equipment as compared to legacy VoIP equipment in the economicdownturn during the third and fourth quarters of 2008.

 

The Company has beenselling TELES equipment as an exclusive distributor since July, 2007, with theTELES line having grown to become our dominant hardware product line. The tablebelow shows the portion of NWB Networks divisional revenue, gross profit andgross profit margin attributable to sales of TELES and IP Gear products, incomparison to sales of all other products in the NWB Networks division, duringthe years of 2007 and 2008 on a quarterly and year-end basis. We note that thefollowing figures are based upon financial statements for the year ended December 31,2007, showing our former subsidiary, IP Gear, Ltd. (an Israeli company) listedas discontinued operations, and December 31, 2008; the following figuresare based only

 

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upon the operations ofthe Company’s NWB Networks division continuing businesses in equipmentdistribution and resale for the following periods in 2007 and 2008:

 
| **2007** | ** ** | **Revenue****NWB  Networks  (non-TELES)** | ** ** | **Revenue****TELES  Products  only** | ** ** | **Gross Profit****NWB  Networks  (non-TELES)** | ** ** | **Gross********Profit****TELES  Products  only** | ** ** | **Gross Profit********Margin********NWB********Networks********(non-TELES)** | ** ** | **Gross Profit********Margin********TELES********Products**** ****only** | ** ** |
|----------|------------|-------------------------------------------|------------|--------------------------------------|------------|------------------------------------------------|------------|--------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|
|     |       |                                      |       |                                 |       |                                           |       |                                             |       |                                                                              |       |                                                                               |       |
| Q1       |       | $                                         | 1,127,874  |                                 | $          | 100,150                                        |       | $                                                | 89,100     |                                                                              | $          | 19,903                                                                             |       | 7.90 | % | 19.87 | % |
| Q2       |       | $                                         | 833,349    |                                 | $          | 133,642                                        |       | $                                                | 45,743     |                                                                              | $          | 66,651                                                                             |       | 5.49 | % | 49.87 | % |
| Q3       |       | $                                         | 1,018,220  |                                 | $          | 546,306                                        |       | $                                                | 42,560     |                                                                              | $          | 149,038                                                                            |       | 4.18 | % | 27.28 | % |
| Q4       |       | $                                         | 557,059    |                                 | $          | 1,341,089                                      |       | $                                                | (107,020   | )                                                                                 | $          | 397,333                                                                            |       | -19.21 | % | 29.63 | % |
|     |       |                                      |       |                                 |       |                                           |       |                                             |       |                                                                              |       |                                                                               |       |
| Year     |       | $                                         | 3,536,502  |                                 | $          | 2,121,187                                      |       | $                                                | 70,383     |                                                                              | $          | 632,925                                                                            |       | 1.99 | % | 29.84 | % |

 
| **2008** | ** ** | **Revenue****NWB  Networks  (non-TELES)** | ** ** | **Revenue****TELES  Products  only** | ** ** | **Gross Profit****NWB  Networks  (non-TELES)** | ** ** | **Gross********Profit****TELES  Products  only** | ** ** | **Gross Profit********Margin********NWB********Networks********(non-TELES)** | ** ** | **Gross Profit********Margin********TELES********Products**** ****only** | ** ** |
|----------|------------|-------------------------------------------|------------|--------------------------------------|------------|-----------------------------------------------------|------------|--------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|
|     |       |                                      |       |                                 |       |                                                |       |                                             |       |                                                                              |       |                                                                               |       |
| Q1       |       | $                                         | 748,150    |                                 | $          | 1,294,250                                           |       | $                                                | 15,342     |                                                                              | $          | 358,832                                                                            |       | 2.05 | % | 27.73 | % |
| Q2       |       | $                                         | 340,896    |                                 | $          | 2,312,847                                           |       | $                                                | 26,962     |                                                                              | $          | 730,643                                                                            |       | 7.91 | % | 31.59 | % |
| Q3       |       | $                                         | 275,215    |                                 | $          | 1,260,425                                           |       | $                                                | 28,574     |                                                                              | $          | 575,340                                                                            |       | 10.38 | % | 45.65 | % |
| Q4       |       | $                                         | 338,072    |                                 | $          | 591,169                                             |       | $                                                | 116,139    |                                                                              | $          | 268,611                                                                            |       | 34.35 | % | 45.44 | % |
|     |       |                                      |       |                                 |       |                                                |       |                                             |       |                                                                              |       |                                                                               |       |
| Year     |       | $                                         | 1,702,333  |                                 | $          | 5,458,691                                           |       | $                                                | 187,017    |                                                                              | $          | 1,933,426                                                                          |       | 10.99 | % | 35.42 | % |

 

The majority of our TELESequipment sales during 2008 have been of TELES’s mobile fixed wirelessapplication gateways, marketed under the iGate and vGate brands. TELES mobilegateways provide a consolidated mobile, public switched telephone network(PSTN) and VoIP gateway solution to carriers and corporate network customersseeking to connect their private branch exchange (PBX) to mobile and VoIPservices, and can be added to integrated services digital network (ISDN) andinternet protocol (IP) environments for least cost routing and other advancedcall routing and rerouting applications. Demand for the iGate and vGate brandsdid slow along with the demand for TELEX equipment in general in the last twoquarters of 2008 due in part to the broad decline in economic conditions.

 

Our exclusivedistribution rights for TELES equipment are contingent upon reaching certainminimum purchase thresholds (meaning, the amount of TELES equipment we purchasefrom TELES). For the fifteen month period ending September 30, 2008, ourpurchase threshold was $1,000,000. That threshold was surpassed in the firstsix month period of the agreement, from July 1 to December 31, 2007,when our TELES purchases (for inventory received from TELES) totaled$1,798,162.

 

Initially, our TELESsales orders outpaced TELES’s ability to supply certain products, particularlyfixed wireless gateways, potentially constraining sales growth and negativelyimpacting customer relations and brand acceptance. However, in the fourthquarter of 2007 TELES was able to increase production and enable us to fill anumber of pending orders, and as of the second quarter of 2008, supply problemshave been overcome. We believe time-to-market is a critical component ofsuccess for technology product sales, both in terms of product delivery andproduct innovation. We remain confident in TELES’s ability to meet productdemand and continue product

 

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innovation in key productlines, such as fixed wireless gateways and customer premise VoIP equipment.However, we do not control production of any of the products we distribute andsell.

 

All products purchasedfrom TELES are per contract quoted in the base currency used by TELES, theEuro. New World Brands sells all goods to its customers in U.S. Dollars. As aresult, we have a certain exposure to currency risk to the extent the relativevalue of the U.S. Dollar drops compared to the Euro. During 2008, thesubstantial increase of the Euro to the U.S. Dollar that occurred in 2007stabilized. Despite exchange rate volatility between the Euro and the U.S.Dollar throughout the year, the exchange rate at the end of 2008 was similar towhat it was at the end of 2007. Increases in our exposure to currency risk dueto the growth of our Euro-denominated inventory has been partially offset bypayment agreements between NWB and TELES designed to mitigate risk. However, ifwe are successful in our efforts to increase TELES sales, and as we increaseour Euro-based inventory, our exposure to currency risk will increase.

 

*NWB Telecom Division Revenue, Gross Profit and Gross ProfitMargin.*

 

Our wholesale VoIPservices business, which formerly operated under the name “IP Gear Connect,”has been renamed “***NWB Telecom***.”

 

Revenue and cost of goodsfor the NWB Telecom division (wholesale VoIP services) for the three month andtwelve month periods ended December 31, 2007 and December 31, 2008were as follows:

 
| **Revenue**                                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **NWB Telecom**                                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **for 3 Months Ending and Year-to-Date** | ** ** | **2007**   | ** ** | **2008**   | ** ** | **Change** | ** ** |
| March 31                                                     |       | $          | 2,870,997  |       | $          | 3,038,549  |       | 5.84 | % |
| June 30                                                      |       | $          | 2,589,778  |       | 3,949,644  |       | 52.51      | % |
| September 30                                                 |       | $          | 2,617,632  |       | 4,283,265  |       | 63.63      | % |
| December 31                                                  |       | $          | 3,365,107  |       | 1,847,690  |       | -45.09     | % |
| Year-to-Date December 31                                     |       | $          | 11,443,514 |       | $          | 13,119,148 |       | 14.64 | % |

 
| **Gross Profit**                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **NWB Telecom**                                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **for 3 Months Ending and Year-to-Date** | ** ** | **2007**   | ** ** | **2008**   | ** ** | **Change** | ** ** |
| March 31                                                     |       | $          | 461,535    |       | $          | 330,217    |       | -28.45 | % |
| June 30                                                      |       | $          | 309,912    |       | 567,339    |       | 83.07      | % |
| September 30                                                 |       | $          | 317,901    |       | 1,390,094  |       | 337.27     | % |
| December 31                                                  |       | $          | 503,894    |       | (158,659   | )          | -131.49    | % |
| Year-to-Date December 31                                     |       | $          | 1,593,242  |       | $          | 2,128,991  |       | 33.63 | % |

 
| **Gross Profit Margin**                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **NWB Telecom**                                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **for 3 Months Ending and Year-to-Date** | ** ** | **2007**   | ** ** | **2008**   | ** ** | **Change** | ** ** |
| March 31                                                     |       | 16.08      | %          | 10.87      | %          | -32.40     | %          |
| June 30                                                      |       | 11.97      | %          | 14.36      | %          | 19.97      | %          |
| September 30                                                 |       | 12.14      | %          | 32.45      | %          | 167.30     | %          |
| December 31                                                  |       | 14.97      | %          | -8.59      | %          | -157.36    | %          |
| Year-to-Date December 31                                     |       | 13.92      | %          | 16.23      | %          | 16.56      | %          |

 

NWBTelecom’s business model includes a portion of cost that is fixed cost and aportion of cost that is variable with the amount of traffic we terminate. Whenare able to terminate a large volume of traffic, the increase in gross marginresults from the portion of cost that is fixed regardless of volume, and webenefit as in Q3 of 2008. When the volume drops, the variable profit declinesbut the fixed costs remain and we suffer a significant reduction in grossprofit, as is seen in Q4 of 2008.

 

During the third andfourth quarters of 2008, we attempted to broaden our presence in theU.S.-to-Latin America telephony market by increasing the number of countriesserved by our network. Due to a variety of factors, this expansion wasunsuccessful. As a result, we have shifted our focus back to our original groupof routes where we have more experience.

 

The change back towardthe routes where we are strongest had its own challenges. These include technicaldifficulties with the sophistication of the solution we intend to implement,the increased reliance on a limited number of vendors and customers, and adecrease in revenue and gross margin following a period of substantial time and

 

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investment dedicated tonew routes.

 

During 2008, NWB Telecomhad one significant customer whose revenue made up over 10% of the totalcompany revenue and two vendors for whom our cost of goods sold exceeded 10%.The following tables illustrate, for 2008, the revenue generated by sales tothis significant customer and from the resale of services purchased from thesevendors, as well as the related gross profit, in comparison to the costs andassociated revenue of all other NWB Telecom vendors, and all other Companyvendors, during the period. Please note that there is overlap between the twovendors as they are both used in some case to generate the same revenue.

 
| **12 Months Ended  December 31, 2008**                     | ** ** | **Significant Vendor** | ** ** | **All Other NWB  Telecom Vendors** | ** ** | **All Other Company-Wide  (including all other NWB  Telecom vendors)** | ** ** |
|--------------------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|
| Revenue (generated from resale of service purchased from NWB Telecom  vendors) |       | $                           | 5,167,013  |                                              | $          | 7,952,135                                                                                            |       | $ | 15,113,161 |   |
|                                                                           |       |                        |       |                                              |       |                                                                                                 |       |
| Gross Profit (earned from resale of service purchased from vendor)             |       | $                           | 838,509    |                                              | $          | 1,290,482                                                                                            |       | $ | 3,410,926 |   |

 
| **12 Months Ended  December 31, 2008**                     | ** ** | **Significant Vendor** | ** ** | **All Other NWB  Telecom Vendors** | ** ** | **All Other Company-Wide  (including all other NWB  Telecom vendors)** | ** ** |
|--------------------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|
| Revenue (generated from resale of service purchased from NWB Telecom  vendors) |       | $                           | 4,783,487  |                                              | $          | 8,335,662                                                                                            |       | $ | 15,496,687 |   |
|                                                                           |       |                        |       |                                              |       |                                                                                                 |       |
| Gross Profit (earned from resale of service purchased from vendor)             |       | $                           | 1,985,869  |                                              | $          | 143,123                                                                                              |       | $ | 2,263,567 |   |

 
| **12 Months Ended  December 31, 2008**                      | ** ** | **Significant  Customer** | ** ** | **All Other NWB  Telecom  Customers** | ** ** | **All Other Company-Wide  (including all other NWB  Telecom customers)** | ** ** |
|---------------------------------------------------------------------------------|------------|---------------------------|------------|-------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|
| Revenue (generated from resale of service purchased from NWB Telecom  customer) |       | $                         | 2,695,364  |                                            | $          | 10,423,784                                                                                             |       | $ | 17,584,810 |   |
|                                                                            |       |                      |       |                                            |       |                                                                                                   |       |
| Gross Profit (earned from resale of service purchased from customer)            |       | $                         | 699,219    |                                            | $          | 1,429,772                                                                                              |       | $ | 3,550,216 |   |

 

Our significant customerrepresented 25.30% of the revenue of the Company and 38.73% of the revenue ofNWB Telecom for 2008. Resale of call termination purchased from the twosignificant vendors represented 23.59% and 13.29% of revenue for the Company,and 36.46% and 20.55% of NWB Telecom revenue.

 

These vendors are underno enforceable obligation to sell us service of any kind, and we are under noobligation to buy, other than on a week-by-week basis, and we are at risk oflosing some or all of the services supplied by this vendor with little or nonotice. Furthermore, we can have no assurance that these vendors will continueto be able to offer services for sale at the gross margins currently earned.Loss of this significant vendor, or of the high-margin services we currentlypurchase, would result in an attendant loss of associated gross profits,without a corresponding immediate decrease in related sales, general andadministrative costs, therefore negatively impacting our overall profitabilityin the near term.

 

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The table below shows theportion of NWB Telecom divisional revenue, gross profit and gross profitmargin, and NWB Telecom gross profit as a percentage of Company-wide grossprofit, during 2008 on a quarterly and year end basis. We note that thefollowing figures are based upon financial statements for the year ended December 31,2008.

 
| **2008** | ** ** | **Revenue****NWB  Telecom** | ** ** | **Gross********Profit********NWB********Telecom** | ** ** | **Gross  Profit  Margin****NWB********Telecom** | ** ** | **NWB  Telecom  Gross********Profit as  % of  Company-  wide  Gross Profit** | ** ** |
|----------|------------|-----------------------------|------------|---------------------------------------------------|------------|-------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|
|     |       |                        |       |                                              |       |                                            |       |                                                                                        |       |
| Q1       |       | $                           | 3,038,549  |                                              | $          | 330,217                                         |       | 10.87                                                                                       | %          | 46.88 | % |
| Q2       |       | $                           | 3,949,644  |                                              | $          | 567,339                                         |       | 14.36                                                                                       | %          | 42.82 | % |
| Q3       |       | $                           | 4,283,265  |                                              | $          | 1,390,094                                       |       | 32.45                                                                                       | %          | 69.71 | % |
| Q4       |       | $                           | 1,847,690  |                                              | $          | (158,659                                        | )          | -8.59                                                                                       | %          | -70.17 | % |
|     |       |                        |       |                                              |       |                                            |       |                                                                                        |       |
| Year     |       | $                           | 13,119,148 |                                              | $          | 2,128,991                                       |       | 16.23                                                                                       | %          | 50.10 | % |

 

*Summary: Company-Wide and Divisional Revenue, Gross Profitand Gross Profit Margin, on a Quarterly and Year-End Basis, for 2007.*

 

It is the goal ofmanagement to present the Company’s financial performance in as comprehensive,accurate, and illustrative a manner as possible. To that end, managementcontinually seeks to improve the presentation of results of the Company’s operationsin this Item 7, “Management’s Discussion and Analysis of Financial Conditionsand Results of Operations.” The following tables duplicate informationpresented elsewhere in this Item 7, but we believe that the followingpresentation of that information may be helpful to shareholders and potentialinvestors. As the Company continues to develop its internal controls andfinancial records keeping, we hope to be able to present this sort ofconsolidated and comprehensive information for current periods in comparison toprior periods. The following presentation is not intended to substitute for anyother portion of this Item 7.

 
| **2008** | ** ** | **Revenue  Company-Wide** | ** ** | **Revenue  NWB Telecom** | ** ** | **% of Company-Wide  Revenue** | ** ** | **Revenue NWB  Networks (non-  TELES)** | ** ** | **% of  Company-  Wide  Revenue** | ** ** | **Revenue NWB  Networks  (TELES only)** | ** ** | **% of  Company-  Wide  Revenue** | ** ** |
|----------|------------|---------------------------|------------|-------------------------------|------------|------------------------------------------|------------|---------------------------------------------------|------------|----------------------------------------|------------|---------------------------------------------------|------------|----------------------------------------|------------|
| Q1       |       | $                         | 5,080,949  |                          | $          | 3,038,549                                |       | 59.80                                             | %          | $                                      | 748,150    |                                              | 14.72      | %                                      | $          | 1,294,250 |   | 25.47 | % |
| Q2       |       | $                         | 6,603,386  |                          | $          | 3,949,644                                |       | 59.81                                             | %          | $                                      | 340,896    |                                              | 5.16       | %                                      | $          | 2,312,847 |   | 35.03 | % |
| Q3       |       | $                         | 5,818,906  |                          | $          | 4,283,265                                |       | 73.61                                             | %          | $                                      | 275,215    |                                              | 4.73       | %                                      | $          | 1,260,425 |   | 21.66 | % |
| Q4       |       | $                         | 2,776,933  |                          | $          | 1,847,690                                |       | 66.54                                             | %          | $                                      | 338,072    |                                              | 12.17      | %                                      | $          | 591,169 |   | 21.29 | % |
|     |       |                      |       |                          |       |                                     |       |                                              |       |                                   |       |                                              |       |                                   |       |
| Year     |       | $                         | 20,280,174 |                          | $          | 13,119,148                               |       | 64.69                                             | %          | $                                      | 1,702,333  |                                              | 8.39       | %                                      | $          | 5,458,691 |   | 26.92 | % |

 
| **2008** | ** ** | **Gross Profit  Company-Wide** | ** ** | **Gross Profit  NWB Telecom** | ** ** | **% of Company-  Wide  Gross Profit** | ** ** | **Gross Profit  NWB  Networks (non-TELES)** | ** ** | **% of  Company-  Wide  Gross Profit** | ** ** | **Gross Profit  NWB  Networks  (TELES only)** | ** ** | **% of  Company-  Wide  Gross Profit** | ** ** |
|----------|------------|-------------------------------------|------------|-----------------------------------------|------------|------------------------------------------------------|------------|-------------------------------------------------------|------------|--------------------------------------------------|------------|---------------------------------------------------------|------------|--------------------------------------------------|------------|
| Q1       |       | $                                   | 704,391    |                                    | $          | 330,217                                              |       | 46.88                                                 | %          | $                                                | 15,342     |                                                    | 2.18       | %                                                | $          | 358,832 |   | 50.94 | % |
| Q2       |       | $                                   | 1,324,944  |                                    | $          | 567,339                                              |       | 42.82                                                 | %          | $                                                | 26,962     |                                                    | 2.03       | %                                                | $          | 730,643 |   | 55.15 | % |
| Q3       |       | $                                   | 1,994,009  |                                    | $          | 1,390,094                                            |       | 69.71                                                 | %          | $                                                | 28,574     |                                                    | 1.43       | %                                                | $          | 575,340 |   | 28.85 | % |
| Q4       |       | $                                   | 226,092    |                                    | $          | -158,659                                             |       | -70.17                                                | %          | $                                                | 116,139    |                                                    | 51.37      | %                                                | $          | 268,611 |   | 118.81 | % |
|     |       |                                |       |                                    |       |                                                 |       |                                                  |       |                                             |       |                                                    |       |                                             |       |
| Year     |       | $                                   | 4,249,436  |                                    | $          | 2,128,991                                            |       | 50.10                                                 | %          | $                                                | 187,017    |                                                    | 4.40       | %                                                | $          | 1,933,426 |   | 45.50 | % |
|          |            |                                     |            |                                         |            |                                                      |            |                                                       |            |                                                  |            |                                                         |            |                                                  |            |  |  |  |  |  |

 

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| **2008** | ** ** | **Gross Profit  Margin  Company-Wide** | ** ** | **Gross Profit  Margin  NWB Telecom** | ** ** | **Gross Profit  Margin  NWB Networks  (non-TELES)** | ** ** | **Gross Profit  Margin  NWB Networks  (TELES-Only)** | ** ** |
|----------|------------|---------------------------------------------|------------|-------------------------------------------------|------------|---------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| Q1       |       | 13.86                                       | %          | 10.87                                           | %          | 2.05                                                          | %          | 27.73                                                          | %          |
| Q2       |       | 20.06                                       | %          | 14.36                                           | %          | 7.91                                                          | %          | 31.59                                                          | %          |
| Q3       |       | 34.27                                       | %          | 32.45                                           | %          | 10.38                                                         | %          | 45.65                                                          | %          |
| Q4       |       | 8.14                                        | %          | -8.59                                           | %          | 34.35                                                         | %          | 45.44                                                          | %          |
|     |       |                                        |       |                                            |       |                                                          |       |                                                           |       |
| Year     |       | 20.95                                       | %          | 16.23                                           | %          | 10.99                                                         | %          | 35.42                                                          | %          |

 

*Total Company Expenses.*

 

Total Company expenses(sales, marketing, general, and administrative) for the three and twelve monthperiods ended December 31, 2008 and 2007 were as follows:

 
| ** **          | ** ** | **3 Months Ended  December 31, 2008** | ** ** | **3 Months Ended  December 31, 2007** | ** ** | **Change** | ** ** |
|---------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------------|------------|------------|------------|
| Total Expenses |       | $                                                         | 1,203,874  |                                                      | $          | 1,266,631  |       | 4.95 | % |
|                     |            |                                                           |            |                                                           |            |            |            |  |  |

 
| ** **          | ** ** | **12 Months Ended  December 31, 2008** | ** ** | **12 Months Ended  December 31, 2007** | ** ** | **Change** | ** ** |
|---------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------|------------|------------|------------|
| Total Expenses |       | $                                                          | 5,842,917  |                                                       | $          | 4,630,863  |       | 26.17 | % |
|                     |            |                                                            |            |                                                            |            |            |            |  |  |

 

Thesubstantial decrease in total expenses for the comparative three month periodis due primarily to decreases in labor costs and legal, accounting, and otherprofessional fees. However, total expenses increased slightly for the twelvemonth period ending December 31, 2008 as compared to that ending December 31,2007, reflecting: (i) higher labor and management costs during the nine monthperiod ending September 30, 2008, as compared to the nine month period endingSeptember 30, 2007; (ii) increased sales and marketing costs (including salesstaff) during the twelve month period ending December 31, 2008, as compared tothe twelve month period ending December 31, 2007; and (iii) migration duringthe first three quarters of 2008 of the Company’s core telecom serviceswitching and routing operations to an outsource provider, utilizing theoutsource provider's equipment rather than our own, resulting in an increase inrelated expenses and a decrease in related capitalized expenditures. We notethat the above figures are based upon financial statements for the periodsended December 31, 2008 and 2007, and the above figures are based only upon theoperations of the Company’s continuing businesses in equipment distribution andresale, and telephony service.

 

*Interest.*

 
| **Continuing Operations Only** | ** ** | **3 Months Ended  December 31, 2008** | ** ** | **3 Months Ended  December 31, 2007** | ** ** |
|------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| Interest                                 |       | $                                                         | 32,988     |                                                      | $          | 19,859 |   |
|                                          |            |                                                           |            |                                                           |            |  |  |

 

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| ** ** | ** ** | **12 Months Ended  December 31, 2008** | ** ** | **12 Months Ended  December 31, 2007** | ** ** |
|------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| Interest   | ** ** | $                                                          | 99,076     |                                                       | $          | 129,346 | ** ** |
|            |            |                                                            |            |                                                            |            |  |  |

 

The reduction in interestexpense is due to a  reduction in theprincipal amount borrowed during 2008 as compared to 2007, and a decline ininterest rates over the last 2 years.

 

*Amortization and Depreciation.*

 
| ** **                 | ** ** | **12 Months Ended  December 31, 2008** | ** ** | **12 Months Ended  December 31, 2007** | ** ** | **Change** | ** ** |
|----------------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------|------------|------------|------------|
| Continuing Operations Only |       | $                                                          | 515,313    |                                                       | $          | 406,152    |       | 26.88 | % |
|                            |            |                                                            |            |                                                            |            |            |            |  |  |

 

Amortization anddepreciation for the Company for continuing operations increased in 2008reflecting increased capital investment during prior periods in switching,routing, and tracking equipment and technology utilized in relation to our NWBTelecom VoIP service business. Our U.S.-based operations have a very limitedamount invested in software technology, and as a result, our currentamortization is negligible and not expected to increase in the near term.

 

*Net Loss*

 

The above factorscontributed to a net loss for the Company for both the three and twelve monthperiods ended December 31, 2008. As a result of the sale of our IP Gear,Ltd. subsidiary to TELES, we are required to restate financials on a pro formabasis for years 2008 and 2007, showing our former subsidiary, IP Gear, Ltd.,listed as discontinued operations for 2007, and separately reporting theresults of operations of the Company’s continuing businesses in equipmentdistribution and resale, and telephony service. The Company’s net losses forthe three and twelve month periods ended December 31, 2008 and 2007, shownboth excluding and including discontinued operations in the figures for 2007,are as follows:

 
| ** **                               | ** ** | **3 Months Ended  December 31, 2008** | ** ** | **3 Months Ended  December 31, 2007** | ** ** |
|------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| Net Loss From Continuing Operations Only |       | $                                                         | (1,091,414 | )                                                         | $          | (943,927 | ) |
|                                          |            |                                                           |            |                                                           |            |  |  |

 
| ** **                               | ** ** | **12 Months Ended  December 31, 2008** | ** ** | **12 Months Ended  December 31, 2007** |   |
|------------------------------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------|--------|
| Net Loss From Continuing Operations Only |       | $                                                          | (1,629,552 | )                                                          | $      | (2,758,497 | ) |
|                                          |            |                                                            |            |                                                            |        |  |  |

 
| ** **                                              | ** ** | **3 Months Ended  December 31, 2008** | ** ** | **3 Months Ended  December 31, 2007** | ** ** |
|---------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| Net Loss From Continuing *and***Discontinued Operations |       | $                                                         | (1,091,414 | )                                                         | $          | (910,157 | ) |
|                                                         |            |                                                           |            |                                                           |            |  |  |

 
| ** **                                              | ** ** | **12 Months Ended  December 31, 2008** | ** ** | **12 Months Ended  December 31, 2007** | ** ** |
|---------------------------------------------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| Net Loss From Continuing *and*  Discontinued Operations |       | $                                                          | (1,629,552 | )                                                          | $          | (6,703,186 | ) |
|                                                         |            |                                                            |            |                                                            |            |  |  |

 

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Thedifference between 2007’s figures for the net loss from continuing operationsonly, as compared to the net loss for continuing and discontinued (meaning, IPGear, Ltd.), illustrates the impact of the Company’s former subsidiary, IPGear, Ltd., on the Company’s financial performance.

 

Following is a summary oftotal company expenses, interest, amortization and depreciation, and resultantnet profit/loss, allocated among our two operating divisions, NWB Telecom andNWB Networks, and showing NWB Networks results for non-TELES products and TELESproducts only. We note that the following figures are based upon financialstatements for the periods ended December 31, 2008 and 2007, showing ourformer subsidiary, IP Gear, Ltd. (an Israeli company), listed as discontinuedoperations in the figures for 2007.

 
| **2007 Continuing  Operations(1)**                            | ** ** | **Company-  Wide** | ** ** | **Corporate  Expenses** | ** ** | **NWB  Telecom** | ** ** | **NWB  Networks  (non-  TELES)** | ** ** | **NWB  Networks  (TELES  only)** | ** ** |
|--------------------------------------------------------------------|------------|--------------------|------------|-------------------------|------------|------------------|------------|----------------------------------|------------|----------------------------------|------------|
|                                                               |       |               |       |                    |       |             |       |                             |       |                             |       |
| Gross Profit                                                       |       | $                  | 2,296,550  |                    | N/A        |             | $          | 1,593,242                        |       | $                                | 70,383     |   | $ | 632,925 |   |
|                                                               |       |               |       |                    |       |             |       |                             |       |                             |       |
| SG&A Expense(2)                                                |       | $                  | (4,214,422 | )                       | $          | (1,942,020       | )(3)       | $                                | (1,259,716 | )                                | $          | (620,720 | ) | $ | (391,966 | ) |
|                                                               |       |               |       |                    |       |             |       |                             |       |                             |       |
| Interest                                                           |       | $                  | (129,346   | )                       | $          | (119,347         | )          | $                                | (9,409     | )                                | $          | (456 | ) | $ | (134 | ) |
| Depreciation/Amortization                                          |       | $                  | (416,441   | )                       | $          | (177,504         | )          | $                                | (236,519   | )                                | $          | (2,344 | ) | $ | (73 | ) |
| Other Income (Expense)                                             |       | $                  | 109,157    |                    | $          | 94,291           |       | $                                | 21,247     |                             | $          | (6,381 | ) | $ | 0 |   |
|                                                               |       |               |       |                    |       |             |       |                             |       |                             |       |
| 2007 Net Profit (Loss) from Continuing Operations Only             |       | $                  | (2,354,502 | )                       | $          | (2,144,280       | )          | $                                | 108,845    |                             | $          | (559,518 | ) | $ | 240,752 |   |
|                                                               |       |               |       |                    |       |             |       |                             |       |                             |       |
| **2007 Continuing and Discontinued Operations(1)**                 |       |               |       |                    |       |             |       |                             |       |                             |       |
|                                                               |       |               |       |                    |       |             |       |                             |       |                             |       |
| Profit (Loss) on Write Down of Discontinued Operations             |       | $                  | (3,949,395 | )                       |       |             |       |                             |       |                             |       |   |
| Gain (Loss) on Disposition of Discontinued Operations              |       | $                  | 4,706      |                    |       |             |       |                             |       |                             |       |   |
| Tax Provision                                                      |       | $                  | (403,995   | )                       |       |             |       |                             |       |                             |       |   |
|                                                               |       |               |       |                    |       |             |       |                             |       |                             |       |
| 2008 Net Profit (Loss) from Continuing and Discontinued Operations |       | $                  | (6,703,186 | )                       |       |             |       |                             |       |                             |       |   |

 

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| ** **                                                         | ** ** | ** **   | ** ** | ** **    | ** ** | ** **  | ** ** | **NWB**      | ** ** | **NWB**      | ** ** |
|--------------------------------------------------------------------|------------|--------------|------------|---------------|------------|-------------|------------|--------------|------------|--------------|------------|
| ** **                                                         | ** ** | ** **   | ** ** | ** **    | ** ** | ** **  | ** ** | **Networks** | ** ** | **Networks** | ** ** |
| **2008 Continuing**                                           | ** ** | **Company-** | ** ** | **Corporate** | ** ** | **NWB**     | ** ** | **(non-**    | ** ** | **(TELES**   | ** ** |
| **Operations(1)**                                                  | ** ** | **Wide**     | ** ** | **Expenses**  | ** ** | **Telecom** | ** ** | **TELES)**   | ** ** | **only)**    | ** ** |
|                                                               |       |         |       |          |       |        |       |         |       |         |       |
| Gross Profit                                                       |       | $            | 4,249,436  |          | N/A        |        | $          | 2,128,992    |       | $            | 152,270    |   | $ | 1,968,174 |   |
|                                                               |       |         |       |          |       |        |       |         |       |         |       |
| SG&A Expense(2)                                                |       | $            | (5,299,722 | )             | $          | (2,586,000  | )(3)       | $            | (1,487,343 | )            | $          | (559,827 | ) | $ | (666,551 | ) |
|                                                               |       |         |       |          |       |        |       |         |       |         |       |
| Interest                                                           |       | $            | (99,076    | )             | $          | (84,211     | )          | $            | (14,794    | )            | $          | 0 |   | $ | (71 | ) |
| Depreciation/Amortization                                          |       | $            | (543,195   | )             | $          | (178,262    | )          | $            | (360,918   | )            | $          | (938 | ) | $ | (3,078 | ) |
| Other Income (Expense)                                             |       | $            | 63,005     |          | $          | 48,208      |       | $            | 14,774     |         | $          | 23 |   | $ | 0 |   |
|                                                               |       |         |       |          |       |        |       |         |       |         |       |
| 2008 Net Profit (Loss) from Continuing Operations Only             |       | $            | (1,692,552 | )             | $          | (2,800,265  | )          | $            | 280,711    |         | $          | (408,472 | ) | $ | 1,298,474 |   |
|                                                               |       |         |       |          |       |        |       |         |       |         |       |
| **2008 Continuing and Discontinued Operations(1)**                 |       |         |       |          |       |        |       |         |       |         |       |
|                                                               |       |         |       |          |       |        |       |         |       |         |       |
| Profit (Loss) on Write Down of Discontinued Operations             |       | $            | 0          |          |       |        |       |         |       |         |       |   |
| Gain (Loss) on Disposition of Discontinued Operations              |       | $            | 0          |          |       |        |       |         |       |         |       |   |
| Tax Provision                                                      |       | $            | 0          |          |       |        |       |         |       |         |       |   |
|                                                               |       |         |       |          |       |        |       |         |       |         |       |
| 2008 Net Profit (Loss) from Continuing and Discontinued Operations |       | $            | 0          |          |       |        |       |         |       |         |       |   |

 

----

| (1)    |   | 2008 is presented in a  manner consistent with 2007 for comparison purposes, though the operations of  our former subsidiary, IP Gear, Ltd., were discontinued and sold in 2007.                                                           |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                       |
| (2)    |   | Includes management’s  determination of sales, general, and administrative expenses directly  allocable to each division or line of business.                                                                                         |
|   |   |                                                                                                                                                                                                                                       |
| (3)    |   | Includes indirectly  allocable expenses, which include, for example, legal, and accounting fees,  costs of SEC compliance, costs of leasing and operating our facilities in  Eugene, Oregon, and certain executive-level management costs. |

 

**Liquidity**

 

The results of theCompany’s activities over the course of 2008 have weakened the Company’sliquidity position as of December 31, 2008 as compared to its position asof December 31, 2007. The following comparison of the current assets andliabilities from December 31, 2007 to December 31, 2008, shows amodest decline in the ratio of current assets to current liabilities (by12.4%), a substantial decline in the quick ratio (by 50%), and a significantdecline in cash position (by 75%).

 
| ** **                                                         | ** ** | **2007** | ** ** | **2008** | ** ** |
|--------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Cash                                                               |       | $        | 2,038,635  |     | $          | 541,116 |   |
| Current Assets                                                     |       | $        | 4,562,197  |     | $          | 4,311,544 |   |
| Current Liabilities                                                |       | $        | 2,274,814  |     | $          | 2,451,979 |   |
| Current Ratio (current  assets to current liabilities)             |       | 2.01:1   |       | 1.76:1   |       |
| Quick Ratio (cash and  accounts receivable to current liabilities) |       | 1.35:1   |       | 0.62:1   |       |

 

The deterioration in ourliquidity position in 2008 was due to three primary elements. First, lossessuffered during 2008 have had a negative impact on our reserves, particularlyour cash reserves. Second, the company invested in more “available for sale”inventory to attempt to compensate for lost sales in the 2007 and the firstquarter of 2008 due to inventory shortages. Third, to the Company invested morein prepayments in the NWB Telecom division in order to obtain better costefficiencies that resulted in steadily increased margins from 2007 through2008, but resulted in losses in the fourth quarter of 2008 when the Companylost supply from certain key vendors in the Company’s NWB Telecomdivision.  The second and third elementsreflect an investment of liquid assets intended to improve profits in both theNWB Telecom and NWB Networks divisions. However, with an unexpected loss ofsupply in the NWB Telecom division, and an unexpected rapid decrease in salesin the NWB Networks division, the Company now hopes to pull back thoseinvestments and increase liquidity, particularly cash reserves,in an attempt tomeet its contractual payment obligations. The table below lists all contractualpayment obligations of the company over time.

 

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| **Contractual**              | ** ** | ** ** | ** ** | ** **          | ** ** | ** **         | ** ** | ** **         | ** ** | ** **           | ** ** |
|------------------------------|------------|------------|------------|---------------------|------------|--------------------|------------|--------------------|------------|----------------------|------------|
| **Payment Obligations** | ** ** | **Total**  | ** ** | **<1 Year** | ** ** | **2-3 Years** | ** ** | **3-5 Years** | ** ** | **>5 Years** | ** ** |
|                         |       |       |       |                |       |               |       |               |       |                 |       |
| Long Term Debt               |       | $          | 1,665,994  |                | $          | 14,954             |       | $                  | 15,733     |                 | $          | 1,650,000 |   | — |   |
|                         |       |       |       |                |       |               |       |               |       |                 |       |
| Capital Leases               |       | $          | 190,524    |                | $          | 93,746             |       | $                  | 93,766     |                 | $          | 3,012 |   | — |   |
|                         |       |       |       |                |       |               |       |               |       |                 |       |
| Operating Leases             |       | $          | 373,312    |                | $          | 146,764            |       | $                  | 193,776    |                 | $          | 32,772 |   | — |   |
|                         |       |       |       |                |       |               |       |               |       |                 |       |
| Purchase Obligations         |       | —     |       | —              |       | —             |       | —             |       | —               |       |
|                         |       |       |       |                |       |               |       |               |       |                 |       |
| Other Long Term Ob.          |       | —     |       | —              |       | —             |       | —             |       | —               |       |
|                         |       |       |       |                |       |               |       |               |       |                 |       |
| Total                        |       | $          | 2,229,830  |                | $          | 255,464            |       | $                  | 303,275    |                 | $          | 1,685,784 |   | — |   |

 

The majority ofcontractual obligations are weighted towards the 3 to 5 year period in thetable and the short term contractual obligations are less significant for thecompany.  This means the need for higherliquidity in the short term may not appear as pressing as it is in the longerterm.  Nonetheless, the company is in aweaker position with respect to both measures of financial capability at theend of 2008 than it was at the end of 2007.

 

The results of operationsduring 2008 as reflected in the Statements of Cash Flows show a usage of cashin the business of just less than $2 million as compared with approximately$2.3 million in 2007.  The improvement isprimarily due to reduction in the Company’s operating loss for 2008 as comparedto 2007. Part of the use of cash was to increase inventory andprepayments. However, a more substantial use of cash in 2008 has been to fundcontinuing operating losses, and we expect that operating losses will continueto consume cash if operating losses cannot be reversed in 2009. Under currenteconomic conditions it may be likely that operating losses will furtherdiminish the Company’s liquidity position in 2009.

 

During 2008 andthe start of 2009, the company drew the maximum amount of funds from its variouslines of credit and at this time has no additional lines of credit upon whichto draw, and has secured no additional sources of equity investment.

 

We have started taking steps to improve our liquidityposition. The Company has made temporary payment terms with TELES, its primaryNWB Networks vendor, to match disbursements of trade payables to TELES with thetiming of cash receipts from NWB Networks sales.  We are also moving to a model of tightermanagement of our prepayments with our vendors in the NWB Telecom division bybetter information management and a more responsive set of processes andprocedures to draw down prepayment and equipment investments to a smallerpercentage of our total assets.  Thecompany has also taken steps to reduce its Selling, General and Admin expensesover the last six months, in an attempt to reduce use of cash and reduceinvestment in illiquid assets. Ultimately, however, we feel it will be difficult to improve thecompany’s asset ratios in the current economic climate and there may bevariables beyond our control that will affect the degree to which we canimprove liquidity, and despite our efforts the Company’s cash position hascontinued to decline in 2009.

 

*Capital Expenditures.*

 

In 2008 we increased our investment in switchingand termination capacity of  the NWBTelecom division.. In the past, our primary investment in capital had beenfocused on funding the R&D efforts of our former IP Gear, Ltd. subsidiary.In the first six months of 2007, the Company made investments in thissubsidiary, until it was sold on July 1, 2007. These capital expenditures arereferred to as “Discontinued Operations” in our current financial statements.Capital expenditures by the Company for equipment providing the infrastructureof our telecom services division, NWB Telecom, are referred to as “ContinuingOperations” in our current financial statements. Capital expenditures ofContinuing Operations for 2007 also include certain expenditures associatedwith equity-based financing activities. The following chart provides acomparative representation of the capital expenditures and disposals forContinuing Operations over the last seven quarters:

 
| ** **                                              | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                    |       |     |       |     |       |
| Capital Expenditures,  Continuing Operations            |       | $        | 551,336    |     | $          | 284,044 |   |
|                                                    |       |     |       |     |       |
| Capital Expenditures,  Discontinued Operations          |       | $        | 0          |     | $          | 748,858 |   |
|                                                    |       |     |       |     |       |
| Depreciation and  Amortization, Continuing Operations   |       | $        | 515,313    |     | $          | 406,152 |   |
|                                                    |       |     |       |     |       |
| Depreciation and  Amortization, Discontinued Operations |       | $        | 0          |     | $          | 1,157,308 |   |

 

**Capital Expenditures of ContinuingOperations of New World Brands**

 

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**Additionsand Disposals over the Last Eight Quarters**

 
| ** ** | ** ** | ** ** | ** ** | **Additions** | ** ** | **Dispositions** | ** ** | **Net Additions** | ** ** |
|------------|------------|------------|------------|---------------|------------|------------------|------------|------------------------|------------|
|       |       |       |       |          |       |             |       |                   |       |
| Q1         |       | 2007       |       | 142,810       |       | —           |       | 142,810                |       |
|       |       |       |       |          |       |             |       |                   |       |
| Q2         |       | 2007       |       | 1,809         |       | (12,609          | )          | (10,800                | )          |
|       |       |       |       |          |       |             |       |                   |       |
| Q3         |       | 2007       |       | 20,449        |       | (95,730          | )          | (75,281                | )          |
|       |       |       |       |          |       |             |       |                   |       |
| Q4         |       | 2007       |       | 227,315       |       | —           |       | 227,315                |       |
|       |       |       |       |          |       |             |       |                   |       |
| Q1         |       | 2008       |       | 147,746       |       | (60,928          | )          | 86,818                 |       |
|       |       |       |       |          |       |             |       |                   |       |
| Q2         |       | 2008       |       | 272,400       |       | (1,606           | )          | 270,794                |       |
|       |       |       |       |          |       |             |       |                   |       |
| Q3         |       | 2008       |       | 26,534        |       | (30,432          | )          | (3,898                 | )          |
|       |       |       |       |          |       |             |       |                   |       |
| Q4         |       | 2008       |       | 104,656       |       | (54,089          | )          | 50,567                 |       |

 

**ComparativeTwelve Month Ending December 31,**

 
|   |   | 2007       |   | 392,383 |   | (108,339 | )      | 284,044 |   |
|--------|--------|------------|--------|---------|--------|----------|--------|---------|--------|
|   |   |       |   |    |   |     |   |    |   |
|   |   | 2008       |   | 551,336 |   | (147,055 | )      | 404,281 |   |
|   |   |       |   |    |   |     |   |    |   |
|   |   | Change (%) |   |    |   |     |   | 42.33   | %      |

 

The purpose of theincreased purchasing of equipment for the NWB Telecom division was to gaincapacity and improve the sophistication of the equipment to provide a morerobust switching platform with the expectations of increased revenues andgreater uptime. We have had challenges in implementing and bringing thetechnology to its full operating capabilities and have had reductions incapacity during this process that have negatively impacted revenues in thefourth quarter of 2008.

 

All of our investment incapital resources is directly for equipment and the building of the expertiseto operate this equipment. We are not engaged in any way in any research anddevelopment or the building of any intellectual property as a result of thisinvestment.

 

*FutureCapital Needs.*

 

Capital expenditures areprimarily related to investments made in the switching and termination  equipment used to operate the NWB Telecomdivision. We also plan to increase expenditures in relation to expansion of ourcustomer support capacity and training services for the NWB Networks business.However, the Company’s ability to pursue its current business plan withoutseeking additional debt- or equity-based capital is entirely dependent onmanagement’s ability to increase revenues at current or higher gross margins,while decreasing overall Company costs relative to gross profits, and there canbe no assurance that management will achieve its goals. In the current climatefor raising debt financing, we may be unwilling or unable to raise funds due tothe high cost of debt and or equity.  Muchof the investment for NWB Telecom has been made in the past 24 months and theexpectation is for less investment required after the first quarter of 2009 ascompared to 2008.  In the NWB Networksdivision, capital expenditures are important in limited amounts due the natureof our business being primarily focused on marketing, sales and support oftelecommunications equipment and solutions.

 

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**Management Changes**

 

Noah Kamrat,formerly our President and Chief Operations Officer, resigned from thosepositions effective January 24, 2008, in order to assume the position ofChief Technology Officer. M. David Kamrat, who also serves as Chief ExecutiveOfficer and a director, assumed the duties of President, and Shehryar Wahid,who also serves as Chief Financial Officer, Secretary, Treasurer, and adirector, assumed the duties of Chief Operations Officer. These changes to keymanagement positions are intended to address a potential void in our managementteam resulting from the sale of our IP Gear, Ltd. subsidiary. Upon the sale ofour IP Gear, Ltd. subsidiary, we divested ourselves of our R&D andmanufacturing business, and as a result lost the core of our in-housetechnology expertise in the VoIP industry, particularly with respect to newproducts and emerging trends in VoIP network equipment and its deployment. NoahKamrat is particularly well suited to assuming the role of Chief TechnologyOfficer due to his depth and breadth of experience selling and operating VoIPservice networks, and selling, developing and deploying VoIP technologyequipment. We believe that, in the role of Chief Technology Officer, Mr. Kamratwill be able to better position the Company to take advantage of emergingproduct and service trends, and enable the Company to work closely with TELESto identify and serve emerging markets and uses for TELES and IP Gear, Ltd.products.

 

On and effective April 30,2008, Abe Narkunski resigned as Vice President of Operations of the Company’sNWB Telecom division. Noah Kamrat will assume Mr. Narkunski’s duties asrelate to NWB Telecom and will continue to serve as the Company’s ChiefTechnology Officer.

 

**Critical Accounting Policies**

 

The Securities and Exchange Commission recently issued“Financial Reporting Release No. 60 Cautionary Advice Regarding DisclosureAbout Critical Accounting Policies” (“FRR 60”), suggesting companies provideadditional disclosures, discussion and commentary on those accounting policiesconsidered most critical to its business and financial reporting requirements.FRR 60 considers an accounting policy to be critical if it is important to theCompany’s financial condition and results of operations, and requiressignificant judgment and estimates on the part of management in the applicationof the policy. For a summary of the Company’s significant accounting policies,including the critical accounting policies discussed below, please refer to theaccompanying notes to the financial statements.

 

The Company assesses potential impairment of its long-livedassets, which include its property and equipment, investments, and itsidentifiable intangibles such as deferred charges under the guidance of SFAS144 “Accounting for the Impairment or Disposal of Long-Lived Assets”. TheCompany must continually determine if a permanent impairment of its long-livedassets has occurred, and write down the assets to their fair values and chargecurrent operations for the measured impairment.

 

**ITEM 7A.****                                           ****QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Thissection is not applicable to the Company.

 

**ITEM 8.**                                                     **FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

 

The Company’s financialstatements for the fiscal year ended December 31, 2008 are included inthis annual  report, beginning on page F-1.

 

**ITEM 9.**                **CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURE**

 

None.

 

**ITEM 9A(T).**                            **CONTROLS AND PROCEDURES**

 

**DisclosureControls and Procedures**

 

As of the end of the periodcovered by this report, the Company has carried out an evaluation under thesupervision and with the participation of its management, including its ChiefExecutive Officer and its Chief Financial Officer of the effectiveness of thedesign and operation of its disclosure controls and procedures as defined in Rules 13a-15(e) and15d- 15(e) under the Securities Exchange Act of 1934. Based upon thatevaluation, the Chief Executive Officer and Chief Financial Officer concludedthat, at December 31, 2008, the Company’s disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934) were effective in ensuring thatinformation required to be disclosed in the reports the Company files andsubmits under the Exchange Act are recorded, processed, summarized and reportedas and when required.

 

**Management’sReport on Internal Control Over Financial Reporting**

 

Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting, as defined in Rule 13a-15(f) and Rule 15d-15(f) underthe Exchange Act. Management must evaluate its internal controls over financialreporting, as required by the Sarbanes-Oxley Act. The Company’s internalcontrol

 

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over financial reportingis a process designed under the supervision of the Company’s management toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of the Company’s financial statements for external purposesin accordance with U.S. generally accepted accounting principles (“GAAP”). Ourmanagement conducted an evaluation of the effectiveness of our internal controlover financial reporting based on the criteria for effective internal controlover financial reporting established in the Internal Control-IntegratedFramework issued by the Committee of Sponsoring Organizations of the Treadway Commission(“***COSO***”) and SEC guidance onconducting such assessments. Based on this evaluation, our management concludedthat our internal control over financial reporting was effective as of December 31,2008.

 

This Annual Report on Form 10-Kdoes not include an attestation report of our independent registered publicaccounting firm regarding internal control over financial reporting. Management’sreport was not subject to attestation by our independent registered publicaccounting firm pursuant to rules of the Securities and ExchangeCommission that permit us to provide only management’s report in this AnnualReport on Form 10-K.

 

**Changesin Internal Controls Over Financial Reporting**

 

There has been no changein our internal controls over financial reporting during the three month periodended December 31, 2008 that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

 

**ITEM 9B.**                                            **OTHER INFORMATION**

 

None.

 

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**PART III**

 

**ITEM 10.**               **DIRECTORS,EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE;**

 

**Directors and Officers**

 

As a result of theapproval of our Amended and Restated Certificate of Incorporation, effective April 24,2007, a staggered Board, divided into three classes, was created: (i) theinitial term for Class I directors due to expire at the 2007 annualmeeting of stockholders; (ii) the initial term for Class II directorsdue to expire at the 2008 annual meeting of stockholders; and (iii) theinitial term for Class III directors will expire at the 2009 annualmeeting of stockholders. Existing directors were assigned to the followingclasses: Noah R. Kamrat, Class II; M. David Kamrat, Class III; andJacob Schorr, Ph.D., Class III.

 

Effective August 20,2007, Noah Kamrat resigned as a member of the Board, and continued to serve asPresident and Chief Operating Officer of the Company. Also effective August 20,2007, Dr. Selvin Passen joined the Board as a Class II member.

 

Effective January 24,2008, Noah Kamrat resigned as President and Chief Operations Officer of theCompany and was appointed by the Board to serve as the Company’s ChiefTechnology Officer and Vice President of Operations. Effective January 24,2008, the Board appointed M. David Kamrat, who at that time served as the ChiefExecutive Officer of the Company and as the Chairman of the Board, to alsoserve as President of the Company. Also effective January 24, 2008, theBoard appointed Shehryar Wahid, who currently serves as the Company’s ChiefFinancial Officer and Secretary and is a member of the Board to also serve asChief Operations Officer and Treasurer of the Company.

 

As a result of theforegoing changes, the executive officers and directors of the Company as of March 6,2009 are as follows:

 
| **Name**               | ** ** | **Age** | ** ** | **Position(s)**                                                                       |
|------------------------|------------|---------|------------|---------------------------------------------------------------------------------------|
|                   |       |    |       |                                                                                  |
| M. David Kamrat        |       | 56      |       | Chief Executive  Officer, President and Chairman of the Board                         |
| Noah R. Kamrat         |       | 38      |       | Chief Technology  Officer and Vice President of Operations                            |
| Shehryar Wahid         |       | 44      |       | Chief Financial  Officer, Chief Operations Officer, Secretary, Treasurer and Director |
| Selvin Passen, M.D.    |       | 74      |       | Director                                                                              |
| Jacob M. Schorr, Ph.D. |       | 64      |       | Director                                                                              |

 

**M. David Kamrat** has served as the Company’s Chief Executive Officerand Chairman of the Board since September 15, 2006, the date on which theCompany acquired the Qualmax business. On January 24, 2008, Mr. Kamratwas appointed President of the Company. Prior to that, Mr. Kamrat servedas Chief Executive Officer and Chairman of the Board of Directors of Qualmax;he held both positions since he founded Qualmax in 2001. From 1999 - 2004, Mr. Kamratoperated 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. Kamrathad a successful career in construction and land development.

 

**Noah Kamrat** served as the Company’s President and as a directorsince September 15, 2006, the date on which the Company acquired theQualmax business. On August 20, 2007 Mr. Kamrat resigned as adirector. On

 

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January 24, 2008, Mr. Kamratresigned as President and Chief Operations Officer and was appointed ChiefTechnology Officer and Vice President of Operations. Prior to that, Mr. Kamratserved as President, Chief Operating Officer, and as a director of Qualmax,which positions he held since 2002. From 1998 to 2002, Mr. Kamrat servedas President of Synergyx Communications Group, an IP consulting and technologycompany. In 1998, Mr. Kamrat served as a director of National Accounts forFrontier Communications (Global) located in Miami, Florida. Mr. Kamrat wasa sales consultant specializing in long distance and Internet services for MCIfrom 1994 to 1997

 

**Shehryar Wahid** has served as the Company’s Chief Financial Officersince February 1, 2007, and as Chief Operations Officer, Secretary, andTreasurer since January 24, 2008. Mr. Wahid has served as a directorof the Company since August 20, 2007. From approximately September 2006through January 2007, Mr. Wahid acted as a consultant to the Company.Mr. Wahid has over the last 16 years held various executive levelpositions in finance and operations in the telecommunications and logisticsindustries, and has worked both as an auditor, for the Financial Services Groupat Ernst & Young, and as a controller and chief financial officer fora number of telecommunications companies. Mr. Wahid holds a CharteredAccountancy Designation from Canada and has substantial knowledge of U.S.-basedGAAP reporting requirements. Mr. Wahid received a B.S. in Biochemistryfrom the University of Toronto and a Business Degree from the University ofWestern Ontario’s Ivey School of Business.

 

**Selvin Passen, M.D.** has served as a director of the Company since August 20,2007. Prior to that, Dr. Passen served as the Company’s Chairman of theBoard from May 22, 2004 to September 15, 2006. Dr. Passen is aretired pathologist who was the Medical Director of Maryland Medical Laboratory, Inc.,a subsidiary of Corning, Inc., until 1994. Since then, Dr. Passen hasbeen involved in real estate development and is the principal holder inBaltimore Marine Center in Baltimore, Maryland, and Lauderdale Marine Center inFort Lauderdale, Florida.

 

**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 2000to July 2006, Dr. Schorr served as Chief Executive Officer and adirector of Spirit Airlines, Inc., and as Chairman of the Board of SpiritAirlines, Inc. from February 2004 to July 2006. From 1997 until2000, Dr. Schorr served as Spirit Airline’s Chief Information Officer.From 1977 until 1994, Dr. Schorr served in various management capacitiesat Maryland Medical Laboratory, and he served as Vice President of CorningClinical Laboratories from 1994 to 1996.

 

**FamilyRelationships**

 

M. David Kamrat is the father of Noah Kamrat.

 

**Section 16(a) BeneficialOwnership Reporting Compliance**

 

Section 16(a) of the Exchange Act requiresour officers, directors, and persons who beneficially own more than 10% of aregistered class of our equity securities (“10% stockholders”) to file reportsof ownership and changes in ownership with the SEC. Officers, directors, and10% stockholders also are required to furnish us with copies of all Section 16(a) formsthey file.

 

To our knowledge, based solely upon a review of thecopies of such reports furnished to us and written representations that noother reports were required during fiscal 2008, the Company’s directors,executive officers and 10% stockholders have complied with all Section 16(a) filingrequirements, as applicable.

 

**Code ofEthics**

 

The Company has adopted a Code of Ethics that appliesto its principal executive officer, principal financial officer, principalaccounting officer or controller and all other employees and directors of theCompany and its subsidiaries. The Company has posted its Code of Ethics on itswebsite (www.nwbtechnologies.com), which is available in print at the requestof any stockholder who calls the Company’s offices at 541-868-2900 and requestssame.

 

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**Committees of the Board of Directors**

 

Pursuant to our Bylaws, our Board of Directors (“***Board***”) may establish committees ofone or more directors from time to time, as it deems appropriate. Our commonstock is currently quoted on the OTC Bulletin Board electronic tradingplatform, which does not maintain any standards requiring us to establish ormaintain an Audit, Nominating, or Compensation committee. As of December 31,2008, our Board of Directors maintains an Audit Committee and CompensationCommittee.

 

Additionally, the OTC Bulletin Board electronictrading platform does not maintain any standards regarding the “independence”of the directors on our Company’s Board, and we are not otherwise subject tothe requirements of any national securities exchange or an inter-dealerquotation system with respect to the need to have a majority of our directorsbe independent. In the absence of such requirements, we have elected to use thedefinition for “director independence” under the NASDAQ stock market’s listingstandards, which defines an “independent director” as “a person other than anofficer or employee of us or its subsidiaries or any other individual having arelationship, which in the opinion of our Board, would interfere with theexercise of independent judgment in carrying out the responsibilities of adirector.” The definition further provides that, among others, employment of adirector by us (or any parent or subsidiary of ours) at any time during thepast three years is considered a bar to independence regardless of thedetermination of our Board.

 

***AuditCommittee***

 

The Company’s entire Board acts as our auditcommittee. Selvin Passen serves as our audit committee chairman, and JacobSchorr is the committee’s financial expert. No member of our audit committee is“independent” under NASDAQ’s listing standards. However, due to their combinedbusiness and financial experience and because our common stock is not currentlylisted on any of the NASDAQ stock markets, we believe that ouremployee-directors can competently perform the functions required of them asmembers of our Audit Committee. 

 

***CompensationCommittee***

 

The Company’s entire board acts as our compensationcommittee. Selvin Passen serves as our compensation committee chairman. Nomember of our compensation committee is independent; however, due to theircombined business and financial experience and because our common stock is notcurrently listed on any of the NASDAQ stock markets, we believe that ouremployee-directors can competently perform the functions required of them asmembers of our Compensation Committee.

 

**ITEM 11.               EXECUTIVECOMPENSATION**

 

The following table sets forth compensation earned,whether paid or deferred, by our Chief Executive Officer, Chief FinancialOfficer, President, General Counsel, and Secretary, our most highly compensatedexecutive officers who earned over $100,000 during the 2008 fiscal year(collectively, the “***NamedExecutive Officers***”), for services rendered in all capacities to us during fiscal yearsended December 31, 2008 and 2007.

 

**SummaryCompensation Table**

 

The following table sets forth the compensation of theNamed Executive Officers of the Company for the Company’s last two completedfiscal years:

 

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| **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)                       |       | 2007     |       | $               | 150,000    |           | $          | 0                      |       | $                       | 0          |                                                   | $          | 0                                             |       | $                                     | 0          |           | $          | 0 |   | $ | 0 |   | $ | 150,000 |   |
| CEO  , President, & Chairman |       | 2008     |       | $               | 267,962    |           | $          | 0                      |       | $                       | 0          |                                                   | $          | 0                                             |       | $                                     | 0          |           | $          | 0 |   | $ | 0 |   | $ | 267,962 |   |
|                                       |       |     |       |            |       |           |       |                   |       |                    |       |                                                   |       |                                          |       |                                  |       |           |       |
| Noah  Kamrat (2)                           |       | 2007     |       | $               | 140,000    |           | $          | 0                      |       | $                       | 0          |                                                   | $          | 0                                             |       | $                                     | 0          |           | $          | 0 |   | $ | 0 |   | $ | 140,000 |   |
| President &  Director             |       | 2008     |       | $               | 217,396    |           | $          | 0                      |       | $                       | 0          |                                                   | $          | 0                                             |       | $                                     | 0          |           | $          | 0 |   | $ | 0 |   | $ | 217,396 |   |
|                                       |       |     |       |            |       |           |       |                   |       |                    |       |                                                   |       |                                          |       |                                  |       |           |       |
| Ian  R. Richardson (3)                     |       | 2007     |       | $               | 120,000    |           | $          | 20,000                 |       | $                       | 0          |                                                   | $          | 0                                             |       | $                                     | 0          |           | $          | 0 |   | $ | 0 |   | $ | 140,000 |   |
| Vice  President, General Counsel           |       | 2008     |       | 0               |       | $              | 0          |                   | $          | 0                       |       | $                                                      | 0          |                                          | $          | 0                                     |       | $              | 0          |   | $ | 0 |   | $ |   |   |
|                                       |       |     |       |            |       |           |       |                   |       |                    |       |                                                   |       |                                          |       |                                  |       |           |       |
| Duy  Tran (4)                              |       | 2007     |       | $               | 120,000    |           | $          | 0                      |       | $                       | 0          |                                                   | $          | 0                                             |       | $                                     | 0          |           | $          | 0 |   | $ | 0 |   | $ | 120,000 |   |
| Vice  President, Secretary                 |       | 2008     |       | 0               |       | $              | 0          |                   | $          | 0                       |       | $                                                      | 0          |                                          | $          | 0                                     |       | $              | 0          |   | $ | 0 |   |   |   |
|                                       |       |     |       |            |       |           |       |                   |       |                    |       |                                                   |       |                                          |       |                                  |       |           |       |
| Shehryar  Wahid (5)                        |       | 2007     |       | $               | 110,000    |           | $          | 0                      |       | $                       | 0          |                                                   | $          | 0                                             |       | $                                     | 0          |           | $          | 0 |   | $ | 0 |   | $ | 110,000 |   |
| Chief  Financial Officer                   |       | 2008     |       | $               | 200,234    |           | $          | 0                      |       | $                       | 0          |                                                   | $          | 0                                             |       | $                                     | 0          |           | $          | 0 |   | $ | 0 |   | $ | 200,234 |   |
|                                            |            |          |            |                 |            |                |            |                        |            |                         |            |                                                        |            |                                               |            |                                       |            |                |            |  |  |  |  |  |  |  |  |  |

 

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| (1)    | Mr. M. David Kamrat 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—Company History—2006 reverse acquisition of Qualmax, Inc.”). |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                              |
| (2)    | Mr. Noah Kamrat served as the Company’s  President, Chief Operating Officer from September 15, 2000 until January 24,  2007, and since January 24, 2007 has served as the Company’s Chief  Technology Officer and Vice President of Operations.                                                     |
|   |                                                                                                                                                                                                                                                                                                                              |
| (3)    | Mr. Richardson served as Chief Financial  Officer of the Company from September 15, 2006 to January 31, 2007,  and from September 15, 2006 until August 1, 2007, served as General  Counsel and Vice President.                                                                                          |
|   |                                                                                                                                                                                                                                                                                                                              |
| (4)    | Mr. Tran served as the Company’s Vice President  and Secretary from September 15, 2006 until August 1, 2007.                                                                                                                                                                                                  |
|   |                                                                                                                                                                                                                                                                                                                              |
| (5)    | Mr. Wahid has served as the Company’s Chief  Financial Officer since February 1, 2007.                                                                                                                                                                                                                             |

 

**EmploymentAgreements**

 

We do not have any employment agreements with ourNamed Executive Officers or any other employee of the Company. There are noarrangements between us and our Named Executive Officers or any other employeewith respect to severance payments or other benefits following termination ofthe employee’s employment with our Company.

 

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**OutstandingEquity 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 |   | 0 |   |
| Noah  Kamrat     |       | 0                                                                                  |       | 0                                                                                    |       | 0 |   | $ | 0 |   | n/a |   | 0 |   | $ | 0 |   | 0 |   | 0 |   |
| Ian  Richardson  |       | 0                                                                                  |       | 0                                                                                    |       | 0 |   | $ | 0 |   | n/a |   | 0 |   | $ | 0 |   | 0 |   | 0 |   |
| Duy  Tran        |       | 0                                                                                  |       | 0                                                                                    |       | 0 |   | $ | 0 |   | n/a |   | 0 |   | $ | 0 |   | 0 |   | 0 |   |
| Shehryar  Wahid  |       | 0                                                                                  |       | 0                                                                                    |       | 0 |   | $ | 0 |   | n/a |   | 0 |   | $ | 0 |   | 0 |   | 0 |   |

 

**DirectorCompensation**

 

None of the directors on our Board receivescompensation solely for their services as directors. Directors, however, areentitled to receive compensation for services unrelated to their service as adirector to the extent that they provide such unrelated services to theCompany. See Item 13 “Certain Relationships and Related Transactions” below.

 

**Option/SARGrants in the Last Fiscal Year**

 

The following table reflects option grants to ourexecutive officers during fiscal year 2008:

 
| **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 |       | 0                                                                                      |       | 0                                                                                                                |       | 0                                                            |       | 0                          |       |
| Noah Kamrat               |       | 0                                                                                      |       | 0                                                                                                                |       | 0                                                            |       | 0                          |       |
| Duy Tran                  |       | 0                                                                                      |       | 0                                                                                                                |       | 0                                                            |       | 0                          |       |
| Ian Richardson            |       | 0                                                                                      |       | 0                                                                                                                |       | 0                                                            |       | 0                          |       |
| Shehryar Wahid            |       | 0                                                                                      |       | 0                                                                                                                |       | 0                                                            |       | 0                          |       |

 

**AggregateOption Exercises and Fiscal Year-End Option Values**

 

The following table sets forth certain informationrelating to the exercise of stock options during the 2008 fiscal year for eachof our executive officers and provides the fiscal year-end value of theunexercised 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 |       | 0                    |       | $            | 0          |                                                                           | 0          |                                                                                             | 0          |   | $ | 0 |   | $ | 0 |   |
| Noah Kamrat          |       | 0                    |       | $            | 0          |                                                                           | 0          |                                                                                             | 0          |   | $ | 0 |   | $ | 0 |   |
| Duy Tran             |       | 0                    |       | $            | 0          |                                                                           | 0          |                                                                                             | 0          |   | $ | 0 |   | $ | 0 |   |
| Ian Richardson       |       | 0                    |       | $            | 0          |                                                                           | 0          |                                                                                             | 0          |   | $ | 0 |   | $ | 0 |   |
| Shehryar Wahid       |       | 0                    |       | $            | 0          |                                                                           | 0          |                                                                                             | 0          |   | $ | 0 |   | $ | 0 |   |

 

**ITEM 12.****                ****SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND  RELATEDSTOCKHOLDER MATTERS**

 

 

The following table sets forth certain information asof March 6, 2009, with respect to (i) those persons known to usto beneficially own more than 5% of our voting securities, (ii) each ofour directors, (iii) each of our executive officers, and (iv) alldirectors and executive officers as a group. The information is determined in 

 

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accordance with Rule 13d-3 promulgated under theExchange Act. Except as indicated below, the beneficial owners have sole votingand dispositive power with respect to the shares beneficially owned.

 
| ** **                   | ** ** | ** **                                                                                                        | ** ** | **Beneficial Ownership** | ** ** |
|------------------------------|------------|-------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                   | ** ** | ** **                                                                                                        | ** ** | ** **                    | ** ** | **Percentage of** | ** ** |
| **Title of Class** | ** ** | **Name and Address of Beneficial  Owner(1)**                                                  | ** ** | **Number  of Shares**    | ** ** | **Class** | ** ** | **Total  Outstanding** | ** ** |
|                         |       |                                                                                                              |       |                          |       |   |   |   |   |
| Common Stock                 |       |                                                                                                              |       |                          |       |   |   |   |   |
|                         |       |                                                                                                              |       |                          |       |   |   |   |   |
|                         |       | M. David Kamrat(2)                                                                                                |       | 157,754,718                   | (3)        | 38.3 | % | 38.3 | % |
|                         |       |                                                                                                              |       |                          |       |   |   |   |   |
|                         |       | Noah Kamrat(4)                                                                                                    |       | 157,754,718                   | (5)        | 38.3 | % | 38.3 | % |
|                         |       |                                                                                                              |       |                          |       |   |   |   |   |
|                         |       | P&S Spirit LLC(6)  c/o Oregon Spirit LLC  2019 SW 20th Street, Suite 108  Fort Lauderdale, FL 33315 |       | 138,272,628                   | (7)        | 33.6 | % | 33.6 | % |
|                         |       |                                                                                                              |       |                          |       |   |   |   |   |
|                         |       | Dr. Selvin Passen(8)  2019 SW 20th Street, Suite 108  Fort Lauderdale, FL 33315                    |       | 100,854,402                   | (9)        | 24.5 | % | 24.5 | % |
|                         |       |                                                                                                              |       |                          |       |   |   |   |   |
|                         |       | Jacob Schorr, Ph.D.(10)                                                                                           |       | 69,136,314                    | (11)       | 16.8 | % | 16.8 | % |
|                         |       |                                                                                                              |       |                          |       |   |   |   |   |
|                         |       | Shehryar Wahid(12)                                                                                                |       | 25,000                        | (13)       | 0.00006 | % | 0.00006 | % |
|                         |       |                                                                                                              |       |                          |       |   |   |   |   |
|                         |       | B.O.S. Better Online Solutions Ltd.  Beit Rabin, Teradyon Industrial Park  Misgav 20170  Israel                   |       | 62,872,005                    | (14)       | 15.3 | % | 15.3 | % |
|                         |       |                                                                                                              |       |                          |       |   |   |   |   |
|                         |       | Total directors and executive officers as a group                                                                 |       | 327,770,434                   |       | 79.6. | % | 79.6 | % |

 

----

| (1) | Except as otherwise indicated, the address of each  beneficial owner is 340 West Fifth Avenue, Eugene, Oregon 97401. |
|-----|----------------------------------------------------------------------------------------------------------------------|

 
| (2) | M. David Kamrat serves as our President and Chief  Executive Officer, and our Chairman of the Board. |
|-----|------------------------------------------------------------------------------------------------------|

 
| (3) | Represents: (a) 55,570,887 shares of Common  Stock directly owned as a result of Mr. Kamrat’s prior direct ownership  interest in Qualmax; and (b) indirect beneficial ownership of 74,342,053  shares of Common Stock based on Mr. Kamrat’s wife, son and  daughter-in-law’s prior direct ownership interests in Qualmax; (c) direct  ownership of a warrant to purchase 13,888,889 shares of Common Stock  exercisable within the next 60 days; and (d) indirect beneficial  ownership of a warrant to purchase 13,888,889 shares of Common Stock based  upon Mr. Kamrat’s son’s direct ownership of a warrant to purchase shares  of Common Stock; and (e) direct ownership of 64,000 shares purchased  during Q4 2008 on the open market. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
| (4) | Noah Kamrat serves as our Chief Technology Officer,  and until August 20, 2007, served as a director. Mr. Kamrat is also  a director and a principal stockholder of Qualmax. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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|   | Mr. Kamrat is also a director and a principal  stockholder of Qualmax. |
|--------|-----------------------------------------------------------------------------|

 
| (5) | Represents: (a) 57,000,491 shares of Common  Stock directly owned as a result of Mr. Kamrat’s prior direct ownership  interest in Qualmax;and (b) indirect beneficial ownership of 72,912,449  shares of Common Stock based on Mr. Kamrat’s wife, father and mother’s  prior direct ownership interests in Qualmax; (c) direct ownership of a  warrant to purchase 13,888,889 shares of Common Stock exercisable within the  next 60 days; (d) indirect beneficial ownership of a warrant to purchase  13,888,889 shares of Common Stock based upon Mr. Kamrat’s father’s  direct ownership of a warrant to purchase shares of Common Stock.; and (e) indirect  beneficial ownership of 64,000 shares purchased by his father during Q4 on  the open market. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
| (6) | P&S Spirit is owned equally by Dr. Selvin  Passen and Jacob Schorr, Ph.D., both of whom are directors of the Company. |
|-----|--------------------------------------------------------------------------------------------------------------------------------|

 
| (7) | Represents: (a) 59,402,130shares of Common  Stock owned directly by P&S Spirit; and (b) a warrant, owned  directly by P&S Spirit, to purchase 27,777,778 shares of Common Stock  exercisable within the next 60 days; and (c) 51,092,720 shares of Common  Stock based upon P&S Spirit’s prior direct ownership interest in Qualmax. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
| (8) | Dr. Passen serves as a director of the Company. |
|-----|------------------------------------------------------|

 
| (9) | Represents: (a) 10,000,000 shares of Common  Stock directly owned by Dr. Passen; (b) 800,000 shares of Common  Stock indirectly beneficially owned by Dr. Passen based upon certain of  his children’s direct ownership of Common Stock; (c) 7,500,000 shares of  Common Stock indirectly beneficially owned based upon Dr. Passen’s  ownership of Oregon Spirit LLC, as a result of Oregon Spirit’s direct  ownership of shares of Common Stock; (d) another 4,667,235 shares of  Common Stock directly beneficially owned by Dr. Passen based on his  prior direct ownership interest in Qualmax; (e) 7,000,853 shares of  Common Stock indirectly beneficially owned by owned by Dr. Passen based  on his ownership interest in Oregon Spirit LLC, as a result of Oregon Spirit’s  prior direct ownership interest in Qualmax; (f) 29,701,065 shares of  Common Stock indirectly beneficially owned by Dr. Passen based on his  direct one-half ownership interest in P&S Spirit LLC; (g) direct  ownership of warrants and options to purchase 1,750,000 shares of Common  Stock exercisable within the next 60 days; (h) indirect beneficial  ownership of a warrant to purchase 13,888,889 shares of Common Stock,  exercisable within the next 60 days, based upon Dr. Passen’s direct  one-half ownership interest in P&S Spirit, as a result of P&S Spirit’s  direct ownership of warrants to purchase shares of Common Stock; and (i) indirect  beneficial ownership of 25,546,360 shares of Common Stock based upon Dr. Passen’s  direct one-half ownership interest in P&S Spirit as a result of P&S  Spirit’s prior direct ownership interest in Qualmax. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

 
| (11) | Represents: (a) 29,701,065 shares of Common  Stock indirectly beneficially owned by Mr. Schorr based on his direct  one-half ownership interest in P&S Spirit LLC; (b) indirect  beneficial ownership of a warrant to purchase 13,888,889 shares of Common  Stock, exercisable within the next 60 days, based upon Dr. Schorr’s  direct one-half ownership interest in P&S Spirit, as a result of P&S  Spirit’s direct ownership of warrants to purchase shares of Common Stock; and  (c) indirect beneficial ownership of 25,546,360 shares of Common Stock  based upon Mr. Schorr’s direct one-half ownership interest in P&S  Spirit as a result of P&S Spirit’s prior direct ownership interest in  Qualmax. |
|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
| (12) | Mr. Wahid serves as Chief Financial Officer of  the Company. |
|------|-------------------------------------------------------------------|

 
| (13)  | Represents 25,000 shares purchased in the last  fiscal quarter of 2008 on the open market. |
|------------|--------------------------------------------------------------------------------------------|

 
| (14) | Represents: (a) direct ownership of 9,846,544 +  51,594,400 shares of Common Stock, plus warrants to purchase 1,430,178 shares  at anytime before December 31, 2010, at $0.2097644 per share. . |
|------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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**ITEM 13.****                                             ****CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE**

 

**Relationshipwith Selvin Passen**

 

Historically in an effort to maintain smooth businessoperations, we have from time to time relied on loans from Dr. SelvinPassen, a director and our former Chairman and a substantial stockholder(directly and beneficially, as disclosed in the above table in Item 12, “SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters”).  “As of December 31, 2008,the Company had outstanding loans in the amount of $1,050,000 with P&SSpirit, a company jointly owned by Dr. Selvin Passen and Dr. Jacob Schorr”.

 

**Relationshipwith Jacob Schorr**

 

Jacob Schorr, Ph.D., serves on our Board and is asubstantial stockholder (beneficially, as disclosed in the above table in Item12, “Security Ownership of Certain Beneficial Owners and Management and RelatedStockholder 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).Please refer to the Company’s Current Report on Form 8-K, filed with theSEC on January 8, 2007, and the Company’s Current Report on Form 8-K,filed with the SEC on June 6, 2007, for additional details.

 

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

 

Since January 1, 2006, the Company has enteredinto various transactions with Dr. Selvin Passen, a principal stockholderof the Company, and his affiliates, as well as with Jacob Schorr, Ph.D., adirector of the Company, M. David Kamrat, the Company’s President and ChiefExecutive Officer and Chairman of the Board, and Noah R. Kamrat, the Company’sChief Technology Officer and a former director. Reference is made to thedescription of each these related party transactions earlier in Item 1, “Descriptionof Business—Recent Developments—P&S Spirit Subscription Agreement.”

 

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**Relationshipand Transactions with BOS**

 

As a result of our acquisition on December 31, 2005 ofcertain assets of BOS, BOS became a principal stockholder of the Company.  BOS’s current ownership position is morefully detailed in Item 12 and Note 14. The company entered into an agreement torepurchase shares from BOS as reported on Form 8K filed with the SEC on August22, 2008, and more fully disclosed in Item 1. On September 30, 2008 the Companycompleted its purchase of the initial installment of 5,000,000 shares from BOS,and has to date purchased 6,600,000 New World Brands Shares from BOS under theBOS-NWB Agreement for a total purchase price of $165,000.

 

**CorporateGovernance**

 

Our common stock is quoted on the OTC Bulletin Boardelectronic trading platform, which does not maintain any standards regardingthe “independence” of the directors on our Company’s Board, and we are nototherwise subject to the requirements of any national securities exchange or aninter-dealer quotation system with respect to the need to have a majority ofour directors be independent. In the absence of such requirements, we haveelected to use the definition for “director independence” under the NASDAQstock market’s listing standards, which defines an “independent director” as “aperson other than an officer or employee of us or its subsidiaries or any otherindividual having a relationship, which in the opinion of our Board, wouldinterfere with the exercise of independent judgment in carrying out theresponsibilities of a director.” The definition further provides that, amongothers, employment of a director by us (or any parent or subsidiary of ours) atany time during the past three years is considered a bar to independenceregardless of the determination of our Board.

 

Based on our adoption of the NASDAQ definition ofindependence, as of December 31, 2008, two of our directors, M. DavidKamrat and Shehryar Wahid, were not considered independent as a result of theirstatus as employees and officers of the Company, and our other two directors,Jacob Schorr and Selvin Passen, are not considered an independent director as aresult of their respective ownership interests in P&S Spirit.

 

**ITEM 14.               PRINCIPALACCOUNTANT FEES AND SERVICES**

 

**Fees Paidto Independent Registered Public Accounting Firms**

 

The following table sets forth, for each of the yearsindicated, the aggregate fees paid to our independent registered publicaccounting firms and the percentage of each of the fees out of the total amountpaid to the accountants:

** **
| ** **                 | ** ** | **12 Months Ended**   | ** ** |
|----------------------------|------------|---------------------------------|------------|
| ** **                 | ** ** | **December 31, 2008** | ** ** | **December 31, 2007** | ** ** |
| **Services Rendered** | ** ** | **Fees**                        | ** ** | **Percentages** | ** ** | **Fees** | ** ** | **Percentages** | ** ** |
|                       |       |                            |       |   |   |   |   |   |   |
| Audit (1)                  |       | $                               | 215,298    |   | 93 | % | $ | 203,344 |   | 94 | % |
| Audit-Related Fees (2)     |       | —                          |       | — |   | — |   | — |   |
| Tax Fees (3)               |       |                            | 16,078     |   | 7 | % | 12,100 |   | 6 | % |
| All Other Fees             |       | —                          |       | — |   | — |   | — |   |
|                       |       |                            |       |   |   |   |   |   |   |
| Total                      |       | $                               | 231,376    |   | 100 | % | $ | 215,444 |   | 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. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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

 

**Pre-ApprovalPolicies and Procedures**

 

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

 

**ITEM 15.**               **EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**

 

Exhibits required to be attached by Item 601 ofRegulation S-B are listed in this Form 10-K’s Exhibit Index, which isincorporated herein by reference.

 

**SIGNATURES**

 

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

 
|                      | NEW WORLD BRANDS, INC. |
|---------------------------|------------------------|
|                      |                   |
| Date: April 15, 2009 | By:                    | /s/ M. David Kamrat |
|                      |                   | M. David Kamrat, Chief Executive Officer |

 

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

 
| **SIGNATURE**                      | ** ** | **TITLE**                                                    | ** ** | **DATE**            |
|------------------------------------|------------|--------------------------------------------------------------|------------|---------------------|
|                               |       |                                                         |       |                |
| /s/ M. David Kamrat |       | Chief Executive Officer,                                     |       | April 15, 2009 |
| M. David Kamrat                    |       | President, and Chairman of the Board                         |       |                |
|                               |       |                                                         |       |                |
| /s/ Shehryar Wahid                 |       | Chief Financial Officer,                                     |       | April 15, 2009 |
| Shehryar Wahid                     |       | Secretary, Treasurer,  Chief Operations Officer and Director |       |                |
|                               |       |                                                         |       |                |
| /s/ Selvin Passen, M.D.            |       | Director                                                     |       | April 15, 2009 |
| Selvin Passen, M.D.                |       |                                                         |       |                |

 

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** **

**TABLE OFCONTENTS:**

 
| ** **                                                       | **Page**   |
|------------------------------------------------------------------|------------|
|                                                             |       |
| Report of independent registered public accounting  firm         | F-2        |
|                                                             |       |
| Financial statements:                                            |       |
| Consolidated balance sheets                                      | F-3 - F-4  |
| Consolidated statements of operations                            | F-5        |
| Consolidated statements of changes in stockholders’  equity | F-6        |
| Consolidated statements of cash flows                            | F-7        |
| Supplemental disclosure of cash flows                            | F-8        |
| Notes to consolidated financial statements                       | F-9 - F-28 |

 

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** **

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

 

To the Audit Committee andStockholders 

New World Brands, Inc. andSubsidiary 

Eugene, Oregon 

 

We have audited theaccompanying consolidated balance sheets of New World Brands, Inc. andSubsidiary as of December 31, 2008 and 2007, and the related consolidatedstatements of operations, changes in stockholders’ equity and cash flows forthe years then ended. These consolidated financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on the consolidated financial statements based on our audits. 

 

We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board(United States).  Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe consolidated financial statements are free of material misstatement. Thecompany is not required to have, nor were we engaged to perform, an auditof  its internal control over financialreporting. Our audits included consideration of internal control over financialreporting as a basis for designing audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on theeffectiveness of the company’s internal control over financial reporting.  Accordingly, we express no such opinion. Anaudit also includes examining, on a test basis, evidence supporting the amountsand disclosures in the financial statements, assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of New World Brands,Inc. and Subsidiary as of December 31, 2008 and 2007, and the consolidatedresults of its operations and its cash flows for the years then ended, inconformity with accounting principles generally accepted in the United Statesof America.

 

 

/s/ Berenfeld SpritzerShechter & Sheer, LLP

Certified Public Accountants

Fort Lauderdale, Florida 

April 15, 2009 

 

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** **

**New World Brands, Inc. and Subsidiary**

**Consolidated Balance Sheets**

**as of December 31, 2008 and 2007**

 
| ** **                  | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|-----------------------------|------------|------------|------------|------------|------------|
| ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| **ASSETS**                  |       |       |       |       |       |
| Current Assets              |       |       |       |       |       |
| Cash and cash equivalents   |       | $          | 541,116    |       | $          | 2,038,635 |   |
| Accounts receivable, net    |       | 988,371    |       | 1,027,739  |       |
| Inventories, net            |       | 1,827,211  |       | 744,654    |       |
| Prepaid expenses            |       | 638,801    |       | 244,157    |       |
| Other current assets        |       | 316,045    |       | 507,012    |       |
|                        |       |       |       |       |       |
| Total Current Assets        |       | 4,311,544  |       | 4,562,197  |       |
|                        |       |       |       |       |       |
| Property and equipment, net |       | 1,446,557  |       | 1,421,806  |       |
|                        |       |       |       |       |       |
| Other Assets:               |       |       |       |       |       |
| Deposits and other assets   |       | 503,856    |       | 668,750    |       |
|                        |       |       |       |       |       |
| Total Long-Term Assets      |       | 1,950,413  |       | 2,090,556  |       |
|                        |       |       |       |       |       |
| Total Assets                |       | $          | 6,261,957  |       | $          | 6,652,753 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

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**New World Brands, Inc. and Subsidiary**

**Consolidated Balance Sheetsas of  December 31, 2008 and 2007**

 
| ** **                                                                                                                             | ** ** | **2008**    | ** ** | **2007**    | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| ** **                                                                                                                             |       |        |       |        |       |
| **LIABILITIES & STOCKHOLDERS’ EQUITY**                                                                         |       |        |       |        |       |
| Liabilities                                                                                                                            |       |        |       |        |       |
| Current Liabilities                                                                                                                    |       |        |       |        |       |
| Accounts payable                                                                                                                       |       | $           | 1,917,899  |        | $          | 1,564,299 |   |
| Accrued expenses                                                                                                                       |       | 447,491     |       | 406,910     |       |
| Customer deposits                                                                                                                      |       | 4,365       |       | 121,874     |       |
| Capital leases, current portion                                                                                                        |       | 67,531      |       | 181,731     |       |
| Notes payable, current portion                                                                                                         |       | 14,693      |       | —      |       |
| Total Current Liabilities                                                                                                              |       | 2,451,979   |       | 2,274,814   |       |
|                                                                                                                                   |       |        |       |        |       |
| Long-Term Liabilities                                                                                                                  |       |        |       |        |       |
| Notes payable, net of current portion                                                                                                  |       | 1,665,995   |       | 500,000     |       |
| Capital leases, net of current portion                                                                                                 |       | 91,913      |       | 31,317      |       |
| Total Long-Term Liabilities                                                                                                            |       | 1,757,908   |       | 531,317     |       |
|                                                                                                                                   |       |        |       |        |       |
| Total Liabilities                                                                                                                      |       | 4,209,887   |       | 2,806,131   |       |
|                                                                                                                                   |       |        |       |        |       |
| Commitments and Contingencies                                                                                                          |       | —      |       | —      |       |
|                                                                                                                                   |       |        |       |        |       |
| Stockholders’ Equity                                                                                                              |       |        |       |        |       |
| Preferred stock, $0.01 par value, 1,000 shares authorized, 200 shares  designated as Series A preferred stock, none issued        |       | —      |       | —      |       |
| Common stock, $0.01 par value, 600,000,000 shares authorized,  418,479,673 and 414,979,673 shares issued in 2008 and 2007 respectively |       | 4,184,797   |       | 4,149,797   |       |
| Additional paid-in capital                                                                                                             |       | 33,606,557  |       | 33,641,557  |       |
| Accumulated deficit                                                                                                                    |       | (35,574,284 | )          | (33,944,732 | )          |
|                                                                                                                                   |       | 2,217,070   |       | 3,846,622   |       |
|                                                                                                                                   |       |        |       |        |       |
| Less: Treasury shares (common 6,600,000 and 0 shares as of  December 31, 2008 and December 31, 2007) at cost                 |       | (165,000    | )          | —      |       |
|                                                                                                                                   |       |        |       |        |       |
| Total Stockholders’ Equity                                                                                                        |       | 2,052,070   |       | 3,846,622   |       |
|                                                                                                                                   |       |        |       |        |       |
| Total Liabilities and Stockholders’ Equity                                                                                        |       | $           | 6,261,957  |        | $          | 6,652,753 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

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**New World Brands, Inc. and Subsidiary**

**Consolidated Statements of Operationsfor the Years Ended December 31, 2008 and 2007**

 
| ** **                                                                 | ** ** | **2008**    | ** ** | **2007**    | ** ** |
|----------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| Net Sales                                                                  | ** ** | ** **  | ** ** | ** **  | ** ** |
| NWB Network - Hardware                                                     |       | $           | 7,161,026  |        | $          | 5,657,689 |   |
| NWB Telecom - Carrier Services                                             |       | 13,119,148  |       | 11,443,514  |       |
|                                                                       |       | 20,280,174  |       | 17,101,203  |       |
| Cost of Sales                                                              |       |        |       |        |       |
| NWB Network - Hardware                                                     |       | (5,040,581  | )          | (4,954,381  | )          |
| NWB Telecom - Carrier Services                                             |       | (10,990,157 | )          | (9,850,272  | )          |
|                                                                       |       | (16,030,738 | )          | (14,804,653 | )          |
|                                                                       |       |        |       |        |       |
| Gross Profit                                                               |       | 4,249,436   |       | 2,296,550   |       |
|                                                                       |       |        |       |        |       |
| Sales, General and Administrative Expenses                                 |       | (5,842,917  | )          | (4,630,863  | )          |
| Loss from Continuing Operations Before Other Income                        |       | (1,593,481  | )          | (2,334,313  | )          |
|                                                                       |       |        |       |        |       |
| Other Income                                                               |       |        |       |        |       |
| Interest Expense                                                           |       | (99,076     | )          | (129,346    | )          |
| Other Income                                                               |       | 63,005      |       | 109,157     |       |
|                                                                       |       | (36,071     | )          | (20,189     | )          |
| **Loss From Continuing Operations Before Income  Taxes**                   |       | (1,629,552  | )          | (2,354,502  | )          |
|                                                                       |       |        |       |        |       |
| Provision for Income Taxes                                                 |       | —      |       | (403,995    | )          |
| **Net Loss From Continuing Operations**                                    |       | (1,629,552  | )          | (2,758,497  | )          |
|                                                                       |       |        |       |        |       |
| Loss from Discontinued Operations (Net of Benefit for Income Taxes of  $0) |       | —      |       | (3,949,395  | )          |
| Gain from sale of Discontinued Operations                                  |       |        |       | 4,706       |       |
|                                                                       |       |        |       |        |       |
| **Net Loss**                                                               |       | $           | (1,629,552 | )           | $          | (6,703,186 | ) |
|                                                                       |       |        |       |        |       |
| Net Loss Per Share from Continuing Operations                              |       | $           | —     |        | $          | (0.01 | ) |
|                                                                       |       |        |       |        |       |
| Net Loss Per Share from Discontinued Operations                            |       | $           | —     |        | $          | (0.01 | ) |
|                                                                       |       |        |       |        |       |
| Net Loss per Share (basic)                                                 |       | $           | —     |        | $          | (0.02 | ) |
|                                                                       |       |        |       |        |       |
| Net Loss per Share (diluted)                                               |       | $           | —     |        | $          | (0.02 | ) |
|                                                                       |       |        |       |        |       |
| Weighted average number of shares outstanding during the year              |       |        |       |        |       |
|                                                                       |       |        |       |        |       |
| Basic                                                                      |       | 411,879,673 |       | 433,592,000 |       |
|                                                                       |       |        |       |        |       |
| Diluted                                                                    |       | 411,879,673 |       | 433,592,000 |       |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

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 **New World Brands, Inc. and Subsidiary**

**Consolidated Statements of Changes in Stockholders’Equityfor the Years Ended December 31, 2008 and 2007**

 
| ** **                                                                              | ** ** | ** **               | ** ** | ** **            | ** ** | ** **   | ** **      | ** **   | ** ** | ** **    | ** ** | ** **        | ** **   | ** **       | ** **    | **Accumulated**              | ** **     | **Retained**   | ** ** | ** **  | ** ** |
|-----------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------|------------|--------------|-----------------|--------------|------------|---------------|------------|-------------------|--------------|------------------|---------------|------------------------------|----------------|----------------|------------|-------------|------------|
| ** **                                                                              | ** ** | ** **               | ** ** | ** **            | ** ** | ** **   | ** **      | ** **   | ** ** | ** **    | ** ** | ** **        | ** **   | **Additional**   | ** **    | **Other**                    | ** **     | **Earnings**   | ** ** | **Total**   | ** ** |
| ** **                                                                              | ** ** | **Preferred Stock** | ** ** | **Common Stock** | ** ** | **Treasury** | ** **      | **Treasury** | ** ** | **Paid-In**   | ** ** | **Comprehensive** | ** **   | **(Accumulated** | ** **    | **Stockholders’ ** | ** **     |
| ** **                                                                              | ** ** | **Shares**               | ** ** | **Amount**            | ** ** | **Shares**   | ** **      | **Amount**   | ** ** | **Stock**     | ** ** | **Shares**        | ** **   | **Capital**      | ** **    | **Loss**                     | ** **     | **Deficit)**   | ** ** | **Equity**  | ** ** |
| **Balances  at January 1, 2007**                                                   | ** ** | **116.6667**             | ** ** | **$**                 | **1**      | ** **   | **44,303,939**  | ** **   | **$**      | **443,040**   | ** ** | ** **        | ** **   | ** **       | ** **    | **$**                        | **36,462,218** | ** **     | **$**      | **(49,295** | **)**      | **$** | **(27,282,102** | **)** | **$** | **9,573,862** | ** ** |
|                                                                                    |       |                     |       |                  |       |         |            |         |       |          |       |              |         |             |          |                         |           |           |       |        |       |
| Conversion of series  A preferred stock to common stock April 24, 2007             |       | (116.6667                | )          | $                     | -1         |         | 348,453,512     |         | 3,484,535  |          |       |              |         |             | (3,484,534    | )                            |           |           |       |        |       |   |
| Sale of stock to  P&S Spirit, May 31, 2007                                     |       |                     |       |                  |       | 22,222,222   |            | 222,222      |       |          |       |              |         | 663,873          |          |                         |           |           |       | 886,095     |       |
| Sale of IP Gear  Ltd. July 1, 2007                                                 |       |                     |       |                  |       |         |            |         |       |          |       |              |         |             |          |                         |           | 4,706          |       | 4,706       |       |
| Loss on  discontinued operations                                                        |       |                     |       |                  |       |         |            |         |       |          |       |              |         |             |          | 49,295                       |           | (3,949,395     | )          | (3,900,100  | )          |
| Gain on foreign  currency translation, net of tax benefit                               |       |                     |       |                  |       |         |            |         |       |          |       |              |         |             |          |                         |           | 40,556         |       | 40,556      |       |
| Net loss from continuing  operations for the twelve months ended December 31, 2007 |       |                     |       |                  |       |         |            |         |       |          |       |              |         |             |          |                         |           | (2,758,497     | )          | (2,758,497  | )          |
|                                                                                    |       |                     |       |                  |       |         |            |         |       |          |       |              |         |             |          |                         |           |           |       |        |       |
| **Balances  at December 31, 2007**                                                 | ** ** | **—**               | ** ** | **$**                 | **0**      | ** **   | **414,979,673** | ** **   | **$**      | **4,149,797** | ** ** | ** **        | ** **   | ** **       | ** **    | **$**                        | **33,641,557** | ** **     | **$**      | **0**       | ** ** | **$** | **(33,944,732** | **)** | **$** | **3,846,622** | ** ** |
|                                                                                    |       |                     |       |                  |       |         |            |         |       |          |       |              |         |             |          |                         |           |           |       |        |       |
| Issuance of  common stock, Crystal Blue Consulting, May 5, 2008                    |       |                     |       |                  |       | 3,500,000    |            | 35,000       |       |          |       |              |         | (35,000          | )             |                         |           |           |       |        |       |
| Repurchase of  stock from BOS, retained as treasury stock, September 2, 2008       |       |                     |       |                  |       |         |            |         |       | (125,000      | )          | 5,000,000         |         |             |          |                         |           |           |       | (125,000    | )          |
| Repurchase of  stock from BOS, October 21, 2008                                    |       |                     |       |                  |       |         |            |         |       | (25,000       | )          | 1,000,000         |         |             |          |                         |           |           |       | (25,000     | )          |
| Repurchase of  stock from BOS, November 13, 2008                                   |       |                     |       |                  |       |         |            |         |       | (15,000       | )          | 600,000           |         |             |          |                         |           |           |       | (15,000     | )          |
| Net loss from  continuing operations for the twelve months ended December 31, 2008 |       |                     |       |                  |       |         |            |         |       |          |       |              |         |             |          |                         |           | (1,629,552     | )          | (1,629,552  | )          |
|                                                                                    |       |                     |       |                  |       |         |            |         |       |          |       |              |         |             |          |                         |           |           |       |        |       |
| **Balance  at December 31, 2008**                                                       | ** ** | **—**               | ** ** | **$**                 | **0**      | ** **   | **418,479,673** | ** **   | **$**      | **4,184,797** | ** ** | **$**             | **(165,000** | **)**            | **6,600,000** | ** **                   | **$**          | **33,606,557** | ** ** | **$**       | **0**      | ** ** | **$** | **(35,574,284** | **)** | **$** | **2,052,070** | ** ** |
|                                                                                         |            |                          |            |                       |            |              |                 |              |            |               |            |                   |              |                  |               |                              |                |                |            |             |            |  |  |  |  |  |  |  |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

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**New World Brands, Inc. and Subsidiary**

**Consolidated Statements of Cash Flowsfor the Years Ended December 31, 2008 and 2007**

 
| ** **                                                                            | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|---------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Cash Flows from Operating Activities**                                              |       |       |       |       |       |
| Net loss from continuing operations                                                   |       | $          | (1,629,552 | )          | $          | (2,758,497 | ) |
| Adjustments to reconcile net income (loss) to net cash used in  operating activities: |       |       |       |       |       |
|                                                                                  |       |       |       |       |       |
| Depreciation and amortization                                                         |       | 515,313    |       | 406,152    |       |
| Allowance for doubtful accounts                                                       |       | (105,001   | )          | (15,046    | )          |
| Changes in operating assets and liabilities                                           |       |       |       |       |       |
| Accounts receivable                                                                   |       | 144,557    |       | 76,118     |       |
| Inventory                                                                             |       | (1,082,557 | )          | 141,098    |       |
| Prepaid expenses                                                                      |       | (394,644   | )          | (121,362   | )          |
| Income tax refund receivable                                                          |       | —     |       | 403,995    |       |
| Other current assets                                                                  |       | 190,967    |       | (368,139   | )          |
| Deposits and other assets                                                             |       | 164,894    |       | (568,750   | )          |
| Accounts payable                                                                      |       | 353,600    |       | 1,122,665  |       |
| Accrued expenses and other liabilities                                                |       | 40,581     |       | (678,032   | )          |
| Customer deposits                                                                     |       | (117,509   | )          | 62,249     |       |
| Total adjustments                                                                     |       | (289,799   | )          | 460,948    |       |
| Net cash used in operating activities                                                 |       | (1,919,351 | )          | (2,297,549 | )          |
|                                                                                  |       |       |       |       |       |
| **Cash flows from Investing Activities**                                              |       |       |       |       |       |
| Purchases of property and equipment                                                   |       | (404,281   | )          | (284,044   | )          |
| Net cash used in investing activities                                                 |       | (404,281   | )          | (284,044   | )          |
|                                                                                  |       |       |       |       |       |
| **Cash Flows from Financing Activities**                                              |       |       |       |       |       |
| Payments of principal on capital lease obligations                                    |       | (189,387   | )          | (131,301   | )          |
| Proceeds from notes payable                                                           |       | 1,192,185  |       | 1,000,000  |       |
| Payments of notes payable                                                             |       | (11,497    | )          | (1,484,323 | )          |
| Proceeds from sale of common and preferred stock                                      |       | —     |       | 886,095    |       |
| Purchase of treasury stock                                                            |       | (165,000   | )          | —     |       |
| Foreign currency translation                                                          |       | —     |       | (29,740    | )          |
| Net repayment of advances from shareholders                                           |       | (188       | )          | (53,479    | )          |
| Net cash provided by financing activities                                             |       | 826,113    |       | 187,252    |       |
| Net cash from continuing operations                                                   |       | (1,497,519 | )          | (2,394,341 | )          |
|                                                                                  |       |       |       |       |       |
| **Cash Flows from Discontinued Operations**                                           |       |       |       |       |       |
| Cash flow from operating activities of discontinued operations                        |       | —     |       | (1,160,828 | )          |
| Cash flow from investing activities of discontinued operations                        |       | —     |       | 2,197,187  |       |
| Total cash flows from discontinued operations                                         |       | —     |       | 1,036,359  |       |
| Net Change in Cash and Cash Equivalents                                               |       | (1,497,519 | )          | (1,357,982 | )          |
|                                                                                  |       |       |       |       |       |
| **Cash and Cash Equivalents at Beginning of Year**                                    |       | 2,038,635  |       | 3,396,617  |       |
| ** **                                                                            |       |       |       |       |       |
| **Cash and Cash Equivalents at End of Year**                                          |       | $          | 541,116    |       | $          | 2,038,635 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

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**New World Brands, Inc. and Subsidiary**

**Consolidated Statement of SupplementalDisclosure of Cash Flows**

**for the Years Ended December 31,2008 and 2007**

 
| ** **                                                               | ** ** | **2008** | ** ** | **2007**   | ** ** |
|--------------------------------------------------------------------------|------------|----------|------------|------------|------------|
| **Cash paid during the year for:**                                       |       |     |       |       |       |
| - Income taxes                                                           |       | —   |       | —     |       |
| - Interest                                                               |       | $        | 84,524     |       | $          | 129,346 |   |
|                                                                     |       |     |       |       |       |
| **Non-cash investing and  financing activities:**                        |       |     |       |       |       |
|                                                                     |       |     |       |       |       |
| Acquisition of property and equipment through  capital lease obligations |       |     |       |       |       |
| - Fair value of property and equipment acquired                          |       | $        | 135,783    |       | $          | 0 |   |
| - Capital lease obligations incurred                                     |       | (135,783 | )          | 0          |       |
|                                                                     |       | —   |       | —     |       |
|                                                                     |       |     |       |       |       |
| Issuance of Common Stock for Preferred Stock                             |       |     |       |       |       |
| - Common Stock                                                           |       | —   |       | 3,706,757  |       |
| - Preferred Stock                                                   |       | —   |       | (1         | )          |
| - Paid in Capital                                                   |       | —   |       | (3,706,756 | )          |
|                                                                     |       | —   |       | —     |       |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

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| **NOTE A** | **ORGANIZATION,  CAPITALIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES** |
|------------|----------------------------------------------------------------------------------|

 

**Organizationand Basis of Presentation**

 

New World Brands, Inc. (“***New World Brands***”, the “***Company***”,“***we***”, “***us***”or “***our***”) is a Delaware corporation that isengaged in the telecommunications business through two operating divisions. Oneis NWB Networks which includes TELES USA. This division is focused on thetelecommunications hardware business and delivers voice over internetequipment, support and solutions as the exclusive reseller of TELES AG line ofproducts.  The other division is NWBTelecom which acts as a long distance wholesale termination provider. Itprimarily offers international routes to domestic carriers for the terminationof voice over internet phone service. The company has been engaged in theseactivities as New World Brands since its merger with Qualmax and as Qualmax forseveral years prior to the merger.

 

On September 15, 2006 New World Brands was animporter of wine and spirits beverages for sale and distribution throughout theUnited States.  On September 15, 2006, we sold our wine andspirits business, and, by way of a reverse acquisition, acquired all of theassets and assumed all of the liabilities of Qualmax, Inc., a Delawarecorporation (“***Qualmax***” and the reverse acquisition the “***Reverse Acquisition***”).

 

Our acquisition of Qualmax and its wholly ownedsubsidiary IP Gear, Ltd. was accounted for as a reverse acquisition.  Although New World Brands was the companythat made the acquisition, Qualmax was treated as the surviving company foraccounting purposes.   On September 15, 2006 the Company changedits fiscal year end from May 31 to December 31, which is Qualmax’sfiscal year end and operated using the assets of the former Qualmax in thetelecommunications business.

 

On July 1, 2007 we sold the IP Gear Ltdsubsidiary in a transaction that is explained in full detail in “Note B—Sale ofDiscontinued Operations—IP Gear, Ltd.” This subsidiary was sold for cash andother consideration to TELES A.G. The primary non-cash consideration was theacquisition of the rights to become the exclusive distributor of the TELES A.G,product line of telecommunications equipment in much of North America.

 

**ReverseAcquisition Accounting**

 

In furtherance of treating the Sale Transaction andAcquisition as a reverse acquisition for accounting purposes, the board ofdirectors of the Company (the “***Board***”)and the board of directors of Qualmax (collectively, the “***Boards***”) have agreed that for accounting purposes they havetreated the transactions as a reverse acquisition of Qualmax by the Company,and have since the time of the consummation, intended the transaction toultimately result in a downstream merger of the Company and Qualmax, and, infurtherance thereof, the Boards have each determined that Qualmax will mergewith and into the Company (the “***Merger***”),and in connection with the Merger, the separate corporate existence of Qualmaxwill cease. The final step in the merger was completed and Qualmax ceased toexist as a separate legal entity in January of 2009( Please See Note O —Subequent Events)

 

The Boards agreed that certain events (the “***Merger Events***”) were required to occur in order to effectivelyconsummate the transactions contemplated, including, without limitation,certain amendments to the Certificate of Incorporation of the Company to, amongother things, increase the authorized number of shares of Common Stock of theCompany, the resultant conversion of the Preferred Stock into shares of theCompany’s Common Stock, make any filings necessary to complete the Merger,and receive approval by the stockholders of the Company and Qualmax. During2007, the number of authorized shares was increased from 50 million shares to600 million shares to allow for a sufficient number of authorized shares toconvert the existing Preferred shares to common. All preferred shares were thenconverted to common stock as a further step towards the completion of themerger.

 

Under generally accepted accounting principles in theUnited States of America (“***GAAP***”),the acquisition of Qualmax has been accounted for as a reverse acquisition andQualmax has been treated as the acquiring entity for 

 

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accounting and financial reporting purposes.  Assuch, the Company’s consolidated financial statements have been and will bepresented as a continuation of the operations of Qualmax and not New WorldBrands, Inc.  Effective on the acquisition date of September 15,2006, New World Brands’ consolidated balance sheet included the assets andliabilities of Qualmax and its wholly owned subsidiary IP Gear, Ltd. and itsconsolidated equity accounts were recapitalized to reflect the combined equityof New World Brands, Qualmax and IP Gear, Ltd. Also, as a result of the ReverseAcquisition, the Company’s fiscal year changed from May 31 to December 31.

 

On February 18, 2008, the Company and Qualmaxentered into an agreement by which Qualmax will be merged with and into theCompany (the “Merger Agreement”). As of the date of the filing of this Report,the Merger has now been completed as outlined in the filing Form 8-K on January 26,2009. Reference is made to the Company’s Final Schedule 14C InformationStatement, filed with the SEC on November 6, 2008, for additionalinformation and documentation concerning the Merger and the Merger Agreement.

 

**Principals ofConsolidation**

 

The consolidated financialstatements include the accounts of the Company and its wholly owned subsidiary,IP Gear, for the year2007. Intercompany balances and transactions have been eliminated inconsolidation.

 

**Basis ofAccounting and Revenue Recognition**

 

The accompanying consolidated financial statementshave been prepared using the accrual method of accounting.  Revenuesfrom our VoIP telephony services division have been recognized as services arerendered.  Revenue from the sale of products from our exclusivedistributorship of VoIP equipment or reseller equipment is recognized as ourcustomers take delivery of our products.  Any amounts received fromour customers in advance are recorded as customer deposits and classified asother current liabilities.

 

**Use ofEstimates**

 

The preparation of consolidated financial statementsin conformity with accounting principles generally accepted in the UnitedStates of America requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the consolidated financialstatements and the reported amounts of revenues and expenses during thereporting period.  Accordingly, actual results could differ fromthose estimates.

 

**Cash andCash Equivalents**

 

The Company considers all highly liquid investments indebt instruments purchased with original maturities of three months or less tobe cash equivalents.

 

**AccountsReceivable**

 

Accounts receivable are presented at net realizablevalue, which is comprised of total accounts receivable less any allowances foruncollectible accounts.  The Company provides an allowance forpotentially uncollectible accounts based upon a periodic review and analysis ofoutstanding accounts receivable balances.  The resulting estimate ofuncollectible receivables is charged to an allowance for doubtfulaccounts.  Recoveries of accounts previously written off are used tooffset the allowance account in the periods in which the recoveries aremade.  Accordingly, accounts receivable has been written down to itsestimated net realizable value. The results of operations for the years ended December 31,2008 and 2007 include charges of approximately $120,000 and $323,000respectively.  The allowance for doubtful accounts as of December 31,2008 was approximately $48,000.

 

**Inventories**

 

Inventories are valued at the lower of cost or market.Cost is determined on a first-in, first-out basis.  Marketrepresents the lower of replacement cost or net realizable value on inventoriesas a whole.  Inventories are made up primarily of high technologytelephone switching and VoIP routing equipment and theirparts.   All year ending inventories consisted of finished goodsfor resale that were purchased from other manufacturers.  Due torapid technological advancements in the industry, inventories may, from time totime, be subject to impairment and 

 

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obsolescence.  We record an allowance forslow-moving and obsolete inventories based upon a periodic review and analysisof inventories on hand.  We perform a periodic comparison of thisslow moving and obsolete inventory to determine if its value is below its costin our records and reduce the value on our records if the cost is above thecurrent value.  Accordingly, the allowance for obsolete inventoriesas of December 31, 2008 was approximately $66,000.

 

**Concentrationof Deposit Risk**

 

From time to time, the Company has cash in financialinstitutions in excess of federally insured limits.  However, theCompany has not experienced any losses in such accounts and believes it is notexposed to any significant credit risk on its cash balances.  Cashexceeding federally insured limits amounted to approximately $175,000  as of December 31, 2008

 

**BusinessConcentrations**

 

We had two vendors, aside from TELES, during the yearended December 31, 2008 who accounted for more than 10% of our payments tovendors. Both of these are vendors of NWB Telecom. They accounted for 26.37% ofthe total payments to vendors made by New World Brands during 2008. ExcludingTELES, the top three vendors of NWB overall, including both NWB Telecom and NWBNetworks, collectively represent 36.35% of purchases. The top three vendorscollectively represented 31% of purchases in 2007.

 

There was one customer in 2008 that accounted for25.30% of revenue. We had no customers in 2007 that made up a sufficientlylarge amount of our sales to be considered a concentration risk on the revenueside of our business.

 

**Impairmentof Long-Lived Assets and Long-Lived Assets Subject to Disposal**

 

We review our long-lived assets for impairmentwhenever events or changes in circumstances indicate that the carrying amountof an asset may not be recoverable, in accordance with Statement of FinancialAccounting Standards (“***SFAS***”) No. 144.  Recoverability of assets to be held and usedis measured by a comparison of the carrying amount of an asset to future undiscountedcash flows expected to be generated by the asset.  If such assets areconsidered to be impaired, the impairment to be recognized is measured by theamount by which the carrying an amount of the assets exceeds its fairvalue.  Assets subject to disposal are reported at the lower of thecarrying amount or fair value less costs to sell.  We did have animpairment of a long lived asset during the year that was written down andsubsequently sold in 2007. See “Note B—Sale of Discontinued Operations—IP Gear,Ltd.” We had no impairment in 2008 as per SFAS No.144.

 

**Propertyand Equipment**

 

Property and equipment are recorded atcost.  For financial statement purposes, depreciation of software,furniture and equipment is computed using the straight-line method over theirestimated useful lives of the assets while leasehold improvements are amortizedover the shorter of their estimated useful lives or the terms of theirrespective leases.  Expenditures for replacements, maintenance andrepairs that do not extend the lives of the assets are charged to operations asthe expenses are incurred.  When assets are retired, sold orotherwise disposed of, their costs and related accumulated depreciation areremoved from the accounts and resulting gains or losses are reflected in theyear of disposal. the policy on the depreciation of computer equipment has beenchanged from 3 yeard to 5 years to better reflect the useful life of this classof assets for the company.

 

**StockOptions**

 

The company accounts for stock options in accordancewith SFAS No. 123” “Accounting for Stock-Based Compensation,” as amendedby SFAS No. 148, “Accounting for Stock-Based Compensation, Transition andDisclosure,” and SFAS No. 123R, “Share-Based Payment.” These standardsrequire the cost associated with employee services in exchange for equityinstruments based on the grant date fair value of the award, be recognized 

 

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over the period during which the employee is requiredto provide services in exchange for the award. No compensation cost isrecognized for awards for which employees do not render the requisite service.Compensation cost for the unvested portion of equity awards granted prior to January 1,2006, will be recognized over the remaining vesting periods. See “Note H—StockOption Plans.”

 

**SoftwareCosts**

 

Certain computer software development costs arecapitalized in the accompanying consolidated balance sheet in accordance withSFAS No. 86,* “*Accounting for the Costs of ComputerSoftware to be Sold, Leased, or Otherwise Marketed.” Capitalization of computersoftware development costs begins upon the establishment of technologicalfeasibility. Capitalization ceases and amortization of capitalized costs beginswhen the software product is commercially available for general release tocustomers. Amortization of capitalized computer software development costs isincluded in general and administrative expenses and is provided using thestraight-line method over the remaining estimated economic life of the product,not to exceed three years.  Much of the software that we had in past yearswas related to the development of equipment in our IP Gear Ltd subsidiary thatis not considered as part our “continuing operations.” Net unamortized softwarecosts as of December 31, 2008 amounted to approximately$89,000.  Amortization of software costs for the years ended December 31,2008 and 2007 was approximately $46,000 and $57,000, respectively.

 

**SegmentInformation**

 

Our business consisted of two operating segments: (i) NWBNetworks (resale hardware), which is the sale and distribution of VoIP andother telephony equipment and related professional services via our U.S.-basedbusiness operated under the name “TELES USA”; and (ii) NWBTelecom(wholesale carrier services), which is telephony service resale anddirect call routing via our U.S.-based VoIP service business operated under thename “IP Gear Connect.”  The proprietary hardware segment, IP GearLtd. was discontinued as at June 30, 2007 and subsequently sold on July 12007. See “Note B—Sale of Discontinued Operations—IP Gear, Ltd.” for furtherinformation regarding this transaction. Please see “Note N—Business Segment Reporting” for the segment reportinginformation of the continuing business segments of the company.

 

**Reclassification**

 

Certain reclassifications of amounts previouslyreported have been made to the accompanying consolidated financial statementsin order to maintain consistency and comparability between periods presented.

 

In June 2007, the Company sold IP Gear, Ltd. (See“Note B—Sale of Discontinued Operations—IP Gear, Ltd.”) For purposes ofcomparability, the results of these operations have been reclassified fromcontinuing operations to discontinued operations for all years presented in theaccompanying consolidated statements of operations.

 

**Fair Valueof Financial Instruments**

 

Our financial instruments consist primarily of cash,certificates of deposit, accounts receivable, accounts payable, accruedliabilities and notes payable.  The carrying amounts of suchfinancial instruments approximate their respective estimated fair values due tothe short-term maturities and approximate market interest rates of theseinstruments.  The estimated fair values are not necessarilyindicative of the amounts we would realize in a current market exchange or fromfuture earnings or cash flows.

 

**Earningsper Share**

 

Net income per share is computed in accordance withSFAS No. 128, “Earnings per Share.” Basic net income per share is basedupon the weighted average number of common shares outstanding during theperiod. Diluted net income per share is based upon the weighted average numberof common shares outstanding and dilutive common stock equivalents outstandingduring the period. Common stock equivalents are options and warrants 

 

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granted by the Company and are calculated under thetreasury stock method. Common equivalent shares from unexercised stock optionsand warrants are excluded from the computation when there is a loss as theireffect is antidilutive, or if the exercise price of such options and warrantsis greater than the average market price of the stock for theperiod.  See “Note G—Stockholders’ Equity” for the computationof basic and diluted share data.

 

**IncomeTaxes**

 

We account for income taxes in accordance with SFAS No. 109,* “*Accounting for Income Taxes,”* *which requires recognition of deferredtax assets and liabilities for expected future tax consequences of events thathave been included in the consolidated financial statements or taxreturns.  Under this method, deferred tax assets and liabilities aredetermined based on the difference between the financial statement and taxbases of assets and liabilities using enacted tax rates in effect for the yearin which the differences are expected to reverse.  Valuationallowances are established when necessary to reduce deferred tax assets amountsexpected to be realized.    U.S. income taxes are notprovided on undistributed earnings, which are expected to be permanentlyreinvested by the foreign subsidiary, unless the earnings can be repatriated ina tax-free or cash-flow neutral manner.

 

Effective January 1, 2007, the Company adoptedFinancial Accounting Standards Board (the “FASB”) Interpretation No. (“FIN”) 48,“Accounting for Uncertainty in Income Taxes” and FSP FIN 48-1, which amendedcertain provisions of FIN 48. FIN 48 clarifies the accounting for uncertaintyin income taxes recognized in financial statements in accordance with SFAS No. 109,“Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return. FIN 48requires that the Company determine whether the benefits of the Company’s taxpositions are more likely than not of being sustained upon audit based on thetechnical merits of the tax position. The provisions of FIN 48 also provideguidance on de-recognition, classification, interest and penalties, accountingin interim periods and disclosure.* *In connection with our adoption of FIN No. 48,we analyzed the filing positions in all of the federal and state jurisdictionswhere we are required to file income tax returns, as well as all open tax yearsin these jurisdictions. The Company did not have any unrecognized tax benefitsand there was no effect on the financial condition or results of operations forthe years ended December 31, 2008 and 2007 as a result of implementing FIN48, or FIN 48-1. In accordance with FIN48, the Company adopted the policy ofrecognizing interest and penalties, if any, related to unrecognized taxpositions as income tax expense. The tax years 2004 - 2007 remain subject toexamination by major tax jurisdictions.

 

**Advertisingand Promotional Costs**

 

We expense advertising and promotional costs asincurred.  Advertising and promotional expenses amounted toapproximately $23,000 and $45,000 for the years ended December 31, 2008and 2007, respectively.

 

**Leases**

 

We account for leases in accordance with SFAS No.13,* “*Accounting for Leases,” under which weperform a review of each newly acquired lease to determine as whether it shouldbe treated either as a capital or an operating lease.  A capitallease asset is capitalized and depreciated over the term of the initial lease.  Aliability equal to the present value of the aggregated lease payments isrecorded utilizing the stated lease interest rate.  If an interestrate is not stated, we will determine our estimated incremental borrowing rate.

 

**ForeignCurrency Translation**

 

As of the year end at December 31, 2008, NewWorld Brands did not have any balances or transactions in a foreign currency.All amounts on the consolidated balance sheets are reported in theirnative currency, the US Dollar.

 

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**RecentlyAdopted Accounting Pronouncements**

 

In September 2006,the Financial Accounting Standards Board (the “***FASB***”) issued Statement of FinancialAccounting Standards (“***SFAS***”)No. 157, “Fair Value Measurements” (“***SFAS 157***”). This Statement establishes aframework for measuring fair value in GAAP and expands disclosures about fairvalue measurements. The FASB deferred the effective date of SFAS 157 untilfiscal years beginning after November 15, 2007 as it relates to the fairvalue measurement requirements for non-financial assets and liabilities thatare initially measured at fair value, but not measured at fair value insubsequent periods. These non-financial assets include goodwill and otherintangible assets with indefinite lives which are included within other assets.The Company has adopted the provisions of SFAS 157 with respect tonon-financial assets effective January 1, 2008 and its adoption did nothave a material impact on our consolidated financial position and consolidatedresults of operations..

 

In February 2007,the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assetsand Financial Liabilities — Including an Amendment of FASB Statement No. 115”(“***SFAS 159***”),which is effective for fiscal years beginning after November 15, 2007.SFAS 159 permits an entity to choose to measure many financial instruments andcertain other items at fair value at specified election dates. Subsequentunrealized gains and losses on items for which the fair value option has beenelected will be reported in earnings. The Company has adopted the provisions ofSFAS 159 in 2008 and did not elect the fair value options on any of itsqualifying assets or liabilities.

 

**RecentAccounting Pronouncements**

 

In December 2007,the FASB issued SFAS No. 141R (revised 2007), “Business Combinations” ***(“SFAS 141R”)***. SFAS141R replaces SFAS 141 and establishes principles and requirements for how anacquirer recognizes and measures in its financial statements the identifiableassets acquired, including goodwill, the liabilities assumed and anynon-controlling interest in the acquiree. SFAS 141R also establishes disclosurerequirements to enable users of the financial statements to evaluate the natureand financial effects of the business combination. This statement is effectivefor fiscal years beginning after December 15, 2008. We are currentlyevaluating the impact the adoption of SFAS 141R will have on our consolidated financialposition and consolidated results of operations.

 

In December 2007,the FASB issued SFAS No. 160, “Noncontrolling Interests in ConsolidatedFinancial Statements” ***(“SFAS160”)***. SFAS 160 establishes accounting and reporting standardsfor ownership interests in subsidiaries held by parties other than the parent,the amount of consolidated net income attributable to the parent and to thenoncontrolling interest, changes in a parent’s ownership interest and thevaluation of retained noncontrolling equity investments when a subsidiary isdeconsolidated. SFAS 160 also establishes reporting requirements that providesufficient disclosures that clearly identify and distinguish between theinterests of the parent and the interests of the noncontrolling owners. Thisstandard is effective for fiscal years beginning after December 15, 2008.We are currently evaluating the impact the adoption of SFAS 160 will have onour consolidated financial position and consolidated results of operations.

 

In March 2008,the FASB issued SFAS No. 161, “Disclosures about Derivative Instrumentsand Hedging Activities” (“ ***SFAS161***”), an amendment of FASB Statement No. 133, “Accountingfor Derivative Instruments and Hedging Activities” (“***SFAS 133***”). SFAS 161amends and expands the disclosure requirement for SFAS 133 by requiringenhanced disclosure about (i) how and why an entity uses derivativeinstruments, (ii) how derivative instruments and related hedged items areaccounted for under SFAS 133 and its related interpretations, and (iii) howderivative instruments and related hedged items affect an entity’s financialposition, financial performance, and cash flows. SFAS 161 is effective for theCompany as of January 1, 2009.

 

In April 2008,the FASB issued FASB Staff Position ( “***FSP***”) 142-3, “Determination of the UsefulLife of Intangible Assets” (“***FSP 142-3***”). FSP 142-3 amends the factors that should beconsidered in developing renewal or extension assumptions used to determine theuseful life of a recognized intangible asset under SFAS No. 142, “Goodwilland Other Intangible Assets.” FSP 142-3 is effective for fiscal years beginningafter December 15, 2008. The Company is currently assessing the impact ofFSP 142-3 on its consolidated financial position and results of operations.

 

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In May 2008,the FASB issued SFAS No. 162, “The Hierarchy of Generally AcceptedAccounting Principles” (“***SFAS162***”). SFAS 162 identifies the sources of accounting principlesand provides entities with a framework for selecting the principles used inpreparation of financial statements that are presented in conformity with GAAP.The current GAAP hierarchy has been criticized because it is directed to theauditor rather than the entity; it is complex; and it ranks FASB Statements ofFinancial Accounting Concepts, which are subject to the same level of dueprocess as FASB SFAS, below industry practices that are widely recognized asgenerally accepted but that are not subject to due process. The Board believesthe GAAP hierarchy should be directed to entities because it is the entity (notits auditors) that is responsible for selecting accounting principles forfinancial statements that are presented in conformity with GAAP. The adoptionof SFAS 162 is not expected to have a material impact on the Company’sconsolidated financial position and results of operations.

 

In May 2008,the FASB issued SFAS No. 163, “Accounting for Financial GuaranteeInsurance Contracts—an interpretation of FASB Statement No. 60” (“***SFAS 63***”). Under FASBSFAS No. 60, “Accounting and Reporting by Insurance Enterprises” (“***SFAS 60***”), diversityexists in practice in accounting for financial guarantee insurance contracts byinsurance enterprises, which diversity results in inconsistencies in therecognition and measurement of claim liabilities. SFAS 63 requires that aninsurance enterprise recognize a claim liability prior to an event of default(an insured event) when there is evidence that credit deterioration hasoccurred in an insured financial obligation. SFAS 63 requires expandeddisclosures about financial guarantee insurance contracts. The accounting anddisclosure requirements of SFAS 63 will improve the quality of informationprovided to users of financial statements. The adoption of SFAS 163 is notexpected to have a material impact on the Company’s consolidated financialposition and results of operations.

 

In May 2008,the FASB issued FSP APB 14-1, “Accounting for Convertible Debt Instruments ThatMay Be Settled in Cash upon Conversion (Including Partial Cash Settlement)”(“***ABP 14-1***”).APB 14-1 requires the issuer to separately account for the liability and equitycomponents of convertible debt instruments in a manner that reflects the issuer’snonconvertible debt borrowing rate. The guidance will result in companiesrecognizing higher interest expense in the statement of operations due toamortization of the discount that results from separating the liability andequity components. APB 14-1 will be effective for financial statements issuedfor fiscal years beginning after December 15, 2008 and for interim periodswithin those fiscal years. The Company is currently evaluating the impact ofadopting APB 14-1 on its consolidated financial statements.

 

| **NOTE B** | **SALE OF  DISCONTINUED OPERATIONS - IP GEAR, LTD.** |
|------------|------------------------------------------------------|

 

New World Brandscompleted the sale of its Israeli subsidiary IP Gear, Ltd. as of an effectivedate of July 1, 2007 for accounting purposes. The company agreed to sellall the outstanding shares of the Company’s subsidiary, IP Gear Ltd., to TELESA.G. of Germany in exchange for cash on closing and further payments over aperiod of time. New World Brands’ consideration, as determined by the final agreement,calls for four elements: a fixed price of $1,500,000 as part of closing; anearn out over four years paid quarterly of not less than $750,000 over the fouryears; a minimum of $400,000 over two years defined as marketing support; andan interest bearing loan credit facility up to $1,000,000 repayable over fouryears. The Earn Outs are to be paid at the greater of $46,875 or 10% of the “CPE”product line revenue for the quarter to be paid within 90 days of the end ofthe quarter. The Company also received a return of working capital investedduring the transition period.

 

With certain exceptions,commencing on the date of the closing and for a certain period of time (asspecified in the Final Agreement), the Company agreed not to, or cause any ofits affiliates to, engage in any research and development or manufacturingactivities competitive with those conducted by IP Gear, Ltd., and notto, or cause any of its affiliates to, engage in the sale, distribution,marketing, and services of products that may compete with certain products ofTELES.  In addition, with certain exceptions, commencing one yearafter the date of closing, and effective for a period of time and withincertain geographic regions relative to the grant of exclusive distribution andsale rights to the Company pursuant to the partner contract described below,the Company agreed not to, or cause any of its affiliates to, engage in thesale, distribution, marketing, and services of products that may compete withproducts of IP Gear, Ltd.

 

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In accordance with the Final Agreement, the Companyand TELES entered into a partner contract relating to the promotion, marketing,sale, and support of certain products of TELES and IP Gear, Ltd., pursuant towhich the Company became the exclusive distributor of products of TELES and IPGear, Ltd. in North America (including the United States, Canada, Mexico, allCaribbean nations, Guatemala, and Honduras) and non-exclusive distributor inother markets.

 

TELES assumed responsibility for all the liabilitiesand obligations of IP Gear, Ltd. except those specifically outlined in theagreement. The two items excluded are any past potential liability that IPGear, Ltd. may have to the Office of the Chief Scientist of Israel and under acontract with one of IP Gear, Ltd.’s vendors, Piecom Tech.

 

New World Brands’ management was authorized by theboard to complete the sale to TELES of its IP Gear, Ltd. (Israel) subsidiary. Apreliminary agreement was reached July 18 2007 and the closing occurred onJuly 26, 2007. The final agreement for the sale of the subsidiary wasapproved by our Board’s consent and by TELES’ Supervisory board on July 25,2007

 

The condensed statement of operations for the 12months ended December 31, 2008, and December 31, 2007 below representthe reclassified discontinued operations of New World Brands as a result of thesale of IP Gear Ltd. It also shows the loss recorded at the end of the secondquarter due to the revaluation of our investment in IP Gear Ltd down to its netrealizable value as defined by the then pending transaction to sell IP GearLtd.

 
| ** **                                                    | ** ** | **Selected Statements of  Operations Data  for the Company’s  Discontinued Operations  for 12 Months Ended  December 31** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                    | ** ** | **2008**                                                                                                                                                                         | ** ** | **2007** | ** ** |
|                                                          |       |                                                                                                                                                                             |       |   |   |
| Total Revenue                                                 |       | $                                                                                                                                                                                | —     |   | $ | 998,981 |   |
|                                                          |       |                                                                                                                                                                             |       |   |   |
| Pre Tax Loss from Discontinued Operations                     |       | —                                                                                                                                                                           |       | (1,407,911 | ) |
| Income Tax Provision                                          |       | —                                                                                                                                                                           |       | — |   |
|                                                          |       |                                                                                                                                                                             |       |   |   |
| Loss from Discontinued Operations                             |       | —                                                                                                                                                                           |       | (1,407,911 | ) |
|                                                          |       |                                                                                                                                                                             |       |   |   |
| Pre-Tax Impairment Loss                                       |       | —                                                                                                                                                                           |       | (2,462,448 | ) |
| Gain from Sale of Discontinued Operations                     |       | —                                                                                                                                                                           |       | 4,706 |   |
| Income Tax Provision                                          |       | —                                                                                                                                                                           |       | — |   |
| Loss from Discontinued Operations, net of Tax                 |       | —                                                                                                                                                                           |       | (3,944,689 | ) |
|                                                          |       |                                                                                                                                                                             |       |   |   |
| Gain on Disposal of IP Gear Ltd.                              |       |                                                                                                                                                                             |       |   |   |
| Loss on disposition                                           |       | $                                                                                                                                                                                | —     |   | (23,975 | ) |
| Gain on Earn out for Q3, Q4 2007 in excess of minimum  booked |       | $                                                                                                                                                                                | —     |   | 28,681 |   |
| Total Gain on disposal during 2007                            |       | $                                                                                                                                                                                | —     |   | 4,706 |   |
|                                                               |            |                                                                                                                                                                                  |            |  |  |  |  |

 

As a result of the impairment in 2007, the Company reporteda loss of $2,462,448 at the end of the second quarter in accordance with FASB No. 144,“Accounting for Impairment of and Disposal of Long-Lived Assets,” and recordeda gain on disposal of $4,706 by the end of the year due to gains from the EarnOut portion of the sale in excess of the minimums by an amount of $28,681.These losses and gains are recorded on the Company’s financial

 

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statements in the income statements for the year end2007 in the line items “Loss from Discontinued Operations” and “Gain From Saleof Discontinued Operations”. We incurred no such loss in 2008 as there were noelements of this portion of the transaction that carried over into 2008.

 

| **NOTE C** | **INVENTORIES** |
|------------|-----------------|

 

Inventories as of December 31, 2008 and 2007 consisted of the following:

 
| **Resale Hardware**                | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|
|                                    |       |     |       |     |       |
| Finished Goods inventories              |       | $        | 1,893,411  |     | $          | 819,654 |   |
| Less allowance for obsolete inventories |       | (66,200  | )          | (75,000  | )          |
|                                    |       |     |       |     |       |
| Inventories, net                        |       | $        | 1,827,211  |     | $          | 744,654 |   |

 

| **NOTE D** | **PROPERTY  AND EQUIPMENT** |
|------------|-----------------------------|

 

As of December 31, 2008 and 2007, our property and equipment consisted of the following:

 
| ** **                                        | ** ** | **2008** | ** ** | **2007** | ** ** | **Useful Lives****(In Years)** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|-------------------------------------|------------|
| Equipment                                         |       | $        | 2,248,989  |     | $          | 1,804,175                           |       | 5 |   |
| Vehicles                                          |       | $        | 46,100     |     | 44,928     |                                | 5          |   |
| Leasehold improvements                            |       | $        | 234,770    |     | 227,922    |                                | 15         |   |
| Computer software                                 |       | $        | 277,730    |     | 189,256    |                                | 3 - 5      |   |
| Furniture and fixtures                            |       | $        | 33,275     |     | 34,519     |                                | 3 - 5      |   |
| Total property and equipment                      |       | $        | 2,840,864  |     | 2,300,800  |                                |       |   |
|                                              |       |     |       |     |       |                                |       |
| Less accumulated depreciation and amortization    |       | $        | (1,394,307 | )        | (878,994   | )                                   |       |   |
| Property and equipment, net                       |       | $        | 1,446,557  |     | $          | 1,421,806                           |       |   |   |
|                                              |       |     |       |     |       |                                |       |
| Operating equipment acquired under capital leases |       | $        | 135,710    |     | $          | 456,197                             |       |   |   |
| Less accumulated amortization                     |       | $        | (21,345    | )        | (167,181   | )                                   |       |   |
|                                              |       | $        | 114,365    |     | $          | 289,016                             |       |   |   |

 

Depreciation and amortization expense of continuingoperations amounted to approximately $515,000 and $406,000 for the years ended December 31,2008 and 2007, respectively.  Amortization of leased equipment, whichhas been included in depreciation expense on the accompanying financialstatements, was approximately $ 113,000 and $90,000 for the years ended December 31,2008 and 2007, respectively.

 

| **NOTE E** | **NOTES  PAYABLE** |
|------------|--------------------|

 

**Loans from P&S Spirit**

 

*P&S Spirit term loan*.

 

On and effective March 30,2007, the Company entered into a Term Loan and Security Agreement (the “***P&S Term Loan Agreement***”and the debt obligation pursuant thereto, the “***P&S Term Loan***”) with P&S Spirit,LLC, a Nevada limited liability company (“***P&S Spirit***”) in the principal amount of$1,000,000. The P&S Term

 

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Loan proceeds were used by the Company to repay alloutstanding principal, interest and fees payable to Bank of America, N.A. (“***BoA***”) under the BoALoan, and to pay certain professional fees associated with preparation andnegotiation of the P&S Term Loan Agreement. Reference is made to theCompany’s Current Report on Form 8-K filed with the SEC on April 5,2007.

 

As discussed below under “Repaymentof P&S Term Loan,” the P&S Term Loan was repaid in two payments, thefirst in the amount of $500,000 in August 2007, and the second in theamount of $500,000 in February 2008.

 

The principals of P&SSpirit include Dr. Selvin Passen, who is a director of the Company as wellas a shareholder of the Company and its former Chief Executive Officer, and Dr. JacobSchorr, who is a director of the Company.

 

*P&S Spirit credit line*.

 

As previously reported onthe Company’s Current Report on Form 8-K, filed with the SEC on June 6,2007, on and effective May 31, 2007, the Company entered into a CreditLine and Security Agreement (the “***P&S Credit Line Agreement***” and the debtobligation pursuant thereto, the “***P&S Credit Line***”) with P&S Spirit.The maximum principal available under the Credit Line is $1,050,000; theinterest rate is 2% over the Prime Rate (as reported in The Wall StreetJournal), payable in relation to the then-outstanding principal; consecutivemonthly payments of interest only (payable in arrears) are required commencing July 1,2007; and all unpaid principal, interest and charges are due upon the maturitydate of June 1, 2011. Upon default, the entire P&S Credit Line amount(including accrued unpaid interest and any fees) will be accelerated, and theCompany would be required to pay any costs of collection. The P&S CreditLine Agreement includes certain affirmative covenants, including, withoutlimitation, a financial reporting requirement (quarterly – 45 days after theclose of a calendar quarter), and a requirement that the Company maintain aratio of current assets to current liabilities of at least 1.2:1.0 and a totalliabilities to tangible net worth ratio not exceeding 2.5:1.0. Both of thesecovenants had been met as of December 31, 2008 and continue to be met asof the date of filing this Form 10K. The most recent interest rate paid onthis loan was 5.25%.

 

The P&S Credit LineAgreement grants P&S Spirit a security interest with respect to all of theCompany’s assets, but was subordinated to the P&S Term Loan and is in pari passuwith the TELES Loan Agreement. The P&S Credit Line Agreement is alsoguaranteed by a corporate Guaranty issued by Qualmax (which, pending completionof the contemplated merger of Qualmax with New World Brands, as stated in NoteO - Subsequent Events,  held acontrolling interest in the Company), and a security interest in the assets ofQualmax (consisting solely of 298,673,634 shares of Common Stock). Copies ofthe P&S Credit Line Agreement, P&S Credit Line Note, Guaranty ofQualmax, Collateral Pledge Agreement by Qualmax, and the Collateral PledgeAgreement by the Company, were included as Exhibits 10.1, 10.2, 10.3, 10.4, and10.5, respectively, to the Company’s Current Report on Form 8-K, filedwith the SEC on June 6, 2007.

 

On February 21, 2008,the Company drew $500,000 in principal on the P&S Credit Line in order torepay its obligations under the P&S Term Loan Agreement, as discussed inmore detail below under “Repayment of P&S Term Loan.”. On May 22, and May 23in two equal amounts, the company drew and additional $550,000( in total) inprincipal on the P & S Credit Line for a total of $1,050,000outstanding and no further amounts available for borrowing by the company underthis credit facility.

 

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

 

**TELES loan agreement**

 

On February 21,2008, the Company and TELES entered into a Term Loan and Security Agreement,effective February 15, 2008 (the “***TELES Loan Agreement***,” and the loanthereunder, the “***TELESLoan***”), providing the Company a loan of up to the principalamount of $1,000,000 (the “***Commitment***”)pursuant to which, from time to time prior to February 1, 2009 or theearlier termination in full of the Commitment, the Company may obtain advancesfrom TELES up to the amount of the outstanding Commitment. Amounts borrowed maynot be reborrowed, notwithstanding any payments thereunder. The outstandingbalance of the TELES Loan will be due and

 

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payable on or before February 1, 2012. The outstandingprincipal amount of the TELES Loan will be payable in 12 approximately equalquarterly installments commencing May 1, 2009. Interest on the outstandingprincipal amount of the TELES Loan is payable quarterly commencing May 1,2008, at an interest rate equal to 7% per annum, compounded quarterly (subjectto certain adjustments provided therein). The description of the TELES LoanAgreement herein is qualified in its entirety by reference to the full text ofsuch agreement, which is attached as Exhibit 10.1 to the Company’s CurrentReport on Form 8-K filed with the SEC on February 27, 2008. TELESA.G. agreed to forgo enforcement of the Loan Agreement element requiring thecompletion of the Merger Agreement between Qualmax and the company in December of2008. The company then executed on a portion of this agreement in December of2008 by offsetting $600,000 of trade payables due to TELES towards the loanfacility. A further $400,000 was drawn in a cash disbursement in January of2009 (see Note O - Subsequent Events). Teles A.G. and New World Brands also agreed at that time to a reductionin the interest rate of the loan from 7% as per the original agreement to arate of 5% commencing on the draw of the first funds pursuant to this loanagreement.

 

**Otherloans**

 

We have a total ofapproximately $31,000 remaining in loans on two company-owned vehicles. Themajority of the balance is for a truck that carries a term of 3 years and aninterest rate of 0%. It is due to expire in 2011.

 

Totalmaturities of all notes payable as of December 31, 2008 were as follows:

 
| 2009                                  |   | $         | 14,693    |   |
|---------------------------------------|--------|-----------|-----------|--------|
| 2010                                  |   | 14,267    |      |
| 2011                                  |   | 1,728     |      |
| 2012                                  |   | 1,650,000 |      |
|                                  |   |      |      |
| Total notes payable                   |   | 1,680,688 |      |
|                                  |   |      |      |
| Notes payable, current portion        |   | 14,693    |      |
|                                  |   |      |      |
| Notes payable, net of current portion |   | $         | 1,665,995 |   |
|                                       |        |           |           |        |  |

 

Interest expense incurredon the above notes payable was approximately $56,000 and $46,000 for the yearsended December 31, 2008 and 2007, respectively.

 

| **NOTE F** | **CAPITAL  LEASE OBLIGATIONS** |
|------------|--------------------------------|

 

**Descriptionof Leasing Arrangements and Depreciation**

 

The company is the lessee of equipment under capitalleases expiring in various years through 2012.  The assets and liabilitiesunder capital leases are recorded at the lower of the present value of theminimum lease payments or their fair value of the asset.  The assets aredepreciated over the lower of their related lease terms or their estimatedproductive lives.  Depreciation of assets under capital leases is includedin depreciation expense for 2008 and 2007. Interest expense incurred on capital lease obligations was approximately$27,000 and $32,000 for the years ended December 31, 2008 and 2007 respectively.

 

**Minimum Future Lease Payments**

 

Minimum future lease payments under the capital leasesas of December 31, 2008 for each of the next five years and in theaggregate are:

 
| **Year ending December 31:** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------|------------|
|                                        |       |       |       |
| 2009                                        |       | $          | 93,746     |   |
| 2010                                        |       | 58,865     |       |
| 2011                                        |       | 34,901     |       |
| 2012                                        |       | 3,012      |       |
| 2013                                        |       | —     |       |
| Subsequent to 2013                          |       | —     |       |
|                                        |       | 190,524    |       |
| Less: Amount representing interest          |       | (31,080    | )          |
| Present value of net minimum lease payment  |       | $          | 159,444    |   |
| Less: Current Portion                       |       | (67,531    | )          |
| Long-Term Portion of Capital Leases         |       | $          | 91,913     |   |
|                                             |            |            |            |  |  |

 

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| **NOTE G** | **STOCKHOLDERS’  EQUITY** |
|------------|--------------------------------|

 

**Capitalization**

 

The Company’s authorized capital stock consists of600,000,000 shares of common stock, $.01 par value per share, and 1,000 sharesof preferred stock, $.01 par value.  There were 411,879,673shares ofcommon stock and no shares of Series A Convertible Preferred Stock issuedand outstanding as of December 31, 2008.

 

The board of directors has the authority, withoutaction by the Company’s stockholders, to provide for the issuance of preferredstock in one or more classes or series and to designate the rights, preferencesand privileges of each class or series, which may be greater than the rights ofthe common stock.

 

**CommonStock**

 

As of December 31, 2006, our total number ofauthorized common stock, $.01 par value, was 50 million shares, with 44,303,909shares issued and outstanding.  On February 1, 2007 our boardacted to increase the number of authorized common stock to 600 million shares.The additional common stock was created to allow for the conversion of all outstandingpreferred shares to common stock. This conversion was authorized by boardconsent on January 31, 2007 and become effective on April 24, 2007resulting in the conversion of all Series A Convertible Preferred Sharesto common shares at a ratio of 2,986,736 common shares for every one preferredshare. Approximately 116.67 Series A Preferred Shares were converted intoapproximately 348 million common shares. This transaction was another step inthe planned sequence of transactions that will conclude in the completion ofthe merger of New World Brands Inc. with Qualmax Inc.

 

On May 31, 2007, the company issued as converted22,222,222 shares of common stock to P & S Spirit, in exchange for aninvestment of $886,093(net of all costs) in the company. The gross amount ofthe purchase price prior to any costs was $1,000,000. These shares of commonstock will be issued without registration under the Securities Act (1933) (asamended) and are subject to the lock out agreement signed by Qualmax, theKamrats, P & S Spirit and certain affiliates of the Kamrats and P &S Spirit filed with the SEC on June 6, 2007.  As per the terms of the agreement related tothe raising of funds associated with the P & S stock purchases, a feeof 3.5 million shares of the company were issued as a commission to the brokerin May of 2008.

 

During the final quarter of 2008, the company engagedin series of transactions with one of its principal shareholders, BOSCorporation, to repurchase a number of shares. The total number of shares repurchasedwas 6.6 million at a total cost of $165,000. These shares are listed in the equity section of the financialstatements as Treasury Shares.

 

Stockholders’ equity transactions prior to the NewWorld Brands/Qualmax, Inc. merger date have been retroactively restatedfor the equivalent number of shares received in the merger after giving effectto any difference in par value of the issuer’s and acquirer’s stock with anoffset to paid-in capital.

 

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**PreferredStock**

 

As of December 31, 2007, we had 1,000 shares ofauthorized preferred stock, $.01 par value.  There was no issued oroutstanding preferred stock at December 31, 2008.

 

**CommonStock Warrants**

 

No warrants for the purchase of our common stock weregranted during the 12 months ending December 31, 2008.

 

Common stock warrant activity for the year was asfollows:

 
| ** **                                | ** ** | **Warrants** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
|-------------------------------------------|------------|--------------|------------|--------------------------------------------|------------|
| Balance granted at December 31, 2006 |       | 2,320,000    |       | $                                          | 0.49       |   |
| Granted in 2007                           |       | 55,555,548   |       | $                                          | 0.09       |   |
|                                      |       |         |       |                                       |       |
| Granted in 2008                           |       | —       |       | $                                          | —     |   |
|                                      |       |         |       |                                       |       |
| Balance granted at December 31, 2008 |       | 57,875,548   |       | $                                          | 0.12       |   |

 

**PreferredStock Warrants**

 

There were no preferred stock warrants outstanding at December 31,2008, and no activity during 2008.

 

**Computationof Basic and Diluted Share Data**

 

The following tables set forth the computation ofbasic and diluted share data for 2008 and 2007 (rounded to the nearestthousand):

 

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| Weighted average number of shares outstanding  during 2007:                             |   |        |   |
|-----------------------------------------------------------------------------------------|--------|-------------|--------|
| Basic (common)                                                                          |   | 433,592,000 |   |
| Effect of dilutive securities                                                           |   |        |   |
| Common - options and warrants                                                           |   | —      |   |
| Weighted average number of shares outstanding -  diluted                                |   | 433,592,000 |   |
| Weighted average of options and warrants not  included above  (anti-dilutive) |   | 43,851,000  |   |

 
| Weighted average number of shares outstanding  during 2008:                             |   |        |   |
|-----------------------------------------------------------------------------------------|--------|-------------|--------|
| Basic (common)                                                                          |   | 411,879,673 |   |
| Effect of dilutive securities                                                           |   |        |   |
| Common - options and warrants                                                           |   | —      |   |
| Weighted average number of shares outstanding -  diluted                                |   | 411,879,673 |   |
| Weighted average of options and warrants not  included above  (anti-dilutive) |   | 61,050,556  |   |

 

| **NOTE H** | **STOCK  OPTION PLANS** |
|------------|-------------------------|

 

**PerformanceEquity Plan**

 

We have a Performance Equity Plan (the “***Performance Equity Plan***”) under which we may grant incentive andnonqualified stock options, stock appreciation rights, restricted stock awards,deferred stock, stock reload options, and other stock-based awards to purchaseup to 600,000 shares of Common Stock to officers, directors, key employees, andconsultants. The Company may not grant any options with a purchase price lessthan fair market value of Common Stock as of the date of grant.  Nooptions or other stock-based rights were issued under the Performance EquityPlan during 2008 and 2007, and none were exercised or exercisable during2008 and 2007.

 

**StockOption Plan**

 

In October 2001, we adopted a stock option plan(the “***2001 Option Plan***”) whereby we have reserved 5,000,000shares of its Common Stock for purposes of granting options to purchase suchshares pursuant to the 2001 Stock Option Plan.  Options are granted toofficers and employees of the Company by the Board of Directors and to membersof the Board on a non-discretionary basis, provided that the exercise price ofthe options is equal or greater than the fair market price of our Common Stockon the date the option is granted. The 2001 Stock Option Plan terminates 10years from its effective date.  A total of 2,920,000 of options (“theNew World Brands options”), granted under the 2001 Option Plan to purchase ourCommon Stock in exchange for services rendered, were vested and exercisable asof December 31, 2008. There were no issuances, exercises or forfeitures in2008 or 2007.  The employees and consultant performed servicesrelated to product promotion, general business, financing, and public/investorrelations.   These options were granted prior to September 15,2006.

 

Employee compensation expense for the New World Brandsstock options issued in 2006 are listed below. As of December 31, 2008, there was approximately $2,000 of totalunrecognized compensation cost related to unvested stock options granted underour stock option plan. There are 2,080,000 shares of common stock available forfuture issuance, as of December 31, 2008.

 

As reported in theCompany’s Final Schedule 14C Information Statement,filed with the SEC on November 6, 2008, the Board approved the adoption ofthe “2008 Stock Option Plan,” pursuant to which up to 41,500,000 shares ofCompany stock shall be available from which to grant options when the grant isapproved by stockholders. Such grants shall be exercisable at an exercise pricewhich shall be at least 100% of the fair market value of a share of

 

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Common Stock on the grant date, at terms andconditions, and on such a date (not to exceed 10 years from the grant date), asset by the Company in its discretion.  Thefollowing table summarizes the Company’s stock option plans as of December 31,2008:

 

**2001 Option Plan**

 
| **Exercise  Price** | ** ** | **Options  Outstanding** | ** ** | **Weighted  Average  Remaining  Contractual  Life (in  Years)** | ** ** | **Options  Exercisable** | ** ** |
|---------------------|------------|--------------------------|------------|----------------------------------------------------------------------|------------|--------------------------|------------|
| $                   | 0.18       |                     | 1,000,000  |                                                                 | 2.5        |                     | 1,000,000  |   |
| $                   | 0.18       |                     | 1,000,000  |                                                                 | 2.5        |                     | 1,000,000  |   |
| $                   | 0.18       |                     | 250,000    |                                                                 | 2.5        |                     | 250,000    |   |
| $                   | 0.18       |                     | 100,000    |                                                                 | 2.5        |                     | 100,000    |   |
| $                   | 0.18       |                     | 100,000    |                                                                 | 2.5        |                     | 100,000    |   |
| $                   | 0.18       |                     | 100,000    |                                                                 | 2.5        |                     | 100,000    |   |
| $                   | 0.50       |                     | 300,000    |                                                                 | 1.75       |                     | 300,000    |   |
| $                   | 0.10       |                     | 70,000     |                                                                 | 2.5        |                     | 70,000     |   |
|                |       | 2,920,000                |       |                                                                 |       | 2,920,000                |       |

 

| **NOTE I** | **INCOME  TAXES** |
|------------|-------------------|

 

Income tax consisted of the following for the yearsended December 31, 2008 and 2007:

 
| ** **                            | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
| Federal:                              |       |     |       |     |       |
| Current                               |       | $        | —     |     | $          | (403,995 | ) |
| Deferred                              |       | —   |       | —   |       |
| State:                                |       |     |       |     |       |
| Current                               |       |     |       | —   |       |
| Deferred                              |       | —   |       | —   |       |
| Subtotal                              |       | —   |       | —   |       |
| Change  in valuation allowance        |       | —   |       | —   |       |
| Benefit  (provision) for income taxes |       | $        | —     |     | $          | (403,995 | ) |

 

The effective tax rate varies from the federalstatutory maximum rate for the years ended December 31, 2008 and 2007principally due to the following:

 
| ** **                                  | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|
| Federal  tax rate                           |       | 34       | %          | 34       | %          |
| Loss  from foreign subsidiary               |       | —   |       | (8       | )%         |
| Change  in valuations allowance             |       | (38      | )%         | (28      | )%         |
| State  tax rate, net of federal tax benefit |       | 4        | %          | 6        | %          |
| Book  vs. tax loss on sale of subsidiary    |       | —   |       | 11       | %          |
| Other                                       |       | —   |       | 2        | %          |
| Total                                       |       | 0        | %          | 17       | %          |

 

Significant portions of the deferred tax assets andliabilities results from the tax effects of temporary differences, whichas of December 31, 2008 and 2007 were as follows:

 
| ** **                                       | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|--------------------------------------------------|------------|------------|------------|------------|------------|
| Deferred tax assets (short-term): |       |       |       |       |       |
| Net  operating loss carry forwards               |       | $          | 2,501,818  |       | $          | 1,829,437 |   |
| Capital  loss from sale of subsidiary            |       | 1,772,929  |       | 1,772,929  |       |
| Allowance  for doubtful accounts receivable      |       | 18,526     |       | 43,726     |       |
| Allowance  for inventory obsolescence            |       | 25,392     |       | 28,767     |       |
| Depreciation &  amortization            |       | —     |       | 21,607     |       |
| Allowance  for disputes                          |       | 1,419      |       | 4,219      |       |
| Accruals                                         |       | —     |       | 3,836      |       |
| Deferred  tax assets (long-term):                |       |       |       |       |       |
| Charitable  contributions carry forward          |       | 8,766      |       | 775        |       |
| Deferred  Tax Assets before Valuation Allowance  |       | 4,328,850  |       | 3,705,296  |       |
|                                             |       |       |       |       |       |
|                                             |       |       |       | 0          |       |
|                                             |       |       |       |       |       |
| Valuation  allowance                             |       | (4,321,857 | )          | (3,705,296 | )          |
| Deferred  tax assets after valuation allowance   |       | 6,993      |       |       |       |
| Deferred  tax liabilities - depreciation         |       | (6,993     | )          |       |       |
| Net  deferred tax assets after valuation         |       | $          | 0          |       | $          | 0 |   |

 

As of December 31, 2008, the Company had netoperating losses of approximately $6.5 million that can be carried forward forup to twenty years and deducted against future taxable income. The netoperating loss carry forwards expire in various years through 2028. The companyalso has a capital loss carry forward of approximately $4.6 million that can becarried forward for five years and deducted against future capital gain income.The capital loss carry forward expires in 2012.

 

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| **NOTE J** | **RELATED  PARTY TRANSACTIONS** |
|------------|---------------------------------|

 

**Loans fromShareholders**

 

The Company received $1,050,000 in the exercise ofloans from P & S Spirit during 2008, a stockholder of the company anda company controlled by two stockholders and members of the Board of Directorsof New World Brands. The terms of this loan are listed in detail in Note E -Notes Payable. The company paid a total of $56,321 in interest payments to P &S Spirit during 2008.

 

| **NOTE K** | **COMMITMENTS  AND CONTINGENCIES** |
|------------|------------------------------------|

 

**OperatingLeases**

 

We have entered into various operating leases for ourfacilities and equipment.  The future minimum annual rental paymentsdue on these operating leases as of December 31, 2008 for each of the next5 years are as follows:

 
| **Year ending December 31:** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------|------------|
| 2009                                        |       | $          | 146,764    |   |
| 2010                                        |       | 109,095    |       |
| 2011                                        |       | 84,681     |       |
| 2012                                        |       | 17,892     |       |
| 2013                                        |       | 14,880     |       |
|                                        |       |       |       |
|                                        |       | $          | 373,312    |   |

 

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Our U.S. operations are headquartered in Eugene,Oregon in leased commercial premises in two buildings, and the total rentalexpense for the years ended December 31, 2008 and 2007 was approximately$106,644 and $68,189, respectively. We have made substantial leaseholdimprovements that are listed as part of our long term assets and are beingamortized over the lives of the leases.

 

**MPILitigation**

 

On September 15, 2006, we sold our subsidiary,International Importers, Inc., and acquired, by way of reverseacquisition, all of the assets and assumed all of the liabilities of Qualmax(the “***ReverseAcquisition***”).

 

As a result of theReverse Acquisition, the Company assumed the liabilities of Qualmax.  Pursuant to the asset purchase agreementbetween Qualmax and BOS, BOS agreed to indemnify and hold Qualmax harmless fromliability, without limitation, arising from the claims raised in the MPILitigation, and BOS has undertaken defense of Qualmax at BOS’s expense.  As a part of the Company’s assumption of liabilitiesand indemnification, it assumed the Qualmax litigation styled as S.A.R.L.Bosanova v. S.A.R.L. Media Partners International MPI,  Societe BOS Better Online Solutions Limited,and Qualmax Inc. Case No. R.G. N 07-08379 in which Qualmax was a defendantin such litigation which was filed in 2007 before the Trade Tribunal ofNanterre, France.

 

On or about September 18,2008, the French Tribunal at Versailles overruled a lower Court ruling in thematter; declared the case to be beyond the scope of French jurisdiction; andordered the Plaintiffs to pay a nominal sum of 2,000 Euros to BOS. As of March 6,2009, there have been no changes in the status of the subject matter.  At present, management does not believe thatthis matter poses any significant financial risk to the Company.

 

**BlackstoneLitigation**

 

On August 10,2006 Qualmax was named as a defendant in a lawsuit styled as *Capital Securities, LLC and Blackstone CommunicationsCompany v. Carlos Bertonnatti, Worldwide PIN Payment Corp. and Qualmax, Inc.,*Case No. 2006-15824-CA-01, in the Circuit Court of the 11th JudicialCircuit in and for Miami-Dade County, Florida The Complaint in the matterincluded causes of action against Qualmax and Carlos Bertonnatti, Worldwide PIN Payment Corp. formisappropriation of trade secrets and corporate opportunity, and tortiousinterference with plaintiffs’ contract with a third party.  The Company also assumed the liability andindemnification included in this matter.

 

Without admittingany liability or wrongdoing on its part, on April 1, 2008, effective as ofMarch 31, 2008, the Company entered into a settlement agreement in thiscase pursuant to which, the Company paid plaintiffs the sum of $50,000 towardplaintiffs’ costs of litigation, and in exchange, plaintiffs released theCompany from all claims asserted by plaintiffs or otherwise arising against theCompany. All claims against the Company have been dismissed with prejudice. Atpresent, management does not believe that this matter poses any material orsignificant financial risk to the Company

 

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**CreditFacility with Pacific Continental Bank**

 

TheCompany entered into an agreement for the use of various credit services withPacific Continental Bank in February 2007. The conditions of thisagreement require the deposit of $250,000 with the bank as security for theservices. The terms and balance remain unchanged at December 31, 2008. Thedeposit is in the company’s money market account with the bank and is reportedon the balance sheet as part of cash and cash equivalents.

 

**PiecomTech Litigation**

 

Effective July 1,2007 we sold our subsidiary, IP Gear Ltd., to TELES (“TELES Agreement”).   A material aspect of the TELES Agreement,included a commitment of the Company to indemnify, hold harmless and defendTELES and IP Gear, Ltd. against any liabilities arising from the Piecom Techlitigation (herein),  As a part of theconsideration for such an obligation, the Company is entitled to the proceeds,if any, of the Piecom Tech litigation.

 

IPGear was namedas a defendant in a lawsuit styled Piecom Tech. Israel Ltd. v. IPGear Ltd.,Case No, 26-05166-07-5, in the Herzliyah, Israel Regional Court. Piecom Tech.had been a vendor to IP Gear, Ltd and was contracted to provide outsourcedcontract manufacturing services. There is currently a deposit held by Piecom of$214,000 towards the production of equipment not yet delivered and an amount inescrow of $32,000 pending resolution of this matter. Release of the escrowfunds of $32,000 depends upon the outcome of pending litigation between Piecomand IP Gear, Ltd. Neither of these amounts is represented on the balance sheetof the Company. On preliminary motions, argued in May of 2008, the Courtruled in favor of IP Gear, Ltd. A mediation hearing occurred in August of2008 and the mediator was unable to resolve the matter. Management believesthat, at present, this litigation does not pose any material or significantfinancial risk to the Company.

 

**AdditionalDisputes**

 

In addition to thematters discussed above, the Company is involved in various disputes that arisein the ordinary course of business.

 

| **NOTE L** | **REGULATORY  MATTERS** |
|------------|-------------------------|

 

The telecommunications industry is subject to federal,state and local regulation.  Any changes in the regulations orenforcement could impact the Company’s ability to continue its currentoperations.

 

| **NOTE M** | **DEFINED  CONTRIBUTION PLAN** |
|------------|--------------------------------|

 

In May 2005, we adopted a Savings Incentive MatchPlan for Employees (SIMPLE) (the “Plan”) for the benefit of our employees whoare reasonably expected to receive at least $5,000 in compensation during acalendar year.  We have elected to contribute to each eligibleemployee’s simple individual retirement account a matching contribution equalto the employee’s elective salary reduction contributions, up to a limit ofthree percent of the employee’s compensation for the calendaryear.  Total expense for the years ended December 31, 2008 and2007 was approximately $34,000 and $23,000 respectively.

 

| **NOTE N** | **BUSINESS  SEGMENT REPORTING** |
|------------|---------------------------------|

 

The following presents our segmented financialinformation by business line for the years ended December 31, 2008 and2007.  We are currently focused on two principal lines of businesses:(i) new and resale hardware, which is the sale and distribution of VoIPand other telephony equipment and related professional services via ourU.S.-based business operated under the names “TELES USA” and “NWB Networks”);and (ii) wholesale carrier services, which is telephony service resale anddirect call routing via our U.S.-based VoIP service business operated under thename “NWB Telecom.”

 

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| ** **                          | ** ** | **2008**  | ** ** | **2007**  | ** ** |
|-------------------------------------|------------|-----------|------------|-----------|------------|
|                                |       |      |       |      |       |
| Net Sales                           |       |      |       |      |       |
| Wholesale Carrier Services          |       | $         | 13,119,148 |      | $          | 11,443,514 |   |
| Hardware                            |       | 7,161,026 |       | 5,657,689 |       |
| Total                               |       | $         | 20,280,174 |      | $          | 17,101,203 |   |
|                                |       |      |       |      |       |
| Cost of Sales                       |       |      |       |      |       |
| Wholesale Carrier Services          |       | $         | 10,990,157 |      | $          | 9,850,272 |   |
| Hardware                            |       | 5,040,581 |       | 4,954,381 |       |
| Total                               |       | $         | 16,030,738 |      | $          | 14,804,653 |   |
|                                |       |      |       |      |       |
| Gross Profit                        |       |      |       |      |       |
| Wholesale Carrier Services          |       | $         | 2,128,991  |      | $          | 1,593,242 |   |
| Hardware                            |       | 2,120,445 |       | 703,308   |       |
| Total                               |       | $         | 4,249,436  |      | $          | 2,296,550 |   |
|                                |       |      |       |      |       |
| Depreciation and Amortization       |       |      |       |      |       |
| Wholesale Carrier Services          |       | $         | 360,918    |      | $          | 236,519 |   |
| Hardware                            |       | 4,016     |       | 2,417     |       |
| Corporate                           |       | 178,262   |       | 177,504   |       |
| Total                               |       | $         | 543,196    |      | $          | 416,440 |   |
|                                |       |      |       |      |       |
| Selling, General and Administrative |       |      |       |      |       |
| Wholesale Carrier Services          |       | $         | 1,487,342  |      | $          | 1,259,717 |   |
| Hardware                            |       | 1,226,379 |       | 1,012,686 |       |
| Corporate                           |       | 2,586,000 |       | 1,942,020 |       |
| Total                               |       | $         | 5,299,721  |      | $          | 4,214,423 |   |

 

| **NOTE O** | **SUBSEQUENT  EVENTS AND OTHER MATTERS** |
|------------|------------------------------------------|

 

**TELES AGLoan Agreement**

 

On January 19, the company drew an amount of$400,000 paid in cash by TELES A.G. within the context of the “TELES LoanAgreement” bringing the total draw to the maximum amount of $1,000,000 as perthe loan agreement. The terms of the loan required the company to complete itsdraw of all funds by no later than February of 2009.

 

**Merger ofQualmax and New World Brands**

 

Thefinal step in the merger of Qualmax and the company has now been completed.Pursuant to a fairness hearing conducted in the State of Oregon, the Directorof the State of Oregon Department of Consumer and Business Services, Directorof Finance and Corporate Securities found that the merger was fair, just,equitable and free of fraud. This allowed the company to pass the final stepnecessary to obtain a valid exemption from registration under Section 3(a)(10) ofthe Securities Act of the shares of common stock of the Company issuable to thestockholders of Qualmax in connection with the merger. The shareholders ofQualmax then approved the Merger Agreeement. All

 

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conditionsof the Merger have been met and the Merger consummated on January 23,2009.  Shareholders of the former Qualmaxare in the process of having their Qualmax shares replaced by a distribution ofthe shares of New World Brands shares as per the Merger Agreement.

 

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**EXHIBIT INDEX**

 
| **Exhibit Number** | ** ** | **Document**                                                                                                                                                                                                              |
|--------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|               |       |                                                                                                                                                                                                                      |
| 3.1                |       | Amended and Restated Certificate of Incorporation of  New World Brands, Inc. (1)                                                                                                                                     |
|               |       |                                                                                                                                                                                                                      |
| 4.2                |       | Certificate of Designation, Preferences and Rights  of Series A Convertible Preferred Stock (2)                                                                                                                      |
|               |       |                                                                                                                                                                                                                      |
| 4.3                |       | Certificate of Amendment to Certificate of  Designation, Preferences and Rights of Series A Convertible Preferred  Stock (3)                                                                                         |
|               |       |                                                                                                                                                                                                                      |
| 4.4                |       | Amended and Restated Stock Subscription and Share  Transfer Agreement, dated as of December 29, 2006, by and among New  World Brands, Inc., P&S Spirit, LLC, M. David Kamrat and Noah Kamrat  (3)           |
|               |       |                                                                                                                                                                                                                      |
| 4.5                |       | Amended and Restated Escrow Agreement dated as of  December 29, 2006 by and among New World Brands, Inc., P&S  Spirit, LLC and the Escrow Agent (as defined therein) (3)                                    |
|               |       |                                                                                                                                                                                                                      |
| 4.6                |       | Amended and Restated Lock-Up Agreement dated as of  December 29, 2006 by and among New World Brands, Inc., P&S  Spirit, LLC, M. David Kamrat, Noah Kamrat and certain other stockholders  party thereto (3) |
|               |       |                                                                                                                                                                                                                      |
| 4.7                |       | Amended and Restated Voting Agreement dated as of  December 29, 2006 by and among New World Brands, Inc., P&S  Spirit, LLC, M. David Kamrat, Noah Kamrat and certain other stockholders  party thereto (3)  |
|               |       |                                                                                                                                                                                                                      |
| 4.8                |       | Form of Warrant Agreement dated as of  December 29, 2006 (3)                                                                                                                                               |
|               |       |                                                                                                                                                                                                                      |
| 10.1               |       | Letter agreement 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 (4)                                    |
|               |       |                                                                                                                                                                                                                      |
| 10.2               |       | Term Loan and Security Agreement by and between New  World Brands, Inc. and P&S Spirit, LLC dated as March 30, 2007  (5)                                                                                    |
|               |       |                                                                                                                                                                                                                      |
| 10.3               |       | Term Note by and between New World Brands, Inc.  and P&S Spirit, LLC dated as March 30, 2007 (5)                                                                                                            |
|               |       |                                                                                                                                                                                                                      |
| 10.4               |       | Guaranty by Qualmax, Inc. dated as of March 30,  2007 (5)                                                                                                                                                       |
|               |       |                                                                                                                                                                                                                      |
| 10.5               |       | Limited Guaranty by M. David Kamrat dated as of  March 30, 2007 (5)                                                                                                                                                  |
|               |       |                                                                                                                                                                                                                      |
| 10.6               |       | Collateral Pledge Agreement made by  Qualmax, Inc. dated as of March 30, 2007 (5)                                                                                                                               |
|               |       |                                                                                                                                                                                                                      |
| 10.7               |       | Credit Line and Security Agreement, dated as of  May 31, 2007, between New World Brands, Inc. and P&S Spirit,  LLC (6)                                                                                 |
|               |       |                                                                                                                                                                                                                      |
| 10.8               |       | Credit Line Note, dated as of May 31, 2007, of  New World Brands, Inc. (6)                                                                                                                                      |
|               |       |                                                                                                                                                                                                                      |
| 10.9               |       | Guaranty of Qualmax, Inc., dated as of  May 31, 2007 (6)                                                                                                                                                        |
|               |       |                                                                                                                                                                                                                      |
| 10.10              |       | Collateral Pledge Agreement, dated as of  May 31, 2007, by Qualmax, Inc. in favor of P&S Spirit, LLC (6)                                                                                                    |
|               |       |                                                                                                                                                                                                                      |
| 10.11              |       | Collateral Pledge Agreement, dated as of  May 31, 2007, by New World Brands, Inc., in favor of P&S                                                                                                          |

 

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Table of Contents

 
|   |   | Spirit, LLC (6)                                                                                                                                                                                                                                                                                                                                                                          |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.12  |   | First Amendment to Amended and Restated Stock  Subscription and Share Transfer Agreement, dated as of May 31, 2007, by  and between New World Brands, Inc. and P&S Spirit, LLC, and  acknowledged and agreed by M. David Kamrat and Noah Kamrat (6)                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.13  |   | First Amendment to Amended and Restated Lock-Up  Agreement, dated as of May 31, 2007, by and among New World  Brands, Inc., Qualmax, Inc., M. David Kamrat, Jane Kamrat, Noah  Kamrat, Tracy Habecker, Dr. Selvin Passen, Oregon Spirit, LLC, and  P&S Spirit, LLC (6)                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.14  |   | First Amendment to Amended and Restated Voting  Agreement, dated as of May 31, 2007, by and among New World  Brands, Inc., Qualmax, Inc., P&S Spirit, LLC, Dr. Selvin  Passen, Oregon Spirit, LLC, and solely for the purposes of Section 21 of  the Restated Original Voting Agreement, M. David Kamrat, Jane Kamrat, Noah  Kamrat, and Tracy Habecker (6) |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.15  |   | Preliminary Agreement, dated July 18, 2007,  between New World Brands, Inc. and TELES AG Informationstechnologien (7)                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.16  |   | Share Sale and Purchase Agreement, dated  July 26, 2007, by and between New World Brands, Inc. and TELES AG  Informationstechnologien (including the Partner Contract as Annex 2) (8)                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.17  |   | Consent of Lender to Sale of Asset, dated  July 26, 2007, by P&S Spirit, LLC (8)                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.18  |   | Agreement and Plan of Merger, dated  February 18, 2008, by and between New World Brands, Inc. and  Qualmax, Inc. (9)                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.19  |   | Term Loan and Security Agreement, effective  February 15, 2008, by and between New World Brands, Inc. as  Borrower and TELES AG Informationstechnologien as Lender (10)                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.20  |   | Intercreditor Agreement, effective February 15,  2008, by and among New World Brands, Inc., P&S Spirit, LLC and TELES  AG Informationstechnologien (10)                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.21  |   | Settlement Agreement, effective March 31, 2008,  by and between Capital Securities, LLC, Blackstone Communications Company,  Carlos Bertonatti, Worldwide PIN Payment Corp., Qualmax, Inc./New World  Brands, Inc. and others (as listed therein) (11)                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 16.1   |   | Letter from Salberg & Company, P.A., dated March  13, 2007 regarding change in certifying accountant (12)                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 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(*)                                                                                                                                                                                                                        |

 

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| (*)  | Filed herewith.                                                                                                                       |
|------|---------------------------------------------------------------------------------------------------------------------------------------|
| (1)  | Previously filed as an exhibit to New World  Brands, Inc.’s Form 8-K, filed with the SEC on April 30, 2007.       |
| (2)  | Previously filed as an exhibit to New World  Brands, Inc.’s Form 10-QSB, filed with the SEC on October 16,  2006. |
| (3)  | Previously filed as an exhibit to New World  Brands, Inc.’s Form 8-K, filed with the SEC on January 8,  2007.     |
| (4)  | Previously filed as an exhibit to New World  Brands, Inc.’s Form 8-K, filed with the SEC on January 10,  2007.    |
| (5)  | Previously filed as an exhibit to New World  Brands, Inc.’s Form 8-K, filed with the SEC on April 5, 2007.        |
| (6)  | Previously filed as an exhibit to New World  Brands, Inc.’s Form 8-K, filed with the SEC on June 6, 2007.         |
| (7)  | Previously filed as an exhibit to New World  Brands, Inc.’s Form 8-K, filed with the SEC on July 20, 2007.        |
| (8)  | Previously filed as an exhibit to New World  Brands, Inc.’s Form 8-K, filed with the SEC on August 1, 2007.       |
| (9)  | Previously filed as an exhibit to New World  Brands, Inc.’s Form 8-K, filed with the SEC on February 22,  2008.   |
| (10) | Previously filed as an exhibit to New World  Brands, Inc.’s Form 8-K, filed with the SEC on February 27,  2008.   |
| (11) | Previously filed as an exhibit to New World  Brands, Inc.’s Form 8-K, filed with the SEC on April 7, 2008.        |
| (12) | Previously filed as an exhibit to New World  Brands, Inc.’s Form 8-K, filed with the SEC on March 14, 2007.       |

 

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