**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549





**FORM
      10-KSB**





**x
      ANNUAL REPORT UNDER
      SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR
      ENDED SEPTEMBER 30, 2006**





**o
      TRANSITION REPORT UNDER
      SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**


**FOR
      THE TRANSITION PERIOD FROM ________ TO________**





Commission
      file number 000-51796





**IQ
      MICRO INC.**





(Name
      of
      small business issuer in its charter)





COLORADO
            20-3353942(State or other jurisdiction of
            (I.R.S.
                Employerincorporation or organization)
            Identification
                No.)33401500 Australian Ave., Suite 700,
              West Palm
              Beach, Florida
            (Zip
                Code)(Address
                of principal executive
                offices)





561-514-0118


(Issuer's
      telephone number)





SECURITIES
      REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT: NONE





SECURITIES
      REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT: COMMON STOCK





(TITLE
      OF
      EACH CLASS)





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





*Note
      - Checking the box above will not relieve any registrant required to file
      reports pursuant to Section 13 or 15(d) of the Exchange Act from their
      obligations under those Sections.*





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





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




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





The
      issuer’s revenues for the fiscal year ended September 30, 2006 were $0





State
      the
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates computed by reference to the price at which the common equity
      was
      sold, or the average bid and asked prices of such common equity, as of a
      specified date within the past 60 days. Approximately $2,635,325 as of February
      12, 2007. The aggregate market value was based upon the average between the
      closing bid and asked price for the common stock on February 12, 2007 as quoted
      by the Over-the-Counter Bulletin Board under the symbol "IQMC", which average
      was $0.35.









(ISSURERS
      INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)





Check
      wither the issuer has filed all documents and reports required to be filed
      by
      Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities
      under a plan confirmed by a court. Yes o No o





(APPLICABLE
      ONLY TO CORPORATE REGISTRANTS)





State
      the
      number of shares outstanding of each of the issuer's classes of common equity,
      as of the latest practicable date: As of February 12, 2007, 50,199,500 shares
      of
      common stock.





(DOCUMENTS
      INCORPORATED BY REFERENCE)





If
      the
      following documents are incorporated by reference, briefly, describe them and
      identify the part of the Form 10-KSB (e.g., Part 1, Part II, etc.) into which
      the document is incorporated: (1) any annual report to security-holders; (2)
      any
      proxy or information statement; and (3) any prospectus filed pursuant to Rule
      424(b) or (c) of the Securities Act of 1933 ("Securities Act"). The listed
      documents should be clearly described for identification purposes (e.g., annual
      report to security holders for fiscal year ended December 24, 1990):
      None





Transitional
      Small Business Disclosure Format (check one):


Yes
o
      No x











TABLE
                  OF CONTENTSPageNumberPART
                  IItem
                  1.
              
              Description
                  of Business
              
              5Item
                  2.
              
              Description
                  of Property
              
              13Item
                  3.
              
              Legal
                  Proceedings
              
              14Item
                  4.
              
              Submission
                  of Matters to a Vote of Security Holders
              
              14PART
                  IIItem
                  5.
              
              Market
                  for Common Equity and Related Stockholder Matters
              
              14Item
                  6.
              
              Management's
                  Discussion and Analysis or Plan of Operation
              
              24Item
                  7.
              
              Financial
                  Statements
              
              37Item
                  8.
              
              Changes
                  In and Disagreements With Accountants on
              
              37Accounting
                  and Financial DisclosureItem
                  8A.
              
              Controls
                  and Procedures
              
              38Item
                  8B.
              
              Other
                  Information
              
              38PART
                  IIIItem
                  9.
              
              Directors,
                  Executive Officers, Promoters and Control Persons; Compliance with
                  Section
                  16(a) of the Exchange Act
              
              38Item
                  10.
              
              Executive
                  Compensation
              
              40Item
                  11.
              
              Security
                  Ownership of Certain Beneficial Owners and Managementand
                  Related Stockholder Matters
              
              43Item
                  12.
              
              Certain
                  Relationships and Related Transactions
              
              44PART
                  IV
              
              Item
                  13.
              
              Exhibits
              
              49Item
                  14.
              
              Principal
                  Accountant Fees and Services
              
              51
  3


**PART
      I**





**Introductory
      Note**





This
      annual report on Form 10-KSB (this “Report”) contains “forward-looking
      statements,” including, among others, statements about our beliefs, plans,
      objectives, goals, expectations, estimates and intentions that are subject
      to
      significant risks and uncertainties and are subject to change based on various
      factors, many of which are beyond our control. The words “may,” “could,”
“should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,”
“plan,” “target,” “goal” and similar expressions are intended to identify
      forward-looking statements.





All
      forward-looking statements, by their nature, are subject to risks and
      uncertainties. Our actual future results may differ materially from those set
      forth in our forward-looking statements.





In
      addition to those risks discussed in this Report under the heading “Risk
      Factors,” factors that could cause our actual results to differ materially from
      those in the forward-looking statements include, without
      limitation:





·
            our
                status as a development stage
                company;


·
            our
                ability to operate as a “going
                concern;”


·
            our
                need for additional capital;


·
            our
                substantial leverage and
                indebtedness;


·
            that
                our assets secure our indebtedness;


·
            restrictive
                covenants in our Securities Purchase Agreement and Secured Convertible
                Debentures;


·
            dilution
                to existing shareholders upon conversion of our Secured Convertible
                Debentures;


·
            our
                cash requirements;


·
            our
                ability to incur more debt;


·
            our
                lack of independent directors;


·
            our
                dependence on key personnel;


·
            that
                our executives are not our
                employees;


·
            immigration
                restrictions related to our senior
                officers;


·
            logistics
                related to our Chief Executive Officer and Chief Operations Officer
                residing in Norway;


·
            difficulties
                in making service of process or enforcing
                judgments;


·
            our
                lack of certain types of insurance
                coverage;


·
            our
                limited use of confidentiality
                agreements;


·
            limitations
                on patent protection and protection of other intellectual
                property;


·
            the
                outcome of possible intellectual property infringement
                claims;


·
            the
                success of our marketing and licensing
                operations;


·
            the
                reception in the industry of the technology we
                sub-license;


·
            possible
                defects in the technology we
                sub-license;


·
            the
                performance of sub-sub-licensees;


·
            our
                management of our growth;


·
            the
                effects of competition in our
                industry;


·
            currency
                exchange and tariff regulations;


·
            Food
                and Drug Administration (“FDA”) regulation of products or processes
                developed by sub-sub-licensees;


·
            the
                extent to which our controlling shareholder exerts its
                influence;


·
            the
                development of a trading market for our common
                stock;


·
            that
                we have not paid dividends on our common stock and do not intend
                to do so
                in the future;


·
            the
                effects of changing laws and
                regulations;






4




·
            the
                costs associated with being a reporting company with the Securities
                and
                Exchange Commission (the “SEC”);


·
            the
                trading price of our common stock;


·
            dilution
                of our common stock upon conversion of warrants and debentures;
                and


·
            other
                risks described from time to time in our filings with the
                SEC.





However,
      other factors besides those listed in the Risk Factors section or discussed
      in
      this Report could also adversely affect our results and you should not consider
      any such list of factors to be a complete set of all potential risks or
      uncertainties. Any forward-looking statements made by us or on our behalf speak
      only as of the date they are made. We do not undertake to update any
      forward-looking statement, except as required by applicable law.





Unless
      otherwise noted, the terms “IQMC,” the “Company,” “we,” “us,” and “our,” as used
      in this document, refer to the past and ongoing business operations of IQ Micro
      Inc.





Certain
      industry data disclosed in this report have been obtained from industry and
      government publications, as indicated. Our management believes such data to
      be
      reasonably accurate. All references in this document to “Fiscal 2006,” “Fiscal
      2005,” and “Fiscal 2004” refer to our fiscal years ending on September 30 of
      such years.





All
      common stock share amounts have been restated to reflect our 1-for-200 reverse
      stock split effected on November 5, 2004.




**Item 1.**
            **Description of
              Business.**





**Overview**





IQ
      Micro
      Inc. (“IQMC”) is an international licensing company established to commercialize
      technology developed by Osmotex AS (“Osmotex”), a Norwegian company incorporated
      in 1999. Osmotex’s technology precisely controls the movement of fluids on a
      micro scale. This technology relates to a field commonly known as
“microfluidics,” which is the movement of minute amounts of fluid through a
      variety of channels, nozzles, pumps, valves and needles. The use of these
      microfluidic devices has a wide variety of applications in the pharmaceutical,
      medical and manufacturing industries. See “- Proprietary Technology -
      Microfluidics Industry” below.





Osmotex
      has been the entity responsible for conducting and coordinating research and
      development of its microfluidics technology. See below for a description of
      Osmotex’s relationship with Centre Suisse d’Electronique at de Microtechnique SA
      (“CSEM”) as part of these research and development activities. Since our
      inception, we have not engaged in any research and development
      activities.





IQMC
      was
      originally formed as Enclave Products, Ltd. (the “Old Corporation”), a Colorado
      corporation, on March 22, 1996. Pursuant to a Plan of Merger dated March 29,
      2004, on April 21, 2004, the Old Corporation filed Articles and Certificate
      of
      Merger with the Secretary of State of the State of Colorado merging the Old
      Corporation into Enclave Products, Ltd., (the “Surviving Corporation”), a
      Colorado corporation. A previous controlling shareholder group of the Old
      Corporation arranged the merger for business reasons that did not materialize.
      On October 18, 2004, a Florida-based shareholder group acquired controlling
      interest in the Surviving Corporation and on November 5, 2004, effected a
      1-for-200 reverse stock split. On November 5, 2004, the Surviving Corporation
      changed its name to IQ Medical Corp. and then, on October 3, 2005, to IQ Micro
      Inc. We became qualified to do business in Florida on October 12, 2005. Our
      common stock is currently quoted on the NASD Over-the-Counter Bulletin Board
      (“OTC-BB”) under the symbol “IQMC.”




5




Osmotex
      was founded to develop and commercialize through licensing agreements,
      low-voltage microactuators (pumps), a sector of the microfluidics industry,
      based on the most recent discoveries in electrokinetics. Osmotex intends to
      take
      a leading role in liquid-handling systems in the microfluidics industry. Osmotex
      is in the final stages of testing its technology in microactuators, which we
      believe will make microfluidics viable for applications from CPU chip cooling
      to
      the microactuation of drugs.


Osmotex
      has developed a process for handling fluids on a micro level by means of a
      specialized, low-voltage pumping mechanism called a microactuator, which is
      a
      sort of “transistor.” Microfluidics devices are built using nanoscale materials,
      which are between 100 and 10,000 times smaller than a single human cell. Osmotex
      patented this process under the name “Invisible Pump.” The Invisible Pump allows
      for a broad range of commercial applications for microfluidics devices, which
      Osmotex intends to commercialize. Many of these applications are only currently
      usable in a controlled laboratory environment.





Osmotex
      anticipates that the Invisible Pump will find considerable use in the following
      technologies and applications.





·
            *Fuel
                cells, with a focus on portable power sources.*Specific markets targeted for portable fuel cells are laptop computers,
                cellular telephones, military, comfort and leisure uses and other
                emerging
                segments.





·
            *“Lab-on-a-chip”
                applications*.
                A
                lab-on-a-chip is a microfluidic laboratory and a micro electro-mechanical
                system (“MEMS”) in which circuits of tiny chambers and channels direct the
                flow of liquid chemicals according to a pre-determined program, all
                on a
                single silicon wafer, or “chip.” MEMS is the integration of
                microelectronics with micromachining technology to create
                systems-on-a-chip or “smart products.” This particular area of research
                could revolutionize several industries based on advancements in the
                area
                of microfluidics (See “- Microfluidics Industry” and “- Micro
                Electro-Mechanical Systems” below). By bringing together microelectronics
                with micromachining technology, we expect MEMS to revolutionize this
                product category. For example, health professionals could carry a
                stack of
                card-sized blood analysis devices. In essence, they would have the
                equivalent of a laboratory in their
                pocket.





·
            *Cooling
                devices for electronic equipment*.
                MEMS could provide an efficient, silent alternative to fans for cooling
                microprocessors, projectors and other electronic
                equipment.





·
            *Microsensors.*A
                sensor could be made small enough to be injected under the skin through
                a
                pre-filled syringe. We expect the first use of such a microsensor
                to be
                for diabetes patients, enabling them to monitor their blood glucose
                levels
                on a real-time basis.





We
      believe that Osmotex’s microfluidics technology is the enabling solution needed
      in the rapidly emerging field of microfluidics. All components of Osmotex’s
      microfluidics technology are either patented or have patent applications pending
      in the United States and nine other countries. Osmotex has strong, long-term
      relationships with international institutions at the forefront of microfluidics
      research (such as the Institute of Colloid and Water Chemistry at the National
      Academy of Sciences of Ukraine in Kiev, CSEM in Geneva, Switzerland and
      MicroTech Innovation Centre, in Horten, Norway.





Through
      June 8, 2005, we had no operations. On June 9, 2005, Osmotex and its
      wholly-owned subsidiary, Osmotex USA, Inc. (“Osmotex USA”), a Florida
      corporation formed in 2005 and currently the controlling shareholder of 85%
      of
      our capital stock, entered into a Technology License Agreement (the “License
      Agreement”). Osmotex licensed to Osmotex USA exclusive, worldwide sales and
      marketing licensing rights to microfluidics technology developed and patented
      by
      Osmotex, as well as additional intellectual property rights of Osmotex (the
      “Licensed Rights”), which include Osmotex’s patents. See “Proprietary Technology
      - Patents” below.




6




On
      June
      9, 2005, the same day that Osmotex and Osmotex USA entered into the License
      Agreement, we entered into two additional agreements. First, we entered into
      a
      Capital Contribution Agreement (the “CC Agreement”) with Osmotex USA. In the CC
      Agreement, we agreed to exchange 42,670,000 shares of our $0.0001 par value
      per
      share common stock to Osmotex USA in return for the Licensed Rights. As a result
      of this transaction, Osmotex USA became the beneficial owner of approximately
      85% of our capital stock. Then, and in connection with the CC Agreement, we
      entered into a Financing and Listing Agreement (the “F&L Agreement”) with
      Osmotex USA and D.P. Martin & Associates, Inc., a Florida corporation (“D.P.
      Martin”), that obligated D.P. Martin to locate at least $500,000 in external
      financing for us by December 31, 2005. Subsequent to March 31, 2006, the
      agreement was further extended to September 30, 2006. Pursuant to the F&L
      Agreement, D.P. Martin:




·
            assisted
                us in establishing Osmotex USA’s acquisition of approximately 85% of our
                outstanding common stock: and





·
            placed
                1,000,000 shares of our common stock beneficially owned by D.P. Martin
                into escrow to be released to D.P. Martin if and when it fulfills
                its
                financing commitment to us under the F&L Agreement. In
                February 2007, these 1,000,000 shares were released from the Osmotex
                escrow and pledged by D.P. Martin & Associates to Cornell Capital
                Partners, LP in connection with securing payment of the Company’s $95,000
                convertible debenture issued to Cornell in February
                2007.





If
      D.P.
      Martin does not fulfill its financing commitment to us, we will have the right
      to retire the 1,000,000 shares of our common stock held in escrow less the
      appropriate number of shares relating to any partial fulfillment.





Shortly
      thereafter, we determined that **** it
      was in
      our best interests and in the best interests of our shareholders to provide
      funding assistance in connection with Osmotex’s continued product development of
      microfluidics technology, other technologies or other items. We determined
      that
      this funding would involve the expenditure of our cash and that such cash
      expenditures would not be classified as debt owed to us by Osmotex or as capital
      contributions in exchange for any equity of Osmotex. We agreed with Osmotex
      and
      Osmotex USA that it was in the best interests of all parties for us to include
      as consideration for the Licensed Rights the payment of $300,000 (the “License
      Fee”), in addition to the prior issuance of 42,670,000 shares of our common
      stock to Osmotex USA. We determined that this arrangement is advantageous to
      us
      and to our shareholders because of the existence of the microfluidics technology
      and the benefits that we believe we can derive as the microfluidics technology
      is further developed and improved. We believe the most direct method of
      supporting Osmotex’s technology is supporting the product development of
      microfluidics technology via the License Fee. These payments are also
      advantageous and beneficial to Osmotex.





On
      July
      21, 2005, we formed IQ Micro (USA) Inc. (“IQ USA”), a Florida corporation and
      our wholly-owned subsidiary. IQ USA is our operating subsidiary that is expected
      to negotiate sub-sub-licensing arrangements for Osmotex’s microfluidics
      technology, including fees and royalties with pharmaceutical, technology and
      other industrial manufacturers throughout the world, such as pharmaceutical
      firms, electronics manufacturers and fuel cell developers, seeking to implement
      Osmotex’s microfluidics technology into their own products (the
“Manufacturers”). We expect the first sub-sub-licensing arrangements with
      Manufacturers to occur prior to March 31, 2007.





We
      paid
      the License Fee with the proceeds of our $500,000 Secured Convertible Debenture
      financing with Cornell Capital Partners, LP, which closed on August 12, 2005.
      Osmotex applied the License Fee funds to its microfluidics technology product
      development efforts. Specifically, Osmotex paid a significant portion of the
      funds to CSEM. Osmotex worked with CSEM on a previous and related project from
      June 2004 until December 2004. In that project, CSEM and Osmotex tested the
      concept of electosmosis of the second kind (“EO2”) for low-power pumping of
      liquids in microfluidic systems. On April 11, 2005, Osmotex entered into a
      letter agreement regarding Fabrication and Testing of Completely Microfabricated
      Micropumps (the “CSEM Letter Agreement”) to further Osmotex’s microfluidics
      technology product development. The CSEM Letter Agreement contains the terms
      of
      a four-step project that we believe will be completed prior to June 30,
      2007. **** The
      overall goal of the relationship formed between Osmotex and CSEM in the CSEM
      Letter Agreement is to assist Osmotex present completely microfabricated
      functional micropumps. Osmotex applied the remainder of the License Fee to
      sales
      and marketing activities conducted by former Osmotex employees in conjunction
      with the CSEM microfluidics technology product development. The net result
      of
      the License Fee is our payment of $300,000 to Osmotex, the sole owner of our
      majority shareholder, Osmotex USA.




7




On
      January 12, 2006, our shareholders, including a majority of the disinterested
      shareholders, ratified and approved the License Fee at a special meeting of
      the
      shareholders. As of January 12, 2006, we entered into the Amendment to Capital
      Contribution Agreement (the “Amendment to CC Agreement”) with Osmotex USA,
      whereby we memorialized our agreement to pay the License Fee, as partial
      consideration for the License Rights, in addition to our issuance of the
      42,760,000 common stock shares to Osmotex USA.





On
      January 12, 2006, we entered into the Amended and Restated Technology License
      Agreement (the “A&R License Agreement”) to which Osmotex and Osmotex USA are
      also parties. In the A&R License Agreement, the Licensed Rights Osmotex
      granted to Osmotex USA in the License Agreement remained the same, but Osmotex
      USA also sub-licensed to us the identical rights it had been granted from
      Osmotex. We expect to utilize the Licensed Rights Osmotex USA sub-licensed
      to us
      pursuant to the A&R License Agreement to effect the sales and marketing of
      Osmotex’s patented microfluidics technology through our wholly-owned subsidiary,
      IQ USA. In the A&R License Agreement, we memorialized our agreement to pay
      the License Fee.





We
      are
      currently a development stage company. The Licensed Rights are currently our
      sole asset and our sole prospective revenue source, in the form of anticipated
      licensing fees and royalties. To sub-sub-license Osmotex’s microfluidics
      technology, we have focused on developing contacts and relationships with
      Manufacturers, including major public corporations. We have targeted
      Manufacturers seeking to implement Osmotex’s technology into their own products.
      To provide full support to the manufacturing process of the Manufacturers’
products, we will provide consulting services and technological development
      services to them. To further support the Manufacturers after they have signed
      sub-sub-licensing agreements with us, we will continue to build a global
      microfluidics network with important research institutions. This network will
      ensure the ongoing exchange of knowledge and information in the industry. The
      network of research institutions currently includes the Institute of Colloid
      and
      Water Chemistry at the National Academy of Sciences of Ukraine in Kiev, CSEM
      and
      the MicroTech Innovation Centre in Horten, Norway.





The
      microfluidics industry is highly competitive and is made up of both large,
      well-organized, well-funded companies and many small start-up companies.
      However, we believe that we and Osmotex have an advantage over our competitors
      due to Osmotex’s advanced research and technology and our current discussions
      with potential sub-sub-licensees. See “Proprietary Technology - Microactuators”
below.





**Proprietary
      Technology**





***Microfluidics
      Industry***





The
      microfluidics industry involves the movement of minute amounts of fluids or
      gas
      through a variety of channels, nozzles, pumps, valves and needles. The following
      are examples of areas where we believe the duration required for certain
      products or processes in the medical, pharmaceutical and manufacturing
      industries can be significantly altered:





·
            Automated
                DNA - decreased from months to hours.


·
            Drug
                development - decreased from years to
                weeks.


·
            Battery
                lifespan - increased from hours to
                months.


·
            Diagnostics
                - decreased from weeks to minutes.




8




During
      the last decade, the main components of microfluidics - the sensors and the
      channel networks through which the fluids travel - have been significantly
      developed. However, great improvements have been necessary on the “transistor”
of microfluidics, the microactuator, which is the key technology Osmotex is
      developing. We believe that until now, clumsy and expensive mechanical or
      high-voltage equipment has limited microfluidics to laboratory systems, with
      relatively low processing power.





With
      Osmotex’s microactuator, the Invisible Pump, devices using microfluidic
      technology can be used on a commercial basis, outside of a lab environment
      and
      with significantly increased processing times and processing power.





In
      using
      microtechnology, active fluid-controlling devices are made with micro valves
      and
      pumps together with important microfluidics sensing capabilities. In its
      February 2004 report, *Microfluidics
      Part I: Inkjet, Drug Delivery, Fuel Cells and More* ,
      the
      high-tech market research firm of In-Stat/MDR reported that, excluding
      lab-on-a-chip, revenues for microfluidics are forecast to grow at a compound
      annual growth rate of 10.3%, from nearly $1.7 billion in 2003, to more than
      $2.7
      billion in 2008.





The
      field
      of microfluidics has been developing for approximately ten years. Most of that
      development, while significant, has been in isolated modules. We believe
      microfluidics growth has lagged due, in part, to a technological bottleneck.
      All
      but one component of microfluidics systems are available in today’s market;
      production techniques, flow channels and microsensors are all reasonably
      developed technologies. For years microfluidics researchers have been seeking
      to
      develop a solution to the most challenging technological component - the
      microactuator. We believe that the long-term growth of the microfluidics
      industry depends primarily on the development of an effective microactuator
      and
      we believe Osmotex has the capacity to develop one.





Scientists
      are beginning to put the pieces of microfluidics systems together. One of the
      main applications of microfluidics is lab-on-a-chip in industrializing chemical
      and biological laboratory work. Lab-on-a-chip, a microfluidics laboratory,
      is a
      form of MEMS in which circuits of tiny chambers and channels direct the flow
      of
      liquid chemical reagents on a single chip just as semiconductors direct the
      flow
      of electrons. These microfluidics circuits can be designed to accommodate
      virtually any analytic biochemical process. For example, a lab-on-a-chip for
      medical analysis could integrate sample input, dilution, reaction and
      separation, whereas one designed to map restriction enzyme fragments might
      have
      an enzymatic digestion chamber followed by a relatively long separation column.
      Many features of these labs-on-a-chip make them well-suited for high-throughput
      analyses, which involve passing a large number of samples through a system
      from
      input to output. Their small dimensions reduce both processing times and the
      amount of reagents necessary for a medical analysis, which we believe will
      substantially reduce costs. Just as microelectronic devices can be manufactured
      with many elements on a single chip, microfluidics devices can be fabricated
      with many channels, allowing for many parallel chemical analyses at a reasonable
      cost. They are uniquely suited to small-scale analyses; sample volumes for
      a
      single experiment often are in the nano- to picoliter-range, opening the door
      to
      the possibility of analyzing components from single cells.





The
      first
      significant commercial application of microfluidics has been in inkjet printing.
      Other potential applications include:





·
            disease
                diagnostics (inexpensive chips used to test for hundreds of
                diseases);


·
            manufacturing
                process control (online analysis in industry, automobile engines,
                etc.);


·
            security
                (biological and chemical surveillance);


·
            medication
                (insulin pumps);


·
            micro
                fuel cells (for powering portable
                electronics);


·
            cooling
                devices for electronic equipment;
                and




9




·
            displays
                (flat screen televisions and
                monitors).





We
      believe that microfluidics is beginning to change many industries in the same
      way that the integrated circuit impacted signal processing, ultimately making
      it
      possible to perform years of manual work in minutes using inexpensive,
      mass-produced equipment.





We
      also
      believe that there is a significant market opportunity with respect to Osmotex’s
      glucose monitoring system. The World Health Organization estimates the total
      number of people with diabetes worldwide to be nearly 200 million. In 2002,
      the
      total annual economic cost of diabetes to the U.S. healthcare system was
      estimated to be $132 billion, which is one out of every ten healthcare dollars
      spent in the United States. In addition, it is estimated that medical
      complications arising from diabetes cost the U.S healthcare system over $45
      billion annually. We believe that a significant portion of those costs could
      be
      eliminated with the more consistent glucose monitoring provided by our
      implantable system.





***Microactuators***





We
      believe that Osmotex’s Invisible Pump technology is the enabling solution needed
      in microfluidics. The Invisible Pump technology is highly scalable; different
      sizes and designs can be optimized to yield the correct flow, pressure or
      agitation for a given application. At the core of the technology lies a recently
      discovered electrokinetic phenomenon, which we believe Osmotex is the first
      to
      exploit technologically. Common to several other actuation principles being
      studied, this phenomenon works by applying an electric field to a channel by
      means of two electrodes.





The
      uniqueness of the Invisible Pump developed by Osmotex however, is its ability
      to
      pump liquids at a low-voltage AC power delivered by microfabricated electrodes
      inside the channel. Unlike competitors’ technologies generally, Osmotex’s
      technology does not:





·
            require
                voltages greater than five volts;


·
            require
                DC power;


·
            alter
                the properties of the liquid; or


·
            have
                specialized, single-use-only
                applications.





We
      believe our competitors’ technology inevitably results in a “dirty” system with
      electrolysis and gas evolution at the electrodes, which consequently must be
      placed in open reservoirs. Furthermore, it is difficult to make such systems
      very complex, as the practical number of external high-voltage electrodes is
      limited. Osmotex’s low-voltage actuators allow for different sizes and
      configurations to yield precise flow, pressure and agitation without affecting
      the liquid’s properties.





We
      believe that Osmotex is the market leader with respect to microactuators at
      this
      time and that no competitor ** currently
      exists with a successful, viable alternative. Through Osmotex’s strategic
      relationships with leading microfluidics research institutions, we are kept
      apprised of any impending new developments in the field. While there are a
      number of competitive technologies developed and under development, Osmotex
      is
      not aware of any current competitor that has been able to utilize low voltages
      to power a microfluidic pump. Existing technology uses voltages as high as
      1,000
      to 5,000 volts, as opposed to the 5 volts currently required for the Osmotex
      technology. Given the advantages of microfluidics devices that can function
      with
      this low-voltage microactuator, Osmotex expects that other competitors may
      be
      developing similar technologies to our or Osmotex’s low-voltage pump. However,
      Osmotex has certain advantages over such competitors:





(1)
            Osmotex’s
                microactuator is in the advanced stages of research and development
                and is
                essentially ready for commercialization and specialization for specific
                applications; and


(2)
            Osmotex
                already holds international patents in many important commercial
                markets
                around the world.




10




We
      believe that the primary competition in the area of the microactuator products
      will come from other biotechnology companies and large pharmaceutical companies
      developing their own alternative products. However, the time required to bring
      these products to market is lengthy and is labor- and capital-intensive. Large
      pharmaceutical and manufacturing clients are likely to be more interested in
      licensing our technology, which is significantly closer to being a commercially
      viable product, than they are in developing their own proprietary
      technology.





The
      Invisible Pump can be integrated in large numbers on a single chip. It contains
      no moving parts and is built using materials 100 to 10,000 times smaller than
      a
      human cell. The Invisible Pump is capable of being mass-produced and we believe
      it will enable drastic reductions in the size of an expansive range of medical
      and industrial equipment.





In
      accordance with our Licensed Rights, in June 2005, we initiated an international
      licensing program, using IQ USA as the sales and marketing arm, to commercialize
      the Invisible Pump.





To
      sub-sub-license Osmotex’s microfluidics technology, we have focused on
      developing contacts and relationships with Manufacturers, including, major
      public corporations. For example, as of the date of this Report, we are in
      contact with several pharmaceutical and fuel cell companies to develop long-term
      sub-sub-licensing agreements. The discussions are advancing in various
      stages. ****





We
      have
      targeted Manufacturers seeking to implement the Invisible Pump technology into
      their own products. To provide full support to the manufacturing process of
      Manufacturers’ products, we will provide consulting services and technological
      development services to them.





To
      further support the Manufacturers after they have signed sub-sub-licensing
      agreements with us, we plan to continue to build a global microfluidics network
      with important research institutions. This network should help ensure the
      ongoing exchange of knowledge and information in the industry. Our network
      of
      research institutions currently includes: the Institute of Colloid and Water
      Chemistry at the National Academy of Sciences of Ukraine in Kiev, CSEM and
      the
      MicroTech Innovation Centre in Horten, Norway.





In
      addition to licensing its microfluidics technology, Osmotex is developing
      proprietary products based on its electrokinetic research. Osmotex has developed
      an electric, breathable membrane with widespread industrial potential. The
      rate
      and direction of liquid transported through the membrane is controlled by an
      electrical signal. The membrane can also be incorporated into various textiles,
      including intelligent sportswear and functional fabrics, in addition to being
      used in applications such as condensation removal and groundwater drainage,
      among others. Textiles incorporating these membranes are capable of transporting
      over one liter of water per hour using the energy from a small
      battery.





***Micro
      Electro-Mechanical Systems***





MEMS
      is
      the integration of mechanical elements, sensors, actuators, and electronics
      on a
      common silicon substrate through microfabrication, similar to the way computer
      chips are mass-produced. MEMS brings together silicon-based microelectronics
      with micromachining technology, making possible the realization of complete
      systems-on-a-chip. While the electronics are fabricated using integrated circuit
      process sequences, the micromechanical components are fabricated using
      compatible micromachining processes that selectively etch away parts of the
      silicon wafer or add new structural layers to form the mechanical and
      electromechanical devices. MEMS is an enabling technology that we expect will
      allow Osmotex to further its current development of smart products, augmenting
      the computational ability of microelectronics with the perception and control
      capabilities of microsensors and microactuators and expanding the scope of
      possible design applications.





Microelectronic
      integrated circuits can be thought of as the “brains” of a system. MEMS augments
      this decision-making capability with “eyes” and “arms” to allow microsystems to
      sense and control the environment. Sensors gather information from the
      environment by measuring mechanical, thermal, biological, chemical, optical
      and
      magnetic phenomena. The electronics then process the information derived from
      the sensors and, through a programmed decision-making capability, direct the
      actuators to respond by moving, positioning, regulating, pumping and filtering,
      thereby controlling the environment to achieve the desired outcome or purpose.
      Because MEMS devices are manufactured using batch fabrication techniques similar
      to those used for integrated circuits, Manufacturers can place unprecedented
      levels of functionality, reliability, and sophistication on a small silicon
      chip
      at a relatively low cost.





11


Increased
      demand for systems such as lab-on-a-chip will likely dramatically bring down
      their cost and make them accessible to a much broader market. Microscale
      miniaturization is another upside-end product that would be small and highly
      portable, about the size of a credit card. Health professionals, for instance,
      could carry a stack of card-sized blood analysis devices, enabling them to
      provide services that would otherwise require a laboratory. Such devices would
      also automate processes that could increase researchers’ ability to conduct more
      experiments and to gather more statistics and more data using less time and
      effort.





Osmotex
      is currently completing tests of an innovative, low-cost, implantable system
      developed with MEMS to continually monitor glucose levels in diabetics and
      provide an immediate alert when levels change. The Invisible Pump automatically
      delivers drugs without repeated skin punctures while significantly improving
      the
      accuracy of glucose readings over currently available solutions. We believe
      Osmotex’s system could dramatically reduce costly medical complications
      diabetics suffer due to poor glucose control.





***Patents***





Osmotex’s
      technology is protected by patents and patent applications. All of Osmotex’s
      currently-held patents and intellectual property rights expire in 2023. The
      material protected by the patents is the core of our licensing program. Osmotex
      holds patents for its patent application titled “ *Method
      Of Fluid Transport* ”
in
      Australia (AU737492), Brazil (PI9810358.0), Canada (CA2295710), Finland
      (FI0993328), France (FR0993328), Germany (DE0993328), Great Britain (GB0993328),
      Italy (IT0993328), Norway (NO308095) and the U.S. (US6320160). These patents
      were originally issued to Consensus A/S, a Norwegian company co-owned by Trond
      Eidsnes, one of our directors, and, after the patents were granted, they were
      transferred to Osmotex. The patent application priority date is June 30,
      1997.





In
      addition, Osmotex has submitted two other Patent Cooperation Treaty
      (“PCT”) **** applications **** for:





·
            PCT
                application PCT/NO 03/00246*“Actuator
                in a microfluidic system for inducing electroosmotic liquid movement
                in a
                micro channel,”*Priority date: 030715; and





·
            PCT
                application PCT/NO 03/00247*“Fabric
                material with improved liquid transport,”*Priority date: 030715.





Osmotex
      has received a Positive International Preliminary Examination Report for both
      applications, stating that the inventions have novelty, include an inventive
      step and have industrial application. We expect the PCT applications to form
      the
      basis for a European Patent Office application and applications in North
      America, European Union and Japan.





The
      Licensed Rights include the patents discussed above and other intellectual
      property, including rights to use any and all of Osmotex’s **** now
      or
      subsequently known or discovered tangible and intangible:





·
            rights
                associated with works of authorship throughout the universe, including,
                but not limited to, copyrights, moral rights and
                mask-works;





·
            trademark
                and trade name rights and similar
                rights;





·
            trade
                secret rights;




12




·
            patents,
                designs, algorithms and other industrial property
                rights;





·
            all
                other intellectual and industrial property rights of every kind and
                nature
                throughout the universe, however named or designated, including,
                without
                limitation, all characters, artwork, graphics, audio-visual components,
                recordings, films, photographs and/or materials related to the patented
                technology; and





·
            all
                registrations, initial applications, renewals, extensions, continuations,
                divisions or reissues of the above, whether now or subsequently in
                force.





**Employees**





Our
      wholly- owned subsidiary, IQ USA, currently enlists the services of several consultants,
      each of whom
      is the subject of a Management Agreement between their respective employer
      and
      us. The management fee associated with each Management Agreement is paid
      directly by IQ USA.





We
      are
      party to a Management Agreement, effective May 1, 2005, with D.P. Martin. In
      that agreement, we engaged and appointed Robert Rudman, an employee of D.P.
      Martin, as our Chief Financial Officer. Mr. Rudman is also one of our directors.
      IQ USA pays a monthly management fee in the amount of $10,000 to D.P. Martin.
      Mr. Rudman is a Canadian Chartered Accountant and a Canadian citizen. Mr.
      Rudman’s H-1B work authorization status was granted with D.P.
      Martin.





We
      are
      party to a Management Agreement, effective October 1, 2005, with Visionaire
      (formerly Jochri Consult AS), a Norwegian company (“Visionaire”), under which we
      engaged and appointed Johnny Christiansen, who resides in Norway and is an
      employee of Visionaire, as our Chief Executive Officer. Mr. Christiansen is
      also
      one of our directors. Mr. Christiansen performs management services for us
      in
      his capacity as Chief Executive Officer from Norway and also performs management
      services for IQ USA, which pays his monthly management fee in the amount of
      $8,000. Mr. Christiansen is also a director of Osmotex.





We
      are
      party to a Management Agreement, effective March 1, 2006, with Visionaire under
      which we engaged and appointed Per Arne Lislien, who resides in Norway and
      is an
      employee of Visionaire, as our Chief Operations Officer. Mr. Lislien performs
      management services for us in his capacity as Chief Operations Officer from
      Norway and also performs management services for IQ USA, which pays his monthly
      management fee in the amount of $10,000.




**Item
                2.**
              **Description
                of
                Property.**





We
      do not
      own any real property. Our executive office is located at 500 Australian Avenue,
      Suite 700, West Palm Beach, Florida, 33401. On July 1, 2005, we verbally agreed
      to a month-to-month lease for this single, 250 square foot, executive office
      in
      a shared office suite with D.P. Martin at a current lease rate of $2,500 per
      month.





On
      August
      1, 2005, we verbally agreed to a month-to-month lease for our use of a
      500-square-foot office space, including administrative support, located at
      Nedre
      vei 4, N-3183 Horten, Norway, where Visionaire currently leases three executive
      offices at a monthly cost of 15,250 (Norwegian Krone) or $2,400. On the basis
      that two of those offices are occupied by Johnny Christiansen and Per Arne
      Lislien, two-thirds, or approximately $1,600, of the office rent is being
      charged back to us and is included in our 2006 projected operating budget.
      Visionaire is owned by one of our directors and Chief Executive Officer, Johnny
      Christiansen.





In
      addition to the Norwegian office, we also incur an expense related to laboratory
      facilities, office space and support of CSEM in Alpnach Dorf, Switzerland in
      connection with Osmotex’s one-year Agreement with CSEM, dated September, 2005,
      for the use of office space for two Osmotex employees, laboratory usage,
      laboratory support services and research and development support. This cost
      varies from month to month depending on usage of the facilities. For budgeting
      purposes, we have projected an average monthly cost of $1,300 for the fiscal
      year ended September 30, 2007.




13




**Item 3.**
              **Legal
                Proceedings.**





As
      of the
      date of this Report, we are not currently involved in any legal
      proceedings.




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





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





**PART
      II**


**Item 5.**
                **Market for Common Equity
                  and Related
                  Shareholder Matters.**





Our
      common stock is currently traded on the OTC-BB under the symbol “IQMC.” We
      changed our name from IQ Medical Corp. to IQ Micro Inc. on **** October
      3, 2005. The table below sets forth, for each of the quarterly periods
      indicated, the highest and lowest closing bid prices for our common stock as
      reported on the OTC-BB and the over-the-counter market in the Pink Sheets as
      maintained by Pink Sheets LLC. The closing bid price for our common stock on
      February 12, 2007 was $0.35. Such quotations reflect inter-dealer prices,
      without retail mark-up, mark-down or commission and may not represent actual
      transactions.








**Quarter**
            
            **High**
            
            **Low****Fiscal
                2004**First
                (ended December 31, 2003)
            
            
            N/A
            
            
            N/ASecond
                (ended March 31, 2004)
            
            
            N/A
            
            
            N/AThird
                (ended June 30, 2004)
            
            
            N/A
            
            
            N/AFourth
                (ended September 30, 2004)
            
            
            N/A
            
            
            N/A**Fiscal
                2005**First
                (ended December 31, 2004)
            
            
            N/A
            
            
            N/ASecond
                (ended March 31, 2005)
            
            
            N/A
            
            
            N/AThird
                (ended June 30, 2005)
            
            $
            0.65
            
            $
            0.12Fourth
                (ended September 30, 2005)
            
            
            0.85
            
            
            0.51**Fiscal
                2006**First
                (ended December 31, 2005)
            
            $
            1.05
            
            $
            0.42Second
                (ended March 31, 2006)
            
            
            0.35
            
            
            0.35Third
                (ended June 30, 2006)
            
            
            0.75
            
            
            0.55Fourth
                (ending September 30, 2006)
            
            
            0.75
            
            
            0.55





The
      closing bid prices appearing in the above table have been adjusted to reflect
      our 1-for-200 reverse stock split effected on November 5, 2004.





**Holders**





As
      of
      February 12, 2007, our shareholders list contained approximately thirty-five
      shareholders of record of common stock.




14




**Dividends**





We
      have
      never declared or paid cash dividends on our capital stock and our board of
      directors does not intend to declare or pay any dividends on the common stock
      in
      the foreseeable future. We expect to retain our earnings, if any, for use in
      expanding our business. The declaration and payment in the future of any cash
      or
      stock dividends on the common stock will be at the discretion of our board
      of
      directors and will depend on a variety of factors, including our ability to
      service our outstanding indebtedness and to pay our dividend obligations on
      securities ranking senior to the common stock, our future earnings, if any,
      our
      capital requirements, our financial condition and such other factors as our
      board of directors may consider to be relevant from time to time.





Furthermore
      in our Second Amended and Restated Security Agreement with Cornell Capital
      Partners, LP, dated March 29, 2006, we agreed that we will not, without prior
      written consent of Cornell Capital Partners, LP:





·
            declare
                or pay any dividend of any kind, in cash or in property, on any class
                of
                its capital stock;





·
            purchase,
                redeem, retire or otherwise acquire for value any shares of such
                stock;





·
            make
                any distribution of any kind in respect
                thereof;





·
            make
                any return of capital to shareholders;
                or





·
            make
                any payments in respect of any pension, profit sharing, retirement,
                stock
                option, stock bonus, incentive compensation or similar plan (except
                as
                required or permitted hereunder).








**Securities
      Authorized for Issuance Under Equity Compensation Plans**





The
      following table sets forth information as to securities issuable upon exercise
      of outstanding options and warrants and available for issuance under equity
      compensation plans as of September 30, 2006.




**Number**
                **of
                  Securities**
                **To
                  Be Issued**
                **Upon
                  Exercise**
                **of
                  Outstanding**
                **Options,
                  Warrants**
                **and
                  Rights**
            
            **Weighted
                  -Average**
                **Exercise
                  Price**
                **of
                  Outstanding**
                **Options,**
                **Warrants
                  and**
                **Rights**
            
            **Number**
                **of
                  Securities**
                **Remaining
                  Available**
                **for
                  Future Issuance**
                **Under
                  Equity**
                **Compensation
                  Plans**
                **(Excluding
                  Securities**
                **Reflected
                  in Column(A))****(A)**
            
            **(B)**
            
            **(c)**Equity
                compensation plans approved by security holders
            
            
            N/A
            
            
            N/A
            
            
            N/A**Warrants:**Equity
                compensation plans not approved by
              security
                holders
            
            
            250,000
            
            $
            0.51
            
            
            0100,000
            
            $
            0.001
            
            
            0100,000
            
            $
            0.001
            
            
            03,000,000
            
            $
            .30
            
            
            0212,000
            
            $
            0.001
            
            
            0Total
            
            
            3,662,000
            
            
            
            
            
            0




15




**Recent
      Sales of Unregistered Securities.**





**Cornell
      Capital Partners, LP Secured Convertible Debenture
      Financings**





We
      issued
      Secured Convertible Debentures to Cornell Capital Partners, LP on August 12,
      2005, November 30, 2005, February 8, 2006, March 29, 2006, and February 15,
      2007
      which in the aggregate as of February 15, 2007, are convertible into up to
      approximately 5,696,429 shares of our common stock (assuming a conversion
      price of $0.28 per share and excluding interest), subject to adjustment in
      accordance with the terms of the applicable agreements and instruments. Each
      of
      these transactions was a private sale to one accredited investor made pursuant
      to Section 4(2) and Rule 506 under Regulation D of the Securities Act of 1933,
      as amended. All of those Secured Convertible Debentures are secured by all
      of
      our property and products and the proceeds of all such items. Pursuant to each
      of the Securities Purchase Agreements, dated August 11, 2005, November 30,
      2005
      and March 29, 2006, we paid Yorkville Advisors, LLC (“Yorkville”), the general
      partner of Cornell Capital Partners, LP, a total fee of $70,000 under each
      such
      agreement. Pursuant to the Securities Purchase Agreement dated February 15,
      2007, we paid Yorkville a total fee of $15,000.





We
      issued
      Cornell Capital Partners, LP a Secured Convertible Debenture on August 12,
      2005
      in the principal amount of $500,000, bearing interest at an annual rate of
      8%.
      Cornell Capital Partners, LP may convert the Secured Convertible Debenture
      into
      our common stock. Principal and interest on this Secured Convertible Debenture
      may be converted into up to approximately 9,800,000 shares of common stock
      (with
      this number varying depending on the trading price of our common stock and
      other
      adjustments as applicable) by Cornell Capital Partners, LP at a conversion
      price
      per share equal to the lesser of:





·
            $0.64,
                which is equal to one hundred twenty percent (120%) of the average
                closing
                bid price of our common stock, as quoted by Bloomberg, LP for the
                five (5)
                trading days immediately preceding the date issued;
                or





·
            an
                amount equal to 80% of the lowest closing bid price of the common
                stock
                (on the OTC Bulletin Board or on the exchange on which the common
                stock is
                then listed, including the “Pink Sheets”), as quoted by Bloomberg L.P. for
                the five (5) trading days immediately preceding the conversion
                date.





The
      conversion price under the second bullet point above was $0.28 as of February
      12, 2007. The number of shares of common stock issuable upon conversion equals
      the quotient obtained by dividing the outstanding amount of the Secured
      Convertible Debenture to be converted by the conversion price, subject to
      adjustment in accordance with the terms of the applicable agreements and
      instruments. This Secured Convertible Debenture has an August 12, 2007 maturity
      date.





On
      November 30, 2005, we issued Cornell Capital Partners, LP a Secured Convertible
      Debenture in the principal amount of $250,000, bearing interest at an annual
      rate of 8%. Cornell Capital Partners, LP may convert this Secured Convertible
      Debenture into our common stock. The Secured Convertible Debenture is secured
      by
      all of our property and products thereof and proceeds of all such items and
      has
      a November 30, 2007 maturity date. As part of the November 2005 Secured
      Convertible Debenture financing and pursuant to the Securities Purchase
      Agreement, dated November 30, 2005, we issued another Secured Convertible
      Debenture to Cornell Capital Partners, LP on February 8, 2006, that except
      for
      its February 8, 2008 maturity date and issuance amount of $250,000, has
      identical terms to the November 2005 Secured Convertible Debenture.





Principal
      and interest on each of the November 30, 2005 and the February 8, 2006 Secured
      Convertible Debentures may each be converted into up to approximately 4,900,000
      shares of common stock (with this number varying depending on the trading price
      of our common stock and other adjustments as applicable) by Cornell Capital
      Partners, LP. For the November 30, 2005 Secured Convertible Debenture, the
      conversion price per share is equal to the lesser of:




16




·
            $0.48,
                which is equal to one hundred twenty percent (120%) of the average
                closing
                bid price of our common stock, as quoted by Bloomberg, LP for the
                five (5)
                trading days immediately preceding the date issued; or





·
            an
                amount equal to 80% of the lowest closing bid price of the common
                stock
                (on the OTC Bulletin Board or on the exchange on which the common
                stock is
                then listed, including the “Pink Sheets”), as quoted by Bloomberg LP for
                the five (5) trading days immediately preceding the conversion
                date.





The
      conversion price under the second bullet point above was $0.28 as of February
      12, 2007. For the Secured Convertible Debenture issued on February 8, 2006,
      the
      conversion price per share is the lesser of:





·
            $0.42,
                which is equal to one hundred twenty percent (120%) of the average
                closing
                bid price of our common stock, as quoted by Bloomberg, LP for the
                five (5)
                trading days immediately preceding the date issued;
                or





·
            an
                amount equal to 80% of the lowest closing bid price of the common
                stock
                (on the OTC Bulletin Board or on the exchange on which the common
                stock is
                then listed, including the “Pink Sheets”), as quoted by Bloomberg LP for
                the five (5) trading days immediately preceding the conversion
                date.





The
      conversion price under the second bullet point above was $0.28 as of February
      12, 2007. The number of shares of common stock issuable upon conversion equals
      the quotient obtained by dividing the outstanding amount of the Secured
      Convertible Debenture to be converted by the conversion price, subject to
      adjustment in accordance with the terms of the applicable agreements and
      instruments.





On
      March
      29, 2006, we issued Cornell Capital Partners, LP a Secured Convertible Debenture
      in the principal amount of $500,000, bearing interest at an annual rate of
      8%.
      Cornell Capital Partners, LP may convert this Secured Convertible Debenture
      into
      our common stock. The Secured Convertible Debenture has a March 29, 2009
      maturity date. As part of this March 2006 Secured Convertible Debenture
      financing, we committed to file a registration statement on Form S-1 or Form
      SB-2 no later than June 29, 2006, as required pursuant to the Securities
      Purchase Agreement, dated March 29, 2006. This deadline has been extended to
      the
      latter half of March, 2007. Principal and interest on this Secured Convertible
      Debenture may be converted into up to approximately 7,400,000 shares of common
      stock (with this number varying depending on the trading price of our common
      stock and other adjustments as applicable) by Cornell Capital Partners, LP.
      The
      conversion price of this Secured Convertible Debenture is based on a formula
      which is a conversion price per share equal to the lesser of:




·
            $0.42,
                which is equal to one hundred twenty percent (120%) of the average
                closing
                bid price of our common stock, as quoted by Bloomberg, LP for the
                five (5)
                trading days immediately preceding the date issued;
                or





·
            an
                amount equal to 80% of the lowest closing bid price of the common
                stock
                (on the OTC Bulletin Board or on the exchange on which the common
                stock is
                then listed, including the “Pink Sheets”), as quoted by Bloomberg LP for
                the five (5) trading days immediately preceding the conversion
                date.





The
      conversion price under the second bullet point above was $0.28 as of February
      12, 2007. The number of shares of common stock issuable upon conversion equals
      the quotient obtained by dividing the outstanding amount of the Secured
      Convertible Debenture to be converted by the conversion price, subject to
      adjustment in accordance with the terms of the applicable agreements and
      instruments.





We
      issued
      Cornell Capital Partners, LP a Secured Convertible Debenture on February 15,
      2007 in the principal amount of $95,000, bearing interest at an annual rate
      of
      8%. Cornell Capital Partners, LP may convert the Secured Convertible Debenture
      into our common stock. Principal on this Secured Convertible Debenture may
      be
      converted into up to approximately 339,286 shares of common stock (with this
      number varying depending on the trading price of our common stock and other
      adjustments as applicable) by Cornell Capital Partners, LP at a conversion
      price
      per share equal to the lesser of:




17




·
            $0.35
                per share; or





·
            an
                amount equal to 80% of the lowest closing bid price of the common
                stock
                (on the OTC Bulletin Board or on the exchange on which the common
                stock is
                then listed, including the “Pink Sheets”), as quoted by Bloomberg L.P. for
                the five (5) trading days immediately preceding the conversion
                date.





The
      conversion price under the second bullet point above was $0.28 as of February
      12, 2007. The number of shares of common stock issuable upon conversion equals
      the quotient obtained by dividing the outstanding amount of the Secured
      Convertible Debenture to be converted by the conversion price, subject to
      adjustment in accordance with the terms of the applicable agreements and
      instruments. This Secured Convertible Debenture has a February 15, 2010 maturity
      date. In connection with the February 15, 2007 Secured Convertible Debenture,
      (a) D.P. Martin & Associates (DPM”) (a stockholder in the Company) pledged
      1,000,000 shares of the Company’s common stock owned by DPM; the proceeds from
      the sale of these shares, if and as liquidated, will reduce the indebtedness
      under the debentures and will be applied against an obligation due the Company
      from DPM, (b) the Company’s Chief Financial Officer provided his personal
      guaranty of up to $25,000; and (c) the Company issued to Cornell Capital
      Partners, LP 212,000 warrants exercisable at $0.001 per share. The net proceeds
      from the issuance of this Debenture were used to pay transaction costs and
      professional fees in connection with our audit and securities law compliance
      and
      reporting.




**Capital
      Contribution Agreement**





On
      June
      9, 2005, we entered into a Capital Contribution Agreement (“CC Agreement”) with
      Osmotex USA. In the CC Agreement, we agreed to exchange 42,670,000 shares of
      our
      $0.0001 par value per share common stock to Osmotex USA, in return for the
      Licensed Rights. As a result of this transaction, Osmotex USA became the
      beneficial owner of approximately 85% of our capital stock. This private sale
      was made pursuant to Section 4(2) and Rule 506 under Regulation D of the
      Securities Act of 1933, as amended.





**Description
      of Securities**





**Merger
      with Enclave Products, Ltd.**





Pursuant
      to a Plan of Merger dated March 29, 2004, on April 21, 2004, the Old Corporation
      filed Articles and Certificate of Merger with the Secretary of State of the
      State of Colorado merging the Old Corporation into the Surviving Corporation.
      In
      the Plan of Merger, we increased our authorized capital shares of common voting
      stock, par value of $0.0001 per share, from 100,000 shares to 100,000,000
      shares. Each shareholder of the Old Corporation exchanged one share of its
      common stock for one share of common stock in the Surviving
      Corporation.





**Reverse
      Stock Split**





On
      November 5, 2004, we filed Articles of Amendment with the Secretary of State
      of
      the State of Colorado with Articles of Amendment to the Articles of
      Incorporation attached thereto, authorizing a one-for-200 reverse stock split
      on
      all outstanding shares of common stock as of that date.




18





**Common
      Stock**





Our
      authorized common stock consists of 300,000,000 shares of common stock, of
      which
      50,199,500 shares were issued and outstanding as of September 30, 2006. Each
      share of our common stock is entitled to one vote and unlimited voting rights
      and each shareholder is entitled to receive its proportionate share of our
      net
      assets upon our dissolution. Our shareholders have no pre-emptive
      rights.





**Preferred
      Stock**





We
      are
      also authorized to issue up to 25,000,000 shares of preferred stock. As of
      the
      date of this Report, no preferred shares are issued or outstanding and no class
      of preferred stock has been designated.





**Secured
      Convertible Debentures**





We
      issued
      Secured Convertible Debentures to Cornell Capital Partners, LP on August 12,
      2005, November 30, 2005, February 8, 2006, (assuming a conversion price of
      $0.28
      per share and excluding interest) March 29, 2006, and February 15, 2007
      which in the aggregate as of February 15, 2007, are convertible into up to
      approximately 5,696,429 shares of our common stock, subject to adjustment
      in accordance with the terms of the applicable agreements and instruments.
      Each
      of these transactions was a private sale to one accredited investor made
      pursuant to Section 4(2) and Rule 506 under Regulation D of the Securities
      Act
      of 1933, as amended. All of those Secured Convertible Debentures are secured
      by
      all of our property and products and the proceeds of all such items. Pursuant
      to
      each of the Securities Purchase Agreements, dated August 11, 2005, November
      30,
      2005 and March 29, 2006, we paid Yorkville Advisors, LLC (“Yorkville”), the
      general partner of Cornell Capital Partners, LP, a total fee of $70,000 under
      each such agreement. Pursuant to the Securities Purchase Agreement dated
      February 15, 2007, we paid Yorkville a total fee of $15,000.





We
      issued
      Cornell Capital Partners, LP a Secured Convertible Debenture on August 12,
      2005
      in the principal amount of $500,000, bearing interest at an annual rate of
      8%.
      Cornell Capital Partners, LP may convert the Secured Convertible Debenture
      into
      our common stock. Principal and interest on this Secured Convertible Debenture
      may be converted into up to approximately 9,800,000 shares of common stock
      (with
      this number varying depending on the trading price of our common stock and
      other
      adjustments as applicable) by Cornell Capital Partners, LP at a conversion
      price
      per share equal to the lesser of:





·
            $0.64,
                which is equal to one hundred twenty percent (120%) of the average
                closing
                bid price of our common stock, as quoted by Bloomberg, LP for the
                five (5)
                trading days immediately preceding the date issued;
                or





·
            an
                amount equal to 80% of the lowest closing bid price of the common
                stock
                (on the OTC Bulletin Board or on the exchange on which the common
                stock is
                then listed, including the “Pink Sheets”), as quoted by Bloomberg L.P. for
                the five (5) trading days immediately preceding the conversion
                date.





The
      conversion price under the second bullet point above was $0.28 as of February
      12, 2007. The number of shares of common stock issuable upon conversion equals
      the quotient obtained by dividing the outstanding amount of the Secured
      Convertible Debenture to be converted by the conversion price, subject to
      adjustment in accordance with the terms of the applicable agreements and
      instruments. This Secured Convertible Debenture has an August 12, 2007 maturity
      date.





On
      November 30, 2005, we issued Cornell Capital Partners, LP a Secured Convertible
      Debenture in the principal amount of $250,000, bearing interest at an annual
      rate of 8%. Cornell Capital Partners, LP may convert this Secured Convertible
      Debenture into our common stock. The Secured Convertible Debenture is secured
      by
      all of our property and products thereof and proceeds of all such items and
      has
      a November 30, 2007 maturity date. As part of the November 2005 Secured
      Convertible Debenture financing and pursuant to the Securities Purchase
      Agreement, dated November 30, 2005, we issued another Secured Convertible
      Debenture to Cornell Capital Partners, LP on February 8, 2006, that except
      for
      its February 8, 2008 maturity date and issuance amount of $250,000, has
      identical terms to the November 2005 Secured Convertible Debenture.




19




Principal
      and interest on each of the November 30, 2005 and the February 8, 2006 Secured
      Convertible Debentures may each be converted into up to approximately 4,900,000
      shares of common stock (with this number varying depending on the trading price
      of our common stock and other adjustments as applicable) by Cornell Capital
      Partners, LP. For the November 30, 2005 Secured Convertible Debenture, the
      conversion price per share is equal to the lesser of:





·
            $0.48,
                which is equal to one hundred twenty percent (120%) of the average
                closing
                bid price of our common stock, as quoted by Bloomberg, LP for the
                five (5)
                trading days immediately preceding the date issued; or





·
            an
                amount equal to 80% of the lowest closing bid price of the common
                stock
                (on the OTC Bulletin Board or on the exchange on which the common
                stock is
                then listed, including the “Pink Sheets”), as quoted by Bloomberg LP for
                the five (5) trading days immediately preceding the conversion
                date.





The
      conversion price under the second bullet point above was $0.28 as of February
      12, 2007. For the Secured Convertible Debenture issued on February 8, 2006,
      the
      conversion price per share is the lesser of:





·
            $0.42,
                which is equal to one hundred twenty percent (120%) of the average
                closing
                bid price of our common stock, as quoted by Bloomberg, LP for the
                five (5)
                trading days immediately preceding the date issued;
                or





·
            an
                amount equal to 80% of the lowest closing bid price of the common
                stock
                (on the OTC Bulletin Board or on the exchange on which the common
                stock is
                then listed, including the “Pink Sheets”), as quoted by Bloomberg LP for
                the five (5) trading days immediately preceding the conversion
                date.





The
      conversion price under the second bullet point above was $0.28 as of February
      12, 2007. The number of shares of common stock issuable upon conversion equals
      the quotient obtained by dividing the outstanding amount of the Secured
      Convertible Debenture to be converted by the conversion price, subject to
      adjustment in accordance with the terms of the applicable agreements and
      instruments.





On
      March
      29, 2006, we issued Cornell Capital Partners, LP a Secured Convertible Debenture
      in the principal amount of $500,000, bearing interest at an annual rate of
      8%.
      Cornell Capital Partners, LP may convert this Secured Convertible Debenture
      into
      our common stock. The Secured Convertible Debenture has a March 29, 2009
      maturity date. As part of this March 2006 Secured Convertible Debenture
      financing, we committed to file a registration statement on Form S-1 or Form
      SB-2 no later than June 29, 2006, as required pursuant to the Securities
      Purchase Agreement, dated March 29, 2006. This deadline has been extended to
      late March, 2007. Principal and interest on this Secured Convertible Debenture
      may be converted into up to approximately 7,400,000 shares of common stock
      (with
      this number varying depending on the trading price of our common stock and
      other
      adjustments as applicable) by Cornell Capital Partners, LP. The conversion
      price
      of this Secured Convertible Debenture is based on a formula which is a
      conversion price per share equal to the lesser of:





·
            $0.42,
                which is equal to one hundred twenty percent (120%) of the average
                closing
                bid price of our common stock, as quoted by Bloomberg, LP for the
                five (5)
                trading days immediately preceding the date issued;
                or




20




·
            an
                amount equal to 80% of the lowest closing bid price of the common
                stock
                (on the OTC Bulletin Board or on the exchange on which the common
                stock is
                then listed, including the “Pink Sheets”), as quoted by Bloomberg LP for
                the five (5) trading days immediately preceding the conversion
                date.





The
      conversion price under the second bullet point above was $0.28 as of February
      12, 2007. The number of shares of common stock issuable upon conversion equals
      the quotient obtained by dividing the outstanding amount of the Secured
      Convertible Debenture to be converted by the conversion price, subject to
      adjustment in accordance with the terms of the applicable agreements and
      instruments.





We
      issued
      Cornell Capital Partners, LP a Secured Convertible Debenture on February 15,
      2007 in the principal amount of $95,000, bearing interest at an annual rate
      of
      8%. Cornell Capital Partners, LP may convert the Secured Convertible Debenture
      into our common stock.  As of February 15, 2007 principal on this Secured
      Convertible Debenture may be converted into up to approximately 339,286
      shares of common stock (assuming a conversion price of $0.28 per share and
      excluding interest) (with this number varying depending on the trading price
      of
      our common stock and other adjustments as applicable) by Cornell Capital
      Partners, LP at a conversion price per share equal to the lesser
      of:





·
            $0.35
                per share; or





·
            an
                amount equal to 80% of the lowest closing bid price of the common
                stock
                (on the OTC Bulletin Board or on the exchange on which the common
                stock is
                then listed, including the “Pink Sheets”), as quoted by Bloomberg L.P. for
                the five (5) trading days immediately preceding the conversion
                date.





The
      conversion price under the second bullet point above was $0.28 as of February
      12, 2007. The number of shares of common stock issuable upon conversion equals
      the quotient obtained by dividing the outstanding amount of the Secured
      Convertible Debenture to be converted by the conversion price, subject to
      adjustment in accordance with the terms of the applicable agreements and
      instruments. This Secured Convertible Debenture has a February 15, 2010 maturity
      date. In connection with the February 15, 2007 Secured Convertible Debenture,
      (a) D.P. Martin & Associates (DPM”) (a stockholder in the Company) pledged
      1,000,000 shares of the Company’s common stock owned by DPM; the proceeds from
      the sale of these shares, if and as liquidated, will reduce the indebtedness
      under the debentures and will be applied against an obligation due the Company
      from DPM, (b) the Company’s Chief Financial Officer provided his personal
      guaranty of up to $25,000; and (c) the Company issued to Cornell Capital
      Partners, LP 212,000 warrants exercisable at $0.001 per share.





Cornell
      Capital Partners, LP is restricted by the terms of each Secured Convertible
      Debenture from converting a Secured Convertible Debenture or receiving shares
      of
      our common stock as payment of interest to the extent such conversion or receipt
      of interest payment would result in Cornell Capital Partners, LP beneficially
      owning in excess of 4.9% of our common stock, on a fully converted basis.
      However, Cornell Capital Partners, LP may waive this restriction. If Cornell
      Capital Partners, LP were to make such waiver and convert all of its Secured
      Convertible Debentures and Warrants (See “- Warrants” below) into our common
      stock, then, assuming a $0.10 variable conversion price per share, it would
      own
      approximately 31.53% of our common stock. The table below demonstrates this
      and
      other ownership scenarios of Cornell Capital Partners, LP if it were to fully
      convert all of the securities we issued to it into our common stock and based
      on
      the assumption of different variable conversion prices per share.




21




**CONVERSION
      OF CONVERTIBLE SECURITIES OF**





**CORNELL
      CAPITAL PARTNERS, LP**




**Fixed**
              **Conversion
                Price Per****Share**
            
            **Debentures**
              **as
                Converted into Shares**
              **of
                Common Stock**
            
            **Warrants
                as Converted into Shares of Common****Stock****Assumed
                Variable Conversion Price Per Share**$0.10
              per
                share
            
            $0.25
              per
                share
            
            $0.42
              per
                share
            
            $0.48
              per
                share
            
            $0.64
              per
                share**Debt
                Issued**August
                2005
            
            $
            0.64
            
            
            6,250,000
            
            
            2,500,000
            
            
            1,190,476
            
            
            1,041,667
            
            
            781,250
            
            
            100,000November
                2005
            
            $
            0.48
            
            
            3,125,000
            
            
            1,250,000
            
            
            595,238
            
            
            520,833
            
            
            520,833
            (1)
            
            100,000February
                2006
            
            $
            0.48
            
            
            3,125,000
            
            
            1,250,000
            
            
            595,238
            
            
            520,833
            (2)
            
            520,833
            (2)
            
            --March
                2006
            
            $
            0.42
            
            
            6,250,000
            
            
            2,500,000
            
            
            1,190,476
            
            
            1,190,476
            (2)
            
            1,190,476
            (2)
            
            3,000,000February
                2007
            
            $
            0.35
            
            
            950,000
            
            
            380,000
            
            
            271,429
            (3)
            
            271,429
            (3)
            
            271,429
            (3)
            
            212,000TOTAL
            
            
            
            
            
            19,700,000
            
            
            7,880,000
            
            
            3,842,858
            
            
            3,545,239
            
            
            3,284,822
            
            
            3,412,000***Ownership
                (Debentures and Warrants Fully
                Converted):***
            
            
            **30.42**
            **%**
            
            **17.57**
            **%**
            
            **11.89**
            **%**
            
            **11.42**
            **%**
            
            **11.01**
            **%**




(1)  Based
      on
      an assumed conversion at this debenture’s fixed conversion price per share of
      $0.48.


(2)  Based
      on
      an assumed conversion at this debenture’s fixed conversion price per share of
      $0.42.


(3)  Based
      on
      an assumed conversion at this debenture’s fixed conversion price per share of
      $0.35.




The
      Securities Purchase Agreement, Secured Convertible Debentures, Second Amended
      and Restated Security Agreement and other applicable agreements governing our
      outstanding indebtedness contain restrictive covenants that limit our ability
      to:





·
            issue
                or sell our common stock or preferred
                stock;





·
            issue
                or sell any warrant, option (except pursuant to an employee stock
                option
                plan), right, contract, call or other security convertible into shares
                of
                our common stock;





·
            file
                a Registration Statement on Form
                S-8;





·
            enter
                into certain transactions with
                affiliates;





·
            merge
                with another company, reorganize, restructure, consummate a reverse
                stock
                split consolidation, or sell all or substantially all of our
                assets;





·
            purchase
                or otherwise acquire all or substantially all of the assets or stock
                of,
                or any partnership or joint venture interest in, any other person,
                firm or
                entity;





·
            enter
                into any security instrument granting the holder of such security
                interest
                in any and all of our assets;





·
            materially
                change our management or ownership;




22




·
            declare
                dividends;





·
            amend
                our Articles of Incorporation and bylaws;
                and





·
            incur
                indebtedness in excess of $25,000.





If
      an
      Event of Default occurs ,
      as
      defined in the Secured Convertible Debentures, and remains uncured, the Secured
      Convertible Debentures will become immediately payable in cash or, at the option
      Cornell Capital Partners, LP, in our common stock. If an event of default occurs
      and remains uncured, the conversion price will be reduced by twenty percent
      (20%) of the conversion price.





We
      may,
      at our option, with three (3) business days advance written notice, redeem
      a
      portion or all amounts outstanding under each of the Secured Convertible
      Debentures we issued to Cornell Capital Partners, LP prior to the maturity
      date
      of each, respectively, provided that the price per share in the last reported
      trade of our common stock on the OTC Bulletin Board or on the exchange on which
      the common stock is then listed as quoted by Bloomberg, LP., is less than the
      lesser of:





·
            an
                amount equal to one hundred twenty percent (120%) of the average
                closing
                bid price of the common stock, as quoted by Bloomberg L.P., for the
                five
                (5) trading days immediately preceding the date the Secured Convertible
                Debenture was issued;





·
            an
                amount equal to eighty percent (80%) of the lowest closing bid price
                of
                the common stock (on the OTC Bulletin Board or on the exchange on
                which
                the Common Stock is then listed, including the “Pink Sheets”), as quoted
                by Bloomberg, LP, for five (5) trading days immediately preceding
                the
                conversion date at the time we give notice of such
                redemption.





We
      must
      pay a redemption premium of twenty percent (20%) of the amount redeemed in
      addition to such redemption, plus accrued interest.





**Warrants**





As
      of
      August 1, 2005, we entered into a Consulting Agreement with Hawk Associates
      for
      investor relations and financial media relations services. As partial
      consideration for Hawk Associates’s services, we agreed to grant it five-year
      warrants to purchase 250,000 shares of our common stock with an exercise price
      of $0.51 per share with full “piggyback” rights to be registered with our next
      registration statement prepared after August 1, 2005. The warrants expire at
      midnight on July 31, 2010.





We
      issued
      four Warrants to Cornell Capital Partners, LP, each of which are subject to
      identical adjustment terms as set forth in the Warrants. We issued the first
      Warrant on August 12, 2005 to Cornell Capital Partners, LP to purchase 100,000
      shares of our common stock at a purchase price of $10.00 with an exercise price
      of $0.001 per share or as subsequently adjusted, which expires on or about
      August 12, 2008. We issued the second Warrant to Cornell Capital Partners,
      LP on
      November 30, 2005 to purchase 100,000 shares of our common stock that are
      exercisable at a price of $0.001 per share or as subsequently adjusted, which
      expires on or about November 12, 2008. We issued the third Warrant to Cornell
      Capital Partners, LP on March 29, 2006 to purchase 3,000,000 shares of our
      common stock that are exercisable at a price of $0.30 per share or as
      subsequently adjusted, which expires on or about March 29, 2011. We issued
      the
      fourth Warrant to Cornell Capital Partners, LP on February 15, 2007 to purchase
      212,000 shares of our common stock that are exercisable at a price of $0.001
      per
      share or as subsequently adjusted, which expires on or about February 15,
      2012.





If,
      subject to the exceptions set forth in the Warrants, during the time the
      Warrants are outstanding we issue or sell, or are deemed to have issued or
      sold,
      any shares of common stock for a consideration per share less than a price
      equal
      to the exercise price of the Warrants, in effect immediately prior to such
      issuance or sale, then immediately after such issuance or sale, the exercise
      price will be reduced to an amount equal to such consideration per share. Upon
      each such adjustment, the number of shares issuable upon exercise of the
      Warrants will be adjusted to the number of shares determined by multiplying
      the
      exercise price in effect immediately prior to such adjustment by the number
      of
      shares issuable upon exercise of the Warrants immediately prior to such
      adjustment and dividing the product by the exercise price resulting from such
      adjustment. Similar adjustments will be made upon the issuance or sale by us
      of
      options to purchase our shares or convertible securities.




23




We
      have
      are no other outstanding options, warrants or securities convertible into our
      common stock.





**Registration
      Rights of Cornell Capital Partners, LP**





We
      entered into a Second Amended and Restated Investor Registration Rights
      Agreement with Cornell Capital Partners, LP, dated March 29, 2006. Pursuant
      to
      that agreement, we committed to file no later than June 29, 2006 a registration
      statement on Form S-1 or Form SB-2 for the resale by Cornell Capital Partners,
      LP of up to 27,000,000 shares of our common stock to be issued upon conversion
      of its Secured Convertible Debentures (dated August 12, 2005, November 30,
      2005,
      February 8, 2006 and March 29, 2006) and Warrants (dated August 12, 2005,
      November 30, 2005 and March 29, 2006). This deadline has been extended to the
      latter half of March, 2007. We expect to file a Form SB-2 and must use best
      efforts to ensure that it is effective within one hundred twenty (120) days
      after the date filed. Our failure to file and ensure the effectiveness of the
      Form SB-2 would constitute an event of default that would require us to pay
      liquidated damages to Cornell Capital Partners, LP in either a cash amount
      or
      shares of our common stock within three (3) business days, after demand
      therefore, equal to 2% of the liquidated value of all of the Secured Convertible
      Debentures we issued to Cornell Capital Partners, LP outstanding for each thirty
      (30) day period the date we were obligated to file such Form SB-2 or ensure
      effectiveness thereof, whichever is applicable.





The
      transfer agent for our common stock is Standard Registrar & Transfer Agency
      Inc., 673 Bluebird Lane Northeast, Albuquerque, New Mexico 87122. Our transfer
      agent’s telephone number is (505) 828-2839.




**Item 6.**
                **Management’s Discussion and Analysis
                  or Plan of Operation**





**Plan
      of Operation.**





This
      Plan
      of Operation summarizes the significant factors affecting our plan of operation
      for the next 12 months. This Plan of Operation should be read in conjunction
      with our consolidated financial statements and notes thereto included in this
      Report.





This
      document, including this Plan of Operation section, contains “forward-looking
      statements,” including, among others, statements about our beliefs, plans,
      objectives, goals, expectations, estimates and intentions that are subject
      to
      significant risks and uncertainties and are subject to change based on various
      factors, many of which are beyond our control. The words “may,” “could,”
“should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,”
“plan,” “target,” “goal” and similar expressions are intended to identify
      forward-looking statements.





All
      forward-looking statements, by their nature, are subject to risks and
      uncertainties. Our actual future results may differ materially from those set
      forth in our forward-looking statements. Please see the Introductory Note and
      the “Risk Factors” section of this Report for a discussion of factors that could
      cause our actual results to differ materially from those in the forward-looking
      statements. However, other factors besides those listed in the Risk Factors
      section or discussed in this Report also could adversely affect our results,
      and
      you should not consider any such list of factors to be a complete set of all
      potential risks or uncertainties. Any forward-looking statements made by us
      or
      on our behalf speak only as of the date they are made. We do not undertake
      to
      update any forward-looking statement, except as required by applicable
      law.




24




In
      the
      Plan of Operation, we refer to the period October 1, 2004 through June 8, 2005
      as the “Pre-operations Period” and the time period of June 9, 2005 through
      September 30, 2006 as the “Development Stage Period.”





**Description
      of the Planned Business**





We
      are an
      international licensing company established to commercialize technology that
      precisely controls the movement of fluids on a micro scale. We were originally
      formed as Enclave Products, Ltd. (the “Old Corporation”), a Colorado
      corporation, on March 22, 1996. Pursuant to a Plan of Merger dated March 29,
      2004, on April 21, 2004 the Old Corporation filed Articles and Certificate
      of
      Merger with the Secretary of State of the State of Colorado merging the Old
      Corporation into Enclave Products, Ltd., a Colorado corporation (the “Surviving
      Corporation”). A previous controlling shareholder group of the Old Corporation
      arranged the merger for business reasons that did not materialize.





On
      October 18, 2004, a Florida-based shareholder group acquired controlling
      interest in the Surviving Corporation and on November 5, 2004, effected a
      1-for-200 reverse stock split. On November 5, 2004, the Surviving Corporation
      changed its name to IQ Medical Corp. and then, on October 3, 2005, to IQ Micro
      Inc. We became qualified to do business in Florida on October 12, 2005. Our
      common stock is currently traded on the Pink Sheets under the symbol “IQMC.” All
      common stock share amounts have been restated to reflect the reverse stock
      split.





Until
      June 8, 2005, we had no operations. On June 9, 2005, we commenced development
      activities when we acquired exclusive, worldwide sales and marketing licensing
      rights to microfluidics technology developed and patented by Osmotex AS
      (“Osmotex”), incorporated in Norway in 1999, as well as additional intellectual
      property rights of Osmotex (the “Licensed Rights”).





We
      acquired the Licensed Rights through the issuance of shares representing
      approximately 85% of our outstanding shares of common stock, in addition to
      a
      cash payment of $300,000.





We
      have
      established a sales and marketing office in West Palm Beach, Florida and through
      IQ Micro (USA) Inc. (“IQ USA”), our wholly-owned subsidiary, are actively
      pursuing global licensing opportunities. Microfluidics technology has a wide
      range of consumer, medical and industrial applications. We intend to become
      a
      specialized supplier of low voltage microfluidics technology.





**Discussion
      of Cash Requirements and Financial Plan**





During
      our Development Stage Period, we completed five private placements with Cornell
      Capital Partners, LP consisting of 8% Secured Convertible Debentures pursuant
      to
      Section 4(2) and Rule 506 of Regulation D under the Securities Act of 1933,
      as
      amended. These private placements to one accredited investor resulted in gross
      proceeds to us of $1,595,000 and net proceeds of $1,290,000.





Cornell
                Capital Partners, LP Private PlacementsClosing
                Date
            
            Gross
                ProceedsAugust
                12, 2005
            
            $500,000November
                30, 2005
            
            $250,000February
                8, 2006
            
            $250,000March
                29, 2006
            
            $500,000February
                15, 2007
            
            $95,000




25





Of
      the
      total net proceeds of $1,290,000, approximately $280,000 has been paid to
      Osmotex as partial payment for the purchase of the Licensing Rights and
      approximately $1,004,000 has been required for operating activities during
      the
      Development Stage Period. As a result, we had approximately $6,000 in cash
      as of
      September 30, 2006. We had approximately $2,800 in cash as of January 31, 2007.
      We also had total current liabilities of approximately $516,000 as of September
      30, 2006. We had total current liabilities of approximately $715,000 as of
      January 31, 2007. We have not generated revenue during the Development Stage
      Period.





The
      following schedule is our estimate of operating expenses for the 12 months
      ending September 30, 2007. These estimates are based on our actual experience
      during the past 12 months. These estimates do not include up to $120,000 in
      potential interest expense related to the four Secured Convertible Debentures
      issued to Cornell Capital Partners, LP that would be due if Cornell Capital
      Partners, LP does not exercise its right to convert the Secured Convertible
      Debentures into shares of our common stock. The schedule is only an estimate
      and
      actual expenses may be greater due to a number of factors as described in the
      “Risk Factors” section and in the Introductory Note on page 1.





General
                and administrative costs
            
            $
            100,000Management
                and consulting fees
            
            
            560,000Professional
                fees
            
            
            240,000Travel
                costs
            
            
            180,000Investor
                relations expenses
            
            
            120,000TOTAL
            
            $
            1,200,000





On
      a
      monthly basis, we require approximately $100,000 in cash to sustain our
      development stage activities. We do not expect this amount to increase or
      decrease materially during the next 12 months. Our estimate for professional
      fees includes legal and accounting fees related to our being a public reporting
      company, including preparation of reports filed with the SEC under the
      Securities Exchange Act of 1934, as amended. The technology we have licensed
      from Osmotex does not require additional research or development. As our
      business model involves the sub-sub-licensing of technology, we have no plans
      to
      purchase plant equipment or significant assets. In addition, the number of
      employees and consultants is expected to remain constant during the next 12
      months.





We
      are
      simultaneously pursuing the following alternatives with respect to obtaining
      additional capital:





·
            We
                are in active discussions with potential sub-sub-licensees and we
                anticipate the successful negotiation of our first licensing agreement
                to
                be completed by March 31, 2007 with the completion of an additional
                two
                sub-sub-licenses by September 30, 2007. In each case, the revenue
                to be
                generated by these sub-sub-licenses will take the form of a licensing
                fee
                plus royalties. The licensing fee will vary depending on the application,
                the target market and the territory. Current discussions with potential
                sub-sub-licensees involve licensing fees in the $1 - $2 million range
                and
                royalties in the 7% - 10% range.





·
            A
                second potential source of capital involves a financial commitment
                from
                D.P. Martin & Associates Inc. (“D.P. Martin”). In connection with the
                June 9, 2005 Capital Contribution Agreement, we entered into a Financing
                and Listing Agreement with Osmotex USA and D.P. Martin that obligated
                D.P.
                Martin to locate at least $500,000 in external financing for us by
                December 31, 2005. Subsequent to March 31, 2006, the agreement was
                further
                extended to September 30, 2006. Pursuant to the Financing and Listing
                Agreement, D.P. Martin (1) assisted us in establishing Osmotex USA’s
                approximate 85% of our outstanding common stock and (2) placed 1,000,000
                shares of our common stock beneficially owned by D.P. Martin into
                escrow
                to be released when it fulfils its financing commitment under the
                Financing and Listing Agreement. These 1,000,000 shares have been
                released
                from this escrow and have been pledged to Cornell Capital in connection
                with our February 2007 $95,000 Debenture. By September 30, 2006,
                D.P.
                Martin had advanced approximately $45,000 to the Company as a shareholder
                loan. Additional advances are being arranged by D.P. Martin and the
                objective is to arrange the total $500,000 in funding.




26




·
            A
                third potential source of capital involves additional debt and/or
                equity
                financing. Cornell Capital Partners, LP has invested a total of $1.5
                million of debt financing in us. If additional funding is required,
                we
                would again approach this investment banker. A new financing transaction
                could once again involve a Secured Convertible Debenture or the exercise
                of existing warrants. We have issued Cornell Capital Partners, LP
                three
                million warrants to purchase shares of common stock with an exercise
                price
                of $0.30 per warrant and 412,000 warrants with an exercise price
                of $0.001
                per share.





We
      are
      continuing to seek additional financing to meet our working capital needs and
      other elements of our business plan. We expect that operating and development
      expenses will increase significantly as we continue to implement our plan.
      No
      assurance can be given that we will be successful in completing these or any
      other financings at the minimum level necessary to fund our working capital
      requirements or to complete our development plan or at all. If we are
      unsuccessful in completing these financings we will not be able to fund our
      working capital requirements or execute our business plan, we will run out
      of
      cash and have to substantially reduce or curtail the development of our
      projects.





**Off-Balance
      Sheet Arrangements**





Other
      than the financial commitment by D.P. Martin as described above, we have no
      off-balance sheet arrangements that have or are likely to have a current or
      future effect on our financial condition, revenues or expenses, results of
      operations, liquidity, capital expenditures or capital resources.




**Future
      Operations**





Presently,
      our revenues are not sufficient to meet operating expenses. The continuation
      of
      our business is dependent upon obtaining further financing and by market
      acceptance of our licensed technology allowing us to achieve a profitable level
      of operations.





The
      issuance of additional equity securities by us could result in a significant
      dilution in the equity interests of our current shareholders.




**Critical
      Accounting Policies and Estimates**





Our
      consolidated financial statements and accompanying notes are prepared in
      accordance with accounting principles generally accepted in the United States.
      Preparing financial statements requires management to make estimates and
      assumptions that affect the reported amounts of assets, liabilities, revenue,
      and expenses. These estimates and assumptions are affected by management’s
      application of accounting policies. We believe that understanding the basis
      and
      nature of the estimates and assumptions involved with the following aspects
      of
      our consolidated financial statements is critical to an understanding of our
      financials.





(a)
            Other
                Assets:





Other
      assets include the Licensed Rights. This asset is carried at amortized cost
      on
      the balance sheet.





(b)
            Financial
                instruments:





Financial
      instruments include beneficial conversion features and other potential
      cash-settled derivatives. These liabilities are carried at fair value on the
      balance sheet.




27




(c)
            Valuation
                of warrants and beneficial conversion features associated with the
                issuance of secured convertible debentures:





The
      fair
      value of the warrants is valued using the Black Scholes-Merton methodology
      which
      requires management to estimate volatility, risk free interest rate and
      forfeiture rates.





**Going
      Concern**





We
      have
      incurred recurring operating losses and at September 30, 2006 have an
      accumulated deficit during the Pre-Development Period of $17,488, an accumulated
      deficit during the Development Stage Period of $1,695,493 and a working capital
      deficit of $551,933. During the Development Stage Period, we used cash of
      $1,110,929 in operating activities. During the Development Stage Period, we
      realized net proceeds of $1,290,000 from four Secured Convertible Debenture
      financings to fund our operations. We cannot assure that we can arrange future
      financings.





Our
      consolidated financial statements have been prepared on the “going concern”
basis which assumes that adequate sources of financing will be obtained as
      required and that our assets will be realized and liabilities settled in the
      ordinary course of business. Accordingly, these consolidated financial
      statements do not include any adjustments related to the recoverability of
      assets and classification of assets and liabilities that might be necessary
      should we be unable to continue as a going concern.





**Risk
      Factors**





If
      any of
      the risks discussed in this Report actually occur, our business, financial
      condition and results of operations could be materially and adversely affected.
      If this were to happen, the price of our shares could decline significantly
      and
      you may lose all or part of your investment. The risk factors described below
      are not the only ones that may affect us. Our forward-looking statements in
      this
      Report are subject to the following risks and uncertainties. Our actual results
      could differ materially from those anticipated by our forward-looking statements
      as a result of the risk factors below. See “Introductory Note”
above.





**Risks
      Related to Our Business and Operations**





***We
      are a development stage company with minimal operating history and you may
      have
      difficulty predicting our future operating income and expenses. You will have
      only limited historical information from which to assess our possible future
      results of operations.***





Although
      our predecessor company was formed in March 1996, we commenced operations in
      June 2005 and are currently considered a development stage company. We have
      not
      generated any revenues from operations during the period of June 9, 2005 through
      September 30, 2006. During the period of June 9, 2005 through September 30,
      2006, we incurred net losses of $1,941,146. Our future operations may never
      be
      profitable. We have a very limited operating history upon which to base an
      evaluation of our prospective operations or results. As a result, we may have
      difficulty in accurately predicting revenues or costs of operations for
      budgeting and planning purposes. This could result in unexpected fluctuation
      in
      our future results of operations and other difficulties, any of which could
      make
      it difficult for us to achieve or maintain profitability and could increase
      the
      volatility of our common stock. Our revenues and profits, if any, will depend
      upon various factors, including whether our sub-sub-licensing business strategy
      can be completed and whether Osmotex’s microfluidics technology will achieve
      market acceptance. We may not achieve our business objectives and the failure
      to
      achieve our goals would have an adverse impact on us. Similarly, prospective
      investors will not be able to review past operations as a gauge to evaluate
      our
      management’s execution, our ability to implement our business plan, the
      effectiveness of our financial controls or other salient
      information.





***Our
      independent registered public accounting firm’s opinion expresses doubt about
      our ability to continue as a “going concern.”***




28




Our
      independent registered public accounting firm’s report issued in connection with
      our audited consolidated financial statements as of September 30, 2006 and
      2005
      and for the periods from October 1, 2004 to June 8, 2005, June 9, 2005 to
      September 30, 2005 and October 1, 2005 to September 30, 2006 expresses
“substantial doubt” about our ability to continue as a going concern, due to,
      among other things, our lack of revenue and our dependence on external financing
      to fund our operations. If we are unable to develop profitable operations,
      we
      may have to cease to exist, which would be detrimental to the value of our
      common stock. Our business operations may not develop and provide us with
      sufficient cash to continue operations.





***We
      will need additional capital to execute our business plan, which we may be
      unable to obtain on terms acceptable to us, if at
      all.***





We
      may be
      required to raise additional capital from the sale of debt or equity securities
      in order to implement our business plan. Our management projected that a total
      capital investment of $2,000,000 was required to fund our business plan for
      the
      year ended September 30, 2006 by which time it was projected that we would
      begin
      earning initial licensing fees. This projected revenue stream is anticipated
      to
      be sufficient to fund all future operating expenses.





The
      capital requirement of $2,000,000 has been arranged with two funding sources.
      To
      date, we have completed five separate financings with Cornell Capital Partners,
      LP, totaling gross proceeds of $1,595,000. Those financings took place in August
      2005, November 2005, February 2006, March 2006 and February 2007. In addition,
      we have a commitment from D.P. Martin, a Florida based financial advisory firm
      representing several existing shareholders, to arrange at least $500,000 in
      external financing for us no later than September 30, 2006. **** D.P.
      Martin has placed 1,000,000 shares of our common stock into escrow as security
      against this commitment. As at September 30, 2006, D.P. Martin had advanced
      the
      Company approximately $45,000 in cash and additional advances are being
      arranged.





However,
      if D.P. Martin is unsuccessful in arranging the total of $500,000 in financing,
      we will have to find a new source for additional financing, either privately
      or
      through an offering. If we are required to raise additional funds, we may be
      unable to raise those additional funds on terms acceptable to us, if at all.
      Our
      inability to obtain additional capital may reduce our ability to continue to
      conduct business operations, and it may possibly force us to evaluate a sale
      or
      liquidation of our assets, if any. Any future financing may involve substantial
      dilution to existing investors.





***We
      have substantial leverage, which may affect our ability to use funds for other
      purposes.***





We
      have a
      substantial amount of outstanding indebtedness. A substantial portion of our
      cash flow will be dedicated to the payment of principal and interest on our
      indebtedness, which will reduce funds available to us for other purposes,
      including capital expenditures. If we were to experience poor financial and
      operational results, the combination of the poor performance and our substantial
      leverage might create difficulties in complying with the covenants in the
      Secured Convertible Debenture or related Securities Purchase Agreement or result
      in an event of default under the Secured Convertible Debentures. Our failure
      to
      comply with such covenants or in the event of default, the Secured Convertible
      Debenture will become immediately payable in cash or, at the option of the
      holder, Cornell Capital Partners, LP, in our common stock.





***Our
      obligations under our Secured Convertible Debentures are secured by all of
      our
      assets. If we default under the terms of the Secured Convertible Debentures,
      Cornell Capital Partners, LP could foreclose its security interest and liquidate
      all of our assets.***





Our
      obligations under the Secured Convertible Debentures are secured by all of
      our
      assets. As a result, if we default under the terms of the Secured Convertible
      Debentures, Cornell Capital Partners, LP could foreclose its security interest
      and liquidate all of our assets. This would cause us to cease
      operations.





29





***Our
      substantial indebtedness could adversely affect our cash flow and our ability
      to
      fulfill our obligations.***





Our
      substantial level of indebtedness increases the possibility that we may be
      unable to generate cash sufficient to pay, when due, the principal of, interest
      on or other amounts due in respect of our indebtedness or other costs and
      expenses. Our substantial leverage could have significant consequences
      including:





·
            making
                it more difficult for us to satisfy our obligations with respect
                to the
                Secured Convertible Debentures;





·
            increasing
                our vulnerability to general adverse economic and industry
                conditions;





·
            limiting
                our ability to obtain additional
                financing;





·
            requiring
                us to dedicate a substantial portion of our cash flow from operations
                to
                payments on our indebtedness, which will reduce the amount of our
                cash
                flow available for other purposes, including capital expenditures
                and
                other general corporate purposes;





·
            requiring
                us to sell debt securities or to sell some of our core assets, possibly
                on
                terms unfavorable to us;





·
            restricting
                us from making strategic acquisitions or exploiting business
                opportunities;





·
            limiting
                our flexibility in planning for, or reacting to, changes in our business
                and our industry; and





·
            placing
                us at a possible competitive disadvantage compared to our competitors
                that
                have less debt.





***Restrictive
      covenants in our Securities Purchase Agreement and Secured Convertible
      Debentures could adversely affect our business by limiting our operating and
      strategic flexibility.***





The
      Securities Purchase Agreement, Secured Convertible Debentures, and Second
      Amended and Restated Security Agreement governing our outstanding indebtedness
      contain restrictive covenants that limit our ability to:





·
            issue
                or sell our common stock or preferred
                stock;





·
            issue
                or sell any warrant, option (except pursuant to an employee stock
                option
                plan), right, contract, call or other security convertible into shares
                of
                our common stock;





·
            file
                a Registration Statement on Form
                S-8;





·
            enter
                into certain transactions with
                affiliates;





·
            merge
                with another company, reorganize, restructure, consummate a reverse
                stock
                split consolidation, or sell all or substantially all of our
                assets;





·
            purchase
                or otherwise acquire all or substantially all of the assets or stock
                of,
                or any partnership or joint venture interest in, any other person,
                firm or
                entity;





·
            enter
                into any security instrument granting the holder of such security
                interest
                in any and all of our assets;




30




·
            materially
                change our management or ownership;





·
            declare
                dividends;





·
            amend
                our Articles of Incorporation and bylaws;
                and





·
            incur
                indebtedness in excess of $25,000.





These
      covenants could have an adverse effect on our business by limiting our ability
      to take advantage of a financing, merger and acquisition or other corporate
      opportunities. **** Upon
      the
      occurrence of an event of default under our Secured Convertible Debentures,
      the
      holder of such indebtedness could elect to declare all amounts outstanding
      under
      such indebtedness, together with accrued interest, to be immediately due and
      payable in cash or shares of our common stock. If the holder accelerates the
      payment of that indebtedness, our assets currently would be insufficient to
      repay in full that indebtedness and any other debt.





***To
      service our indebtedness, make capital expenditures and fund our operations,
      we
      will require a significant amount of cash. Our ability to generate cash depends
      on many factors beyond our control.***





Our
      ability to make payments on our indebtedness and to fund planned capital
      expenditures will depend on our ability to generate and have excess cash in
      the
      future, which is dependent on various factors. These factors include our ability
      to market and sub-sub-license the Licensed Rights to sub-sub-licensees, as
      well
      as general economic, financial, competitive, legislative, regulatory and other
      factors that are beyond our control.





We
      may
      not be able to generate sufficient cash flow from operations, we may not realize
      currently anticipated cost savings and operating improvements on schedule or
      at
      all, and future borrowings may not be available to us in amounts sufficient
      to
      enable us to pay our indebtedness or to fund our other liquidity needs. We
      may
      need to refinance all or a portion of our indebtedness before maturity. We
      may
      not be able to refinance any of our indebtedness on commercially reasonable
      terms or at all.





***Despite
      current indebtedness levels, we and our subsidiary may still be able to incur
      substantially more debt, which could exacerbate the risks described
      above.***





Our
      subsidiary and we may be able to incur substantial additional indebtedness
      in
      the future. The terms of the Securities Purchase Agreement, Secured Convertible
      Debentures and Second Amended and Restated Security Agreement limit but do
      not
      fully prohibit our subsidiary or us from incurring additional indebtedness.
      If
      new debt is added to our or our subsidiary’s current debt levels, the related
      risks that we now face could intensify.





***We
      do not have any independent directors on our Board of
      Directors.***





Currently,
      we have no independent directors on our
      Board of Directors. By “independent director,” we mean a person other than an a
      shareholder, officer or consultant of ours or any other individual having a
      relationship that, in the opinion of our board of directors, would interfere
      with the director’s exercise of independent judgment in carrying out the
      responsibilities of a director.  Without
      independent directors, our Board of Directors may have no way to resolve
      conflicts of interest, including, without limitation, executive compensation,
      employment contracts and the like. In the absence of independent directors,
      our
      executive officers, could establish policies and enter into transactions without
      independent review and approval. This presents the potential for a conflict
      of
      interest between our shareholders and us generally and the controlling officers,
      shareholders or directors.





Svein
      Milford, Trond Eidsnes and Johnny Christiansen are members of our Board of
      Directors who are also directors of Osmotex. In addition, EKO, AS, a company
      that Mr. Eidsnes controls, is the beneficial owner of approximately 19.34%
      of
      Osmotex. Our fourth director, Robert Rudman, is our Chief Financial Officer.
      When making decisions on our behalf that are related to or involve a matter
      with
      Osmotex or its wholly-owned subsidiary, Osmotex USA, there is no independent
      director contributing to the vote on a decision about the matter.





31





***We
      depend on certain key personnel, the loss of any of which could have a material
      adverse effect on our operations.***





The
      development and marketing of our licensed technology will be dependent upon
      the
      skills and efforts of a small group of personnel, including Svein Milford,
      our
      Chairman, Johnny Christiansen, our President and Chief Executive Officer, Robert
      Rudman, our Chief Financial Officer, and Per Arne Lislien, our Chief Operations
      Officer. Losing the services of any of our key personnel could have a material
      adverse effect on our operations. Furthermore, we must be able to identify,
      attract, hire, train, retain and motivate highly skilled managerial, marketing
      and sales talent. The failure to retain and attract the necessary personnel
      could materially adversely affect our business, financial condition and
      operating results. Competition
      for qualified executives
      in the microfluidics industry is intense and there are a limited number of
      persons with applicable experience and motivation and commitment to the growth
      of this industry. We believe that our future success in the microfluidics
      business significantly depends on our ability to attract and retain highly
      skilled and qualified personnel who are knowledgeable about this technology
      and
      committed to growing the microfluidics industry.





***Our
      Chief Executive Officer, Chief Financial Officer and Chief Operations Officer
      operate under management agreements and are not our
      employees.***





Mr.
      Rudman, Mr. Christiansen and Mr. Lislien are not our employees. Mr. Rudman
      is an
      employee of D.P. Martin, and Mr. Christiansen and Mr. Lislien are each an
      employee of Visionaire. Their respective employers have entered into management
      agreements with us in which their respective employers have assigned Mr. Rudman,
      Mr. Christiansen and Mr. Lislien the duties to act as our Chief Financial
      Officer, Chief Executive Officer and Chief Operations Office, respectively.
      Mr.
      Rudman and Mr. Christiansen do not devote 100% of their working time to us.
      Mr.
      Lislien does devote 100% of his time to us. If Mr. Rudman, Mr. Christiansen
      or
      Mr. Lislien were unable or unwilling to provide services to us for whatever
      reason, our business operations would be adversely affected.





***Our
      Chief Financial Officer is a Canadian citizen currently residing in the United
      States. Immigration restrictions could limit his ability to conduct business
      in
      the United States.***





Robert
      Rudman, who acts as our Chief Financial Officer, is a Canadian citizen. Mr.
      Rudman’s ability to continue to act as our Chief Financial Officer is dependent
      on the conditions under which his H-1B work authorization status was granted
      with D.P. Martin and whether the services provided to us through a Management
      Agreement are within the authorized scope of that work authorization status.
      Compliance with the H-1B conditions is beyond our control. As of the date of
      this Report, Mr. Rudman’s H-1B work authorization allows him to remain in the
      United States for three years from the date of approval, and apply for one
      three-year renewal, while he remains an employee of D.P. Martin.





If
      Mr.
      Rudman’s work authorization is revoked or expires, he may not be able to work in
      the United States. His relocation would disrupt our business operations and
      could adversely affect our business, financial condition and operating results.
      Mr. Rudman has indicated us that he is evaluating the steps necessary for him
      to
      secure permanent United States immigration status, but the timing and outcome
      of
      these steps is uncertain.





***Our
      Chief Executive Officer and our Chief Operations Officer are Norwegian citizens
      currently residing in Norway, which may limit our ability to operate
      efficiently.***





Our
      Chief
      Executive Officer, Johnny Christiansen, and our Chief Operations Officer, Per
      Arne Lislien, are Norwegian citizens who reside full-time in Norway. Given
      their
      physical distance from our office in Florida, their command of English as their
      second language and the six-hour time difference from that of our Florida
      office, we may not always be able to communicate with them in a timely or
      effective manner. Such limitations may at times affect our ability to operate
      our business efficiently.




32




***United
      States shareholders may face substantial risks associated with effecting service
      of process or enforcing judgments against our directors and officers who reside
      outside of the United States.***





One
      of
      our directors and executive officers is a Canadian citizen and certain of our
      directors and officers are not United States citizens and some reside in Norway.
      As a result, United States shareholders face substantial risks with respect
      to
      our officers or directors who are not United States citizens or who do not
      reside in the United States, including that it may difficult or
      impossible:





·
            to
                effect service of process on them within the United
                States;





·
            to
                enforce judgments obtained against them in the United States, either
                in
                the United States or in foreign jurisdictions;
                and





·
            to
                bring an original action in foreign jurisdictions to enforce liabilities
                against them based on the civil liability provisions of the United
                States
                federal securities laws.





***We
      currently maintain no theft, casualty or key-man insurance coverage and
      therefore we could incur losses without having the resources to cover those
      losses.***





We
      currently do not maintain theft or casualty insurance. As a result, in the
      event
      our property is damaged or stolen, we will bear the full cost of its repair
      or
      replacement. This cost could be significant and could have a material, adverse
      effect on our financial condition and our ability to continue business
      operations. In addition, we do not maintain key-man insurance. As a result,
      we
      would not be compensated in the event of the death or disability of Mr. Rudman,
      Mr. Christiansen or Mr. Lislien, on whom we believe our future success in the
      microfluidics business significantly depends. See the risk factor entitled,
“We
      depend on certain key personnel, the loss of any of which could have a material
      adverse effect on our operations” above.





***Our
      limited use of confidentiality agreements may not adequately protect our
      unpatented proprietary information.***





Our
      reliance on confidentiality agreements and provisions to protect our unpatented
      proprietary information, know-how and trade secrets may not be adequate. Our
      competitors may either independently develop the same or similar information
      or
      obtain access to our proprietary information. In addition, we may not prevail
      if
      we assert challenges to intellectual property rights against third parties.
      Some
      of our key personnel’s employers have been required to enter into management
      agreements that include provisions providing for confidentiality. One of our
      consulting firms has agreed to keep confidential information we furnish to
      them
      pursuant to our consulting agreement with it. With the exception of
      six **** potential
      sub-sub-licensees, we have not required any other party to enter into a
      confidentiality agreement with us.




***Foreign
      countries may not provide adequate patent protection.***





Patent
      applications filed in certain foreign countries are subject to laws, rules
      and
      procedures, which differ from those of the United States. Foreign patent
      applications Osmotex files may not be issued. Furthermore, some foreign
      countries provide significantly less patent protection than the United States.
      We **** could
      incur substantial costs in defending patent infringement suits brought by others
      and in prosecuting patent infringement suits against third party
      infringers.




33




***Our
      ability to protect our Licensed Rights and other proprietary rights is
      uncertain, exposing us to the possible loss of competitive
      advantage.***





Our
      ability to compete effectively will depend in part on Osmotex’s, Osmotex USA’s,
      IQ USA’s and our ability to maintain the proprietary nature of the Licensed
      Rights, primarily through patent protection. Osmotex has granted the Licensed
      Rights to Osmotex USA, which has sub-licensed the Licensed Rights to us. Osmotex
      has filed, and we expect will continue to file, patent applications. If a
      particular patent is not granted, the value of the invention described in
      Osmotex’s patent application would be diminished. Further, even if these patents
      are granted, they may be difficult to enforce. Efforts to enforce any patent
      rights could be expensive, be distracting for our management, be unsuccessful,
      cause our sub-licensed patent rights to be invalidated, and frustrate our
      business plan. Additionally, even if patents are issued and are enforceable,
      others may independently develop similar, superior or parallel technologies
      and
      any technology Osmotex developed may prove to infringe upon patents or rights
      owned by others. Thus, the Licensed Rights may not afford us any meaningful
      competitive advantage.





***We
      face the potential risk of infringement claims that can result in costly
      re-engineering, royalty agreements, or litigation.***





We
      believe that our Licensed Rights and other proprietary rights do not infringe
      on
      the proprietary rights of third parties. Third parties may assert infringement
      claims against us, Osmotex or Osmotex USA in the future with respect to current
      or future technology or other works. Such an assertion may require us to enter
      into royalty arrangements or result in costly litigation.





***We
      have limited licensing and marketing experience.***





Achieving
      market acceptance for Osmotex’s microfluidics technology will require
      substantial marketing efforts and expenditure of significant funds to educate
      the Manufacturers as to the distinctive characteristics and anticipated benefits
      of Osmotex’s microfluidics technology. We currently have limited licensing and
      marketing experience and limited financial, personnel and other resources to
      undertake the extensive marketing activities that are necessary to market and
      license Osmotex’s microfluidics technology.





***We
      may be unable to license technology that will gain acceptance in the
      marketplace.***





Osmotex
      designs its own microfluidics technology and we have entered into a license
      agreement with Osmotex and Osmotex USA granting us a sub-license to the Licensed
      Rights; however, we have not fully implemented a licensing program for the
      microfluidics technology and may not be able to successfully market and license
      Osmotex’s microfluidics technology to third parties. We may not be able to
      generate revenues or profits under such an agreement. In addition, given our
      early stage of development and limited capital resources, we may not be able
      to
      fully utilize and implement the Licensed Rights. Furthermore, the end products
      utilize new microfluidics technology. As with any new technology, in order
      for
      us to be successful, the microfluidics technology must gain market acceptance.
      In order to survive, we must succeed at technology protection, marketing and
      customer acquisition, financial management, staff training and development
      and
      the management and growth of a development stage venture. We may not be
      successful in addressing all or any of these issues and the failure of any
      one
      could significantly impair our business, financial condition and operating
      results.





***The
      technology we expect to sub-sub-license may contain
      defects.***





The
      technology we expect to sub-sub-license to Manufacturers may contain
      deficiencies that become apparent subsequent to commercial use. Remedying such
      errors could hamper our further sub-sub-licensing efforts and cause us to incur
      additional costs, which would have a material adverse effect on our financial
      position.





***Our
      sub-sub-licensees’ performances are uncertain.***





While
      we
      believe that the sub-sub-licensees will have the financial resources and
      in-house capabilities to carry Osmotex’s microfluidics technology to market, the
      sub-sub-licensees may not perform in the manner we anticipate and we may not
      be
      able to generate royalty revenue.




34




***We
      may not be able to manage growth and expansion
      effectively.***





Rapid
      growth of our business may significantly strain our management, operational
      and
      technical resources. If we are successful in obtaining rapid market penetration
      of Osmotex’s microfluidics technology, we will be required to service customers
      on a timely basis at a reasonable cost. Our strategy is that we will not
      manufacture but create sub-sub-licensing arrangements with Manufacturers. This
      could potentially strain our operational, management and financial systems
      and
      controls.





**Risk
      Factors Related to Our Industry** ****





***The
      microfluidics industry is highly competitive and inherently
      risky.***





The
      microfluidics industry is made up of both large, well organized, well funded
      competitors and many small start-up companies, many of which have substantially
      greater financial, technical, marketing and human resource capabilities than
      we
      have. These or other companies may succeed in developing products or
      technologies that are more effective than those developed, or being developed,
      by our sub-sub-licensees, or us which would render our technology obsolete
      or
      non-competitive in the marketplace. There are a number of factors that impact
      a
      microfluidics company’s success, including research and development, funding,
      and industry expertise. **** Each
      of
      these factors represents an inherently uncertain risk.





***We
      may become subject to risks inherent in international operations including
      currency exchange rate fluctuations and tariff
      regulations.***





To
      the
      extent we sub-sub-license the microfluidics technology outside the United
      States, we likely will be subject to the risks associated with fluctuations
      in
      currency exchange rates. We may also be subject to tariff regulations and
      requirements for export licenses, (which licenses may on occasion be delayed
      or
      difficult to obtain), unexpected changes in regulatory requirements, longer
      accounts receivable requirements, difficulties in managing international
      operations, potentially adverse tax consequences, restrictions on repatriation
      of earnings and the burdens of complying with a wide variety of foreign
      laws.





***Food
      and Drug Administration approval may be required by sub-sub-licensees for end
      products created using Osmotex’s microfluidics
      technology.***





Certain
      applications of Osmotex’s microfluidics technology by sub-sub-licensees of that
      technology (such as a glucose monitor) may require the sub-sub-licensees to
      seek
      FDA approval. Any delays or denials connected to the FDA’s approval would delay
      or potentially eliminate our ability to generate royalty revenue from the
      affected sub-sub-licensees.





**Risk
      Factors Related to Our Common Stock**





***Osmotex
      USA controls a substantial interest in us and thus they heavily influence all
      actions that may require a shareholder vote.***





Osmotex
      USA beneficially owns approximately 85% of our outstanding common stock. As
      a
      result, Osmotex USA has and will continue to have substantial control over
      our
      management and direction. It is not possible for any matter requiring a
      shareholder vote to be approved without the consent of Osmotex USA. Osmotex
      USA’s ownership and control of us may prevent or frustrate certain attempts to
      effect a transaction that is in the best interests of our minority
      shareholders.




35




***There
      has not been an active trading market for our common stock and we may not be
      able to develop an active market that would provide liquidity and price
      protection to investors.***





The
      trading market for our common stock on the Pink Sheets has been thin and
      sporadic. As a result, transactions in our shares may reflect the vagaries
      of a
      particular circumstance and are less likely to reflect our intrinsic value.
      Moreover, the quotations for our common stock for such trades as exists may
      reflect inter-dealer prices, and may not necessarily represent actual
      transactions. We are filing this Report as part of a plan to develop an active
      market for our common stock in an effort to improve liquidity and shareholder
      value. The filing of this Report and our undertaking to file periodic reports
      with the SEC may not create a more active market for our common stock. In the
      event a regular public trading market does not develop, any investment in our
      common stock would remain highly illiquid. Accordingly, you may not be able
      to
      sell your shares readily.





***We
      do not pay cash dividends to our shareholders and we have no plans to pay future
      cash dividends.***





We
      plan
      to retain earnings to finance future growth and have no current plans to pay
      future cash dividends to shareholders. Because we do not pay cash dividends,
      holders of our common stock will experience a gain on their investment in our
      common stock only in the case of an appreciation of value of our common stock.
      Such an appreciation in value may not occur.





***We
      may be unable to comply with changing laws, regulations and standards related
      to
      corporate governance and public disclosure when we become a fully reporting
      company.***





Our
      common stock is currently quoted on the OTC-BB under the symbol “IQMC.” Our
      longer-term plan includes efforts to have the stock listed on an exchange such
      as the American Stock Exchange (“AMEX”) or the NASDAQ SmallCap Market. Each of
      these markets have specific listing criteria for companies, which include both
      financial thresholds and corporate governance requirements. Those listing
      standards are subject to amendment and modification from time to time. Corporate
      governance requirements include specific requirements for audit committees
      and
      audit committee members, enhanced processes for evaluating internal control
      over
      financial reporting and disclosure controls and procedures. We do not currently
      meet the requirements for listing on the AMEX or the NASDAQ SmallCap Market
      and
      we may not be able to meet the financial and corporate governance standards
      that
      are currently in place or that may be imposed from time to time in the future.
      Our inability to secure such a listing will likely limit the marketability
      of
      our common stock and may adversely impact both the market price of and the
      liquidity of the trading market for our common stock.





***We
      will incur increased costs as a result of being a fully reporting company with
      the SEC.***





Compliance
      with the reporting company obligations under the Securities Exchange Act of
      1934, as amended, involves substantial costs, including the cost of engaging
      an
      independent registered public accounting firm to review quarterly financial
      reports and prepare audited annual reports, the cost of liability insurance
      and
      indemnification for directors and officers, the cost to implement procedures
      for
      internal control over financial reporting and disclosure controls and
      procedures, the cost of preparing and filing with the SEC quarterly, annual
      and
      periodic reports and the cost of printing and mailing information related to
      shareholders meetings. We believe that these costs will be offset by the benefit
      of greater access to capital and an improved trading market and liquidity for
      our shareholders. However, the costs related to being public are largely fixed,
      while the benefits are uncertain.





***Our
      shares of common stock may trade at a price that would classify them as “penny
      stock.”***





“Penny
      stocks” generally are defined as equity securities with a price of less than
      $5.00. Broker-dealer practices in connection with transactions in penny stocks
      are regulated by certain penny stock rules adopted by the SEC. Excluded from
      the
      penny stock designation are securities registered on certain national securities
      exchanges or quoted on Nasdaq, provided that current price and volume
      information with respect to transactions in such securities are provided by
      the
      exchange or are sold to established customers or accredited investors. The
      penny
      stock rules require a broker-dealer, prior to a transaction in a penny stock
      not
      otherwise exempt from the rules, to deliver a standardized risk disclosure
      document that provides information about penny stocks and the risks in the
      penny
      stock market. The broker-dealer also must provide the customer with current
      bid
      and offer quotations for the penny stock, the compensation of the broker-dealer
      and its salesperson in connection with the transaction, and the monthly account
      statements showing the market value of each penny stock held in the customer’s
      account. In addition, the penny stock rules generally require that, prior to
      a
      transaction in a penny stock, the broker-dealer must make a special written
      determination that such penny stock is a suitable investment for the purchaser
      and receive the purchaser’s written agreement to the transaction. These
      disclosure requirements may have the effect of reducing the level of trading
      activity in the secondary market for a stock that is subject to the penny stock
      rules. It is very likely that initially our common stock will be subject to
      the
      penny stock rules.




36




***You
      may suffer additional dilution upon the exercise of Warrants and the conversion
      of our Secured Convertible Debentures.***





As
      of the
      date of this Report, we had 50,199,500 **** shares
      of
      our common stock issued and outstanding. As of the date of this Report, we
      had
      issued $1,595,000 principal amount of Secured Convertible Debentures and
      3,662,000 Warrants. The conversion of the Secured Convertible Debentures, the
      exercise of the Warrants, or the issuance and conversion or exercise of any
      other convertible security, including any convertible preferred stock and any
      stock options we grant to Robert Rudman, Johnny Christiansen or anyone else,
      would further dilute your percentage equity ownership interest and voting
      power. As of February 15, 2007, the Secured Convertible Debentures may
      be converted into up to approximately 5,696,429 shares of our common stock
      (assuming a conversion price of $0.28 per share and excluding interest)(with
      this number varying depending on the trading price of our common stock) by
      Cornell Capital Partners, LP at conversion prices per share as stated in this
      Report.





We
      have
      issued Warrants to purchase up to a total of 3,662,000 shares of our common
      stock in the aggregate. Two of our Warrants are each for 100,000 shares of
      our
      common stock and each are, exercisable at $0.001 per share. The third Warrant
      is
      for 3,000,000 shares of our common stock, exercisable at $0.30 per share. The
      fourth Warrant is for 250,000 shares of our common stock, which is exercisable
      at $0.51 per share. The fifth Warrant is for 212,000 shares of our common stock,
      exercisable at $0.001 per share. If, subject to the exceptions set forth in
      the
      Warrants, during the time the Warrants are outstanding we issue or sell, or
      are
      deemed to have issued or sold, any shares of common stock for a consideration
      per share less than a price equal to the exercise price of the Warrants, in
      effect immediately prior to such issuance or sale, then immediately after such
      issuance or sale, the exercise price will be reduced to an amount equal to
      such
      consideration per share. Upon each such adjustment, the number of shares
      issuable upon exercise of the Warrants will be adjusted to the number of shares
      determined by multiplying the exercise price in effect immediately prior to
      such
      adjustment by the number of shares issuable upon exercise of the Warrants
      immediately prior to such adjustment and dividing the product by the exercise
      price resulting from such adjustment. Similar adjustments will be made upon
      the
      issuance or sale by us of options to purchase our shares or convertible
      securities.


**Item 7.**
                **Financial
                  Statements.**





Our
      Financial Statements beginning on Page F-1 are filed as part of this Report
      and
      are incorporated herein by reference.





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





At
      a
      special meeting of our shareholders on January 12, 2006, the shareholders
      ratified our appointment of Daszkal Bolton LLP as our independent registered
      public accounting firm for the periods ended June 8, 2005, and September 30,
      2005, and the fiscal year ending September 30, 2006. We previously engaged
      Lawrence Scharfman, CPA, for fiscal years 2003 and 2004. As of the date of
      this
      Report, there are no disagreements between us and Daszkal Bolton LLP or us
      and
      Lawrence Scharfman, CPA.




37




**Item 8A.**
                **Controls and
                  Procedures**





The
      Company’s Chief Executive Officer and Chief Financial Officer have evaluated the
      effectiveness of the Company’s disclosure controls and procedures as of
      September 30, 2006. Based on that evaluation, the Chief Executive Officer and
      Chief Financial Officer have concluded that disclosure controls and procedures
      are effective to ensure that information required to be disclosed by the Company
      in reports that the Company files or submits under the Securities Exchange
      Act
      of 1934 is recorded, processed, summarized and reported within the time periods
      specified in SEC rules and forms. No changes in the Company’s internal control
      over financial reporting that have materially affected, or are reasonably likely
      to materially affect, its internal control over financial reporting, including
      any corrective actions with regard to significant deficiencies and material
      weaknesses, occurred during the fourth quarter of the year ended September
      30,
      2006 or subsequent to the date of the evaluation by its management
      thereof.


**Item 8B.**
                **Other
                  Information**





Not
      applicable.





**PART
      III**


**Item 9.**
                  **Directors, Executive
                    Officers,
                    Promoters and Control Persons**;
                    Compliance With Section 16(a) of the Exchange
                    Act****





All
      directors listed in the table below were elected at our Annual Meeting of the
      Shareholders on September 6, 2005, and shall hold office until their respective
      successors are elected.





**Name**
            
            **Age**
            
            **Position**Svein
                Milford
            
            63
            
            ChairmanJohnny
                Christiansen
            
            56
            
            President,
                Chief Executive Officer, DirectorRobert
                Rudman
            
            59
            
            Chief
                Financial Officer, Secretary, Treasurer, DirectorTrond
                Eidsnes
            
            57
            
            Director





**Svein
      Milford,** ***Chairman
      of the Board of Directors and Director*** .
      Mr.
      Milford, a Norwegian citizen, has worked with international companies for thirty
      years. He has served as Chairman of the Board of Directors of IQ Micro since
      2005 and has been Chairman of the Board of Directors for Lifecare AS, a
      Norwegian company (“Lifecare”), since 2004. From 2000 to 2006, Mr. Milford was
      Chairman for Leroy Seafood Group ASA, a global fisheries company. From 1991
      to
      2000, Mr. Milford was Chief Executive Officer for Sagatex ASA, an international
      technical textile company, and from 1985 to 1991, he served as Chief Executive
      Officer of Bird Technology AS, a company specializing in hydroacoustics,
      underwater electronics and navigation. Mr. Milford graduated from Norw
      Broadcasting Group with a degree in electronics engineering in 1965. He received
      a management degree from Oslo Institute of Business in 1970 and a master’s
      degree in business administration from the University of Oregon in
      1971.





**Johnny
      Christiansen,** ***President,
      Chief Executive Officer and Director*** **.** Mr.
      Christiansen, a Norwegian citizen, has served as President, Chief Executive
      Officer and a director of IQ Micro since 2005. Mr. Christiansen is a graduate
      of
      the Norwegian Naval Academy and the Horten School of Technology and has spent
      his business career serving in senior positions with several high-tech
      companies. In 1999, he became the President and Chief Executive Officer of
      Sensonor ASA, which focuses on developing sensing technology and is the largest
      developer of MEMS sensors for the world automotive industry. Currently, Mr.
      Christiansen is the President of Visionaire, a consultancy company in the
      high-tech industry. Mr. Christiansen is also a director of Osmotex.




38




**Trond
      Eidsnes,** ***Director*** .
      Mr.
      Eidsnes, a Norwegian citizen, founded Osmotex in 2000 and has served as a
      director of Osmotex since 2000. He has also held several positions as managing
      director in production companies in Norway. Since 2004, Mr. Eidsnes has been
      General Manager of Duratex Naizil AS, a Danish and Norwegian company focused
      on
      the development and application of high-tech textiles for a variety of
      applications, including defense industry purposes. He became Chief Executive
      Officer and a director of Lifecare in 1986 and 2005, respectively. Mr. Eidsnes
      graduated from the Bergen School of Technology in 1968 and from the Norwegian
      School of Management in 1990.




**Robert
      Rudman,** ***Chief
      Financial Officer, Secretary and Treasurer*** .
      Mr.
      Rudman, a Canadian citizen, has been Chief Financial Officer, Secretary and
      Treasurer of IQ Micro since 2005. Mr. Rudman is the Chairman of SmarTire Systems
      Inc. of Richmond, British Columbia, Canada. He became President of SmarTire
      in
      1996, and then Chairman and Chief Executive Officer in 1999. Mr. Rudman joined
      SmarTire in 1993 as the Chief Financial Officer after serving as an independent
      financial consultant to the Company for several months. From 1986 to 1992,
      Mr.
      Rudman was a partner in a consulting firm providing professional assistance
      to
      publicly traded companies. He became a Canadian Chartered Accountant in 1974
      and
      has seventeen years of experience assisting public companies. Mr. Rudman worked
      with Laventhol & Horwath from 1971 to 1973 and Price Waterhouse & Co.
      from 1973 to 1976 in Winnipeg, Manitoba. In addition to his Chartered
      Accountancy degree, Mr. Rudman holds a Bachelor of Arts degree from Lakehead
      University in Thunder Bay, Ontario, which he earned in 1969.





**Additional
      Executive Officer**





**Per
      Arne Lislien,** ***Chief
      Operations Officer*** **.** Mr.
      Lislien, a Norwegian citizen, has served as Chief Operations Officer of IQ
      Micro
      since March 2006. Mr. Lislien has spent his business career serving several
      high-tech companies in senior positions. He currently holds board positions
      with
      several other Norwegian companies. He is a Senior Partner of Visionaire, a
      Norwegian consultancy company focused on micro- and nano-technology. In 2001,
      Mr. Lislien was appointed Executive Vice President of Memscap SA in France
      and
      Chief Executive Officer of Memscap AS, its Norwegian operation, which was
      acquired from SensoNor ASA. Memscap SA and Memscap AS offer sensor solutions
      to
      the medical and aerospace industries. In 2000, Mr. Lislien was appointed
      Assistant Chief Operating Officer of SensoNor ASA, which focuses on developing
      sensing technology and is the largest developer of MEMS sensors for the world
      automotive industry. In 1997, Mr. Lislien was appointed Executive Vice President
      and Chief Operating Officer of Kongsberg Automotive ASA, where he managed the
      Supply Chain Management section from 1992 to 1994. In 1994, Mr. Lislien was
      appointed Manager of Logistics and Economy with Scan-Sense AS, a Norwegian
      sensor company focused on the Oil & Gas markets. Mr. Lislien served in the
      Royal Norwegian Air Force from 1987 to 1992, following his graduation from
      the
      Royal Norwegian Air Force Academy.





**Management
      Agreements**





We
      are
      party to a Management Agreement, effective May 1, 2005, with D.P. Martin. In
      that agreement, we engaged and appointed Robert Rudman, an employee of D.P.
      Martin, as our Chief Financial Officer. Mr. Rudman is also one of our directors.
      IQ USA pays a monthly management fee to D.P. Martin. Mr. Rudman’s H-1B work
      authorization status was granted with D.P. Martin. IQ USA pays a monthly
      management fee of $10,000 to D.P. Martin. Mr. Rudman dedicates, on average,
      two-thirds of his total working time to us, which was anticipated upon execution
      by the parties of the Management Agreement. We anticipate Mr. Rudman’s devotion
      of two-thirds of his time will continue throughout 2007.





We
      are
      party to a Management Agreement, effective October 1, 2005, with Visionaire
      whereby we engaged and appointed Johnny Christiansen, who resides in Norway
      and
      is an employee of Visionaire, as our Chief Executive Officer. Mr. Christiansen
      is also one of our directors. Mr. Christiansen will perform management services
      for us in his capacity as Chief Executive Officer from Norway and management
      services for IQ USA, which pays his monthly management fee to a maximum of
      $8,000 per month. Mr. Christiansen is also a director of Osmotex. Mr.
      Christiansen dedicates, on average, two-thirds of his total working time to
      us,
      which was anticipated upon execution by the parties of the Management Agreement.
      We anticipate Mr. Christiansen’s devotion of two-thirds of his time will
      continue throughout 2007.




39




We
      are
      party to a Management Agreement, effective March 1, 2006, with Visionaire
      whereby we engaged and appointed Per Arne Lislien, who resides in Norway and
      is
      an employee of Visionaire, as our Chief Operations Officer. Mr. Lislien will
      perform management services for us in his capacity as Chief Operations Officer
      from Norway and management services for IQ USA, which pays his monthly
      management fee of $10,000 per month. Mr. Lislien dedicates his entire total
      working time to us, which was anticipated upon execution by the parties of
      the
      Management Agreement. We anticipate Mr. Lislien’s devotion of all **** of
      his
      time will continue throughout 2007.





**Audit
      Committee**





We
      do not
      currently have a separate audit committee. Currently, our entire Board of
      Directors performs all the functions that may be delegated to an audit
      committee. We intend to establish an audit committee during the fiscal year
      ending September 30, 2007 and are currently assessing which potential and
      current members of our Board are best qualified, based on their accounting
      or
      related financial management expertise, independence, time availability,
      corporate experience and other relevant factors, to serve on our audit
      committee. Based on our small size, early development state and limited
      financial and human resources, we did not believe that creating an audit
      committee separate and distinct from our full Board of Directors would have
      been
      cost-effective prior to fiscal year ending September 30, 2007.





**Section
      16(a) Beneficial Ownership Reporting Compliance**





Section
      16(a) of the Securities Exchange Act of 1934 requires our officers and
      directors, and persons who beneficially own, directly or indirectly, more than
      ten percent (10%) of the registered class of our equity securities to file
      reports of ownership and changes in ownership on Form 3, 4 and 5 with the
      SEC.


Officers,
      directors, and greater than ten percent (10%) beneficial owners are required
      by
      SEC regulation to furnish us with copies of all Forms 3,4 and 5 they file.
      To
      our knowledge, based solely on a review of the copies of such reports furnished
      to the Company and on representations that no other reports were required,
      our
      officers, directors and persons who beneficially own more than ten percent
      (10%)
      of our equity securities are in compliance with Section 16(a) of the Exchange
      Act.





**Family
      Relationships**





No
      family
      relationships exist among the Company's directors or officers.





**Code
      of Ethics**





We
      have
      not formally adopted a written Code of Ethics. Management of the Company is
      planning to draft a Code of Ethics in fiscal year ending September 30, 2007
      designed to deter wrongdoing and promote honest and ethical conduct, full,
      fair
      and accurate disclosure, compliance with laws, prompt internal reporting, and
      accountability to adherence to the Code of Ethics. We have not adopted a written
      Code of Ethics prior to filing this report because based on our small size,
      early development stage and limited financial and human resources, we did not
      believe that formally adopting a written Code of Ethics would have been
      necessary or cost-effective prior to the fiscal year ending September 30,
      2007.


**Item 10.**
                **Executive
                  Compensation.**





We
      currently do not pay any compensation to our executives. Our wholly-owned
      subsidiary, IQ USA, pays all compensation to IQMC’s executives. This table
      itemizes the compensation IQ USA paid to each executive during the fiscal year
      ended September 30, 2006.




40




**Name**
            
            **Fiscal
                Year Ended**
            
            **Fees**
            
            **Other
                Compensation**Robert
                Rudman (1)
            
            2006
            
            $120,000
            
            Mr.
                Rudman receives reimbursement
                for reasonable expenses incurred in connection with his duties as
                Chief
                Financial Officer.Johnny
                Christiansen (2)
            
            2006
            
            $79,250
            
            Visionaire
                receives reimbursement
                for reasonable expenses incurred in connection with Mr. Christiansen’s
                duties as Chief Executive Officer.Per
                Arne Lislien (3)
            
            2006
            
            $114,480
            
            Visionaire
                receives reimbursement
                for reasonable expenses incurred in connection with Mr. Lislien’s duties
                as Chief Operations Officer.





(1)
            We
                are party to a Management Agreement, effective May 1, 2005, with
                D.P.
                Martin, a Florida financial advisory firm. In that agreement, we
                engaged
                and appointed Robert Rudman, an employee of D.P. Martin, as our Chief
                Financial Officer. Mr. Rudman is also one of our directors. IQ USA
                pays a
                monthly management fee to D.P. Martin. Mr. Rudman’s H-1B work
                authorization status was granted with D.P. Martin. IQ USA pays a
                monthly
                management fee of $10,000 to D.P.
                Martin.





(2)
            We
                are party to a Management Agreement, effective October 1, 2005, with
                Visionaire whereby we engaged and appointed Johnny Christiansen,
                who
                resides in Norway and is an employee of Visionaire, as our Chief
                Executive
                Officer. Mr. Christiansen is also one of our directors. Mr. Christiansen
                will perform management services for us in his capacity as Chief
                Executive
                Officer from Norway and management services for IQ USA, which pays
                his
                monthly management fee to a maximum of $8,000 per month. Mr. Christiansen
                is also a director of Osmotex.





(3)
            We
                are party to a Management Agreement, effective March 1, 2006, with
                Visionaire whereby we engaged and appointed Per Arne Lislien, who
                resides
                in Norway and is an employee of Visionaire, as our Chief Operations
                Officer. Mr. Lislien will perform management services for us in his
                capacity as Chief Operations Officer from Norway and management services
                for IQ USA, which pays his monthly management fee of $10,000 per
                month.





**Employment
      Agreements, Management Agreements and Consulting
      Agreements**





We
      do not
      have any employees and are therefore not a party to any employment
      agreements.





We
      are
      party to a Management Agreement, effective May 1, 2005, with D.P. Martin. In
      that agreement, we engaged and appointed Robert Rudman, an employee of D.P.
      Martin, as our Chief Financial Officer. Mr. Rudman is also one of our directors.
      IQ USA pays a $10,000 monthly management fee to D.P. Martin. Mr. Rudman is
      a
      Canadian Chartered Accountant and a Canadian citizen. Mr. Rudman’s H-1B work
      authorization status was granted with D.P. Martin. In the Management Agreement
      we also provide Mr. Rudman the opportunity to participate in an incentive stock
      option plan. So long as Mr. Rudman properly discharges his duties under the
      Management Agreement to us, Mr. Rudman is not required to devote 100% of his
      time and attention to his time to us. Mr. Rudman is obligated under the
      Management Agreement to immediately communicate to us any business opportunities
      and inventions that he becomes aware or for which he is responsible, which
      then
      become our property. The Management Agreement has no set term and terminates
      only in the event we or D.P. Martin terminate it, D.P. Martin ceases to perform
      its duties thereunder, or in the event of the death or disability of Mr.
      Rudman.




41




We
      are
      party to a Management Agreement, effective October 1, 2005, with Visionaire
      whereby we engaged and appointed Johnny Christiansen, who resides in Norway
      and
      is an employee of Visionaire, as our Chief Executive Officer. Mr. Christiansen
      is also one of our directors. Mr. Christiansen will perform management services
      for us in his capacity as Chief Executive Officer from Norway and management
      services for IQ USA, which pays his monthly management fee to a maximum of
      $8,000 per month. Mr. Christiansen is also a director of Osmotex. In the
      Management Agreement we also provide Mr. Christiansen the opportunity to
      participate in an incentive stock option plan. So long as Mr. Christiansen
      properly discharges his duties under the Management Agreement to us, Mr.
      Christiansen is not required to devote 100% of his time and attention to his
      time to us. Mr. Christiansen is obligated under the Management Agreement to
      immediately communicate to us any business opportunities and inventions that
      he
      becomes aware or for which he is responsible, which then becomes our property.
      The Management Agreement has no set term and terminates only in the event we
      or
      Visionaire terminate it, Visionaire terminates it or ceases to perform it duties
      thereunder, or in the event of the death or disability of Mr.
      Christiansen.





We
      are
      party to a Management Agreement, effective March 1, 2006, with Visionaire
      whereby we engaged and appointed Per Arne Lislien, who resides in Norway and
      is
      an employee of Visionaire, as our Chief Operations Officer. Mr. Lislien will
      perform management services for us in his capacity as Chief Operations Officer
      from Norway and management services for IQ USA, which pays his monthly
      management fee of $10,000 per month. Mr. Lislien dedicates, on average, his
      entire total working time to us, which was anticipated upon execution by the
      parties of the Management Agreement. We anticipate Mr. Lislien’s devotion of all
      of his time will continue throughout 2006. In the Management Agreement we also
      provide Mr. Lislien the opportunity to participate in an incentive stock option
      plan. So long as Mr. Lislien properly discharges his duties under the Management
      Agreement to us, Mr. Lislien is not required to devote 100% of his time and
      attention to his time to us. Mr. Lislien is obligated under the Management
      Agreement to immediately communicate to us any business opportunities and
      inventions that he becomes aware or for which he is responsible, which then
      becomes our property. The Management Agreement has no set term and terminates
      only in the event we or Visionaire terminates it, Visionaire terminates it
      or
      ceases to perform it duties thereunder, or in the event of or disability of
      Mr.
      Lislien.





On
      August
      1, 2005, we entered into a letter agreement for consulting services with Hawk
      Associates, which will operate as an independent contractor. Hawk Associates
      provides us company identity, investor relations, financial media relation
      and
      other consulting and advisory services. In exchange for Hawk Associates’s
      services under the letter agreement, we granted Hawk Associates five-year
      Warrants in the amount of 250,000 shares of our common stock that will be priced
      on the first full day of trading of our common stock, with full “piggyback”
rights to be registered with our first registration statement. The Warrants
      expire at midnight on July 31, 2010. In addition, we pay Hawk Associates a
      retainer fee of $7,000 per month, plus normal out-of-pocket expenses, plus
      a one
      time payment of $4,000 (for creating of a company identity package). The initial
      term of this letter agreement expired on January 1, 2006, but the letter
      agreement successively renews for a period of thirty days every successive
      thirty days. Either we or Hawk Associates can terminate this letter agreement
      with 30 days’ notice. This letter agreement is currently in effect. Hawk
      Associates is bound to keep confidential any proprietary information we furnish
      to it.





On
      September 1, 2005, we entered into a letter agreement with Hawk Associates
      for
      the design, construction and delivery of our website (http://www.iq-micro.com)
      and for ongoing maintenance thereof. In exchange for Hawk Associates’s services
      under the letter agreement, we paid Hawk Associates a fixed fee of $10,000.
      For
      Hawk Associates’s regular hosting, maintenance and update of the website, we pay
      Hawk Associates $200.00 per month which covers four hours and then $50.00 an
      hour thereafter. This letter agreement expires on August 31, 2006, but
      automatically renews for successive one-year periods. After July 30, 2006,
      we or
      Hawk Associates have the right to terminate this letter agreement with 30 days’
notice. This letter agreement is currently in effect.





42





**Stock
      Options**





None
      of
      our officers or directors holds any options to purchase our securities. However,
      our Management Agreements with D.P. Martin and Visionaire
      provided that Robert Rudman, the employee of D.P. Martin, and Johnny
      Christiansen and Per Arne Lislien, employees of Visionaire, will be offered
      and
      will accept participation in an incentive stock option plan.





**Equity
      Compensation Plan Information**





We
      currently have no equity compensation plans for our executives.





**Compensation
      of Directors**





Our
      directors are reimbursed for out-of-pocket expenses incurred on our behalf,
      but
      currently receive no additional compensation for service as
      directors.


**Item 11.**
                **Security Ownership of Certain
                  Beneficial Owners and Management**and Related Stockholder
                  Matters****





The
      following table sets forth, as of February 12, 2007, the number and percentage
      of outstanding shares of our common stock beneficially owned by our executive
      officers, our directors and stockholders owning more than 5% of our common
      stock
      and all directors and executive officers as a group. Osmotex USA, the
      wholly-owned subsidiary of Osmotex, is the beneficial owner of more than 5%
      of
      our outstanding common stock. Each of the officers and directors can be reached
      in care of IQ Micro Inc. at 500 Australian Avenue, Suite 700, West Palm Beach,
      Florida, 33401.





To
      the
      best of our knowledge, except as noted below, each of such persons has sole
      voting and investment power with respect to the shares beneficially
      owned.





**Name
                of Executive Officer or Director**
            
            **Common
                Shares**
            
            **Percent
                of Class****Directors
                and Executive Officers**Svein
                Milford
            
            
            0
            
            
            0.0
            %Johnny
                Christiansen
            
            
            0
            
            
            0.0
            %Robert
                Rudman
            
            
            0
            
            
            0.0
            %Trond
                Eidsnes (1)
            
            
            0
            
            
            0.0
            %Per
                Arne Lislien
            
            
            0
            
            
            0.0
            %All
                Directors and Executive Officers as a Group
              (5
                persons)
            
            
            0
            
            
            0.0
            %**Name
                and Address of Other Beneficial Owner**
            
            
            **Common
                Shares**
            
            
            **Percent
                of Class**Osmotex
                USA, Inc. (2)
              c/o
                Osmotex AS
              Solheimsgaten
                16A
              5080
                Bergen, Norway
            
            
            42,670,000
            
            
            85.0
            %





(1)
            EKO,
                AS, a company which Mr. Eidsnes controls, is the beneficial owner
                of
                approximately 19.34% of Osmotex.




43




(2)
            Osmotex
                USA, our majority shareholder, is the wholly-owned subsidiary of
                Osmotex.
                Upon the terms and subject to the conditions set forth in the CC
                Agreement, dated June 9, 2005, as amended by the Amendment to CC
                Agreement, dated January 12, 2006, Osmotex USA agreed to contribute
                the
                Licensed Rights to us as a capital contribution in exchange for 42,670,000
                shares of our $0.0001 par value per share common stock, as well as
                our
                payment of the License Fee. Our shareholders, including a majority
                of our
                disinterested shareholders, ratified and approved the License Fee
                at a
                special meeting of the shareholders on January 12,
                2006.





**Securities
      Authorized for Issuance Under Equity Compensation Plans**





See
      Item
      5 “Market for Common Equity and Related Shareholder Matters”.


**Item 12.**
                **Certain Relationships and
                  Related
                  Transactions.**





Currently,
      we have no independent directors on our Board of Directors, and therefore have
      no formal procedures in effect for reviewing and pre-approving any transactions
      between us, our directors, officers and other affiliates. We will use our best
      efforts to ensure that all transactions are on terms at least as favorable
      to us
      as we would expect to negotiate with unrelated third parties.





**Capital
      Contribution Agreement**





On
      June
      9, 2005, we entered into a Capital Contribution Agreement (“CC Agreement”). In
      the CC Agreement, we agreed to exchange 42,670,000 shares of our common stock,
      $0.0001 par value per share, to Osmotex USA, in return for the Licensed Rights.
      As a result of this transaction, Osmotex USA became the beneficial owner of
      approximately 85% of our common stock.





Shortly
      thereafter, we determined that **** it
      was in
      our best interests and in the best interests of our shareholders to provide
      funding assistance in connection with Osmotex’s continued product development of
      microfluidics technology, for other technologies or other items. We determined
      that this funding would involve the expenditure of our cash, and such cash
      expenditures would not be classified as debt owed to us by Osmotex or as capital
      contributions in exchange for any equity of Osmotex. We have determined that
      this situation is advantageous to us and to our shareholders because of the
      existence of the microfluidics technology and the benefits that we believe
      we
      can derive as the microfluidics technology is further developed and improved.
      These payments will also be advantageous and beneficial to Osmotex.





We
      agreed
      with Osmotex and Osmotex USA that it was in all parties’ best interests if we
      included as consideration for the Licensed Rights, the payment of the License
      Fee, in addition to the prior issuance of 42,670,000 shares of our common stock
      to Osmotex USA. The License Fee has been paid in full. We paid the License
      Fee
      payment from the proceeds of our $500,000 Secured Convertible Debenture
      financing with Cornell Capital Partners, LP, which closed on August 12, 2005.
      Osmotex applied the License Fee funds to its microfluidics technology product
      development efforts. Specifically, Osmotex paid a significant portion of the
      funds to CSEM with which it has an agreement to further Osmotex’s microfluidics
      technology product development. Osmotex applied the remainder of the funds
      to
      sales and marketing activities conducted by former Osmotex employees in
      conjunction with the CSEM microfluidics technology product development. The
      net
      result of the License Fee is our payment of $300,000 to Osmotex, the sole owner
      of our majority shareholder, Osmotex USA.





The
      Licensed Rights are currently our sole asset and our sole prospective revenue
      source, in the form of anticipated licensing fees and royalties. We believe
      the
      most direct method of supporting Osmotex’s technology is by supporting the
      product development of microfluidics technology via the License
      Fee.





Our
      shareholders, including a majority of our disinterested shareholders, ratified
      and approved the License Fee at a special meeting of the shareholders on January
      12, 2006. As of January 12, 2006, we entered into the Amendment to CC Agreement
      with Osmotex USA, whereby we memorialized our agreement to pay the License
      Fee,
      as partial consideration for the Licensed Rights, in addition to our issuance
      of
      the 42,760,000 common stock shares to Osmotex USA.





44





**Financing
      and Listing Agreement**





In
      connection with the CC Agreement, dated June 9, 2005, we entered into the
      F&L Agreement with Osmotex USA and D.P. Martin that obligated D.P. Martin to
      locate at least $500,000 in external financing for us by December 31, 2005.
      Subsequent to March 31, 2006, the agreement was further extended to September
      30, 2006. Pursuant to the F&L Agreement, D.P. Martin: (1) assisted us in
      establishing Osmotex USA’s approximate 85% of our outstanding common stock, and
      (2) placed 1,000,000 shares of our common stock beneficially owned by D.P.
      Martin into escrow to be released to D.P. Martin if and when it fulfills its
      financing commitment to us under the F&L Agreement. These 1,000,000 shares
      have been released from this escrow and have been pledged to Cornell Capital
      in
      connection with our February 2007 $95,000 Debenture. By September 30, 2006,
      D.P.
      Martin had advanced approximately $44,900 as a shareholder loan to the Company
      and additional advances are being arranged.




**Amended
      and Restated Technology License Agreement**





On
      June
      9, 2005, Osmotex and Osmotex USA entered into the License Agreement. Osmotex
      licensed to Osmotex USA the Licensed Rights. See “- Description of Business -
      Proprietary Technology - Patents” above.





Because
      two of our directors are also directors of our 85% shareholder, our board deemed
      the License Fee to be an interested party transaction and deemed it in the
      best
      interest of the company to have our shareholders, including a majority of our
      minority shareholders, approve the License Fee. On January 12, 2006, our
      shareholders approved the License Fee at a special meeting. Therefore, on
      January 12, 2006, we entered into the A&R License Agreement, to which
      Osmotex and Osmotex USA are also parties. In the A&R License Agreement, we
      memorialized our agreement to pay the License Fee. Also, Osmotex USA
      sub-licensed to us the identical Licensed Rights it had been granted from
      Osmotex. We expect to utilize the Licensed Rights to effect the sales and
      marketing of Osmotex’s patented microfluidics technology through our
      wholly-owned subsidiary, IQ USA.





**CSEM
      Letter Agreement**





Osmotex
      applied the License Fee funds to its microfluidics technology product
      development efforts. Specifically, Osmotex paid a significant portion of the
      funds to CSEM. Osmotex worked with CSEM on a previous and related project from
      June 2004 until December 2004. In that project, CSEM and Osmotex tested the
      concept of EO2 for low-power pumping of liquids in microfluidic systems. On
      April 11, 2005, Osmotex entered into the CSEM Letter Agreement to further
      Osmotex’s microfluidics technology product development. The CSEM Letter
      Agreement contains the terms of a four-step project that we believe will be
      completed prior to June 30, 2007. The overall goal of the relationship formed
      between Osmotex and CSEM in the CSEM Letter Agreement is to assist Osmotex
      present completely microfabricated functional micropumps.





**Management
      Agreements**





We
      are
      party to a Management Agreement, effective May 1, 2005, with D.P. Martin. In
      that agreement, we engaged and appointed Robert Rudman, an employee of D.P.
      Martin, as our Chief Financial Officer. Mr. Rudman is also one of our directors.
      IQ USA pays a monthly management fee to D.P. Martin in the amount of $10,000
      per
      month. Mr. Rudman is a Canadian Chartered Accountant and a Canadian citizen.
      Mr.
      Rudman’s H-1B work authorization status was granted with D.P. Martin. Mr. Rudman
      has provided his personal guaranty of up to $25,000 in connection with our
      February 2007 $95,000 Convertible Debenture financing with Cornell Capital
      Partners, LP.




45




We
      are
      party to a Management Agreement, effective October 1, 2005, with Visionaire
      whereby we engaged and appointed Johnny Christiansen, who resides in Norway
      and
      is an employee of Visionaire, as our Chief Executive Officer. Mr. Christiansen
      is also one of our directors. Mr. Christiansen will perform management services
      for us in his capacity as Chief Executive Officer from Norway and management
      services for IQ USA, which pays his monthly management fee of $8,000 per month.
      Mr. Christiansen is also a director of Osmotex.





We
      are
      party to a Management Agreement, effective March 1, 2006, with Visionaire
      whereby we engaged and appointed Per Arne Lislien, who resides in Norway and
      is
      an employee of Visionaire, as our Chief Operations Officer. Mr. Lislien will
      perform management services for us in his capacity as Chief Operations Officer
      from Norway and management services for IQ USA, which pays his monthly
      management fee of $10,000 per month.





We
      believe that the terms of the agreements and transactions described above are
      no
      less favorable to us than those that could be obtained from an unrelated third
      party in an arm's length transaction. Although shareholder approval of the
      $300,000 License Fee payment was not required by our Bylaws or other applicable
      legal requirement, in the interest of maintaining good relations with our
      shareholders and acting in a manner conducive to good corporate practices,
      we
      submitted the License Fee payment for ratification by our shareholders,
      including a majority of our disinterested shareholders, at a special meeting
      held on January 12, 2006. Our shareholders ratified the License Fee payment
      at
      the special meeting.




**Indemnification
      of Directors and Officers.**





Our
      bylaws include an indemnification provision which requires us to indemnify
      our
      officers and directors for any liability including prompt reimbursement or
      provision for reasonable attorney fees and costs of defense arising out of
      any
      act or omission of any officer or director on our behalf to the full extent
      allowed by the laws of the State of Colorado, if the officer or director acted
      in good faith and in a manner the officer or director reasonably believed to
      be
      in, or not opposed to, our best interests, and with respect to any criminal
      action or proceeding, had no reasonable cause to believe the conduct was
      unlawful. The board of directors is required to make a determination by a
      majority vote, not including the director who is party to the action, whether
      the officer or director in the specific case has met the applicable standard
      of
      conduct or determined by independent legal counsel or the shareholders, if
      so
      directed by a quorum of disinterested directors.





Section
      7-109-102 of the Colorado Business Corporations statute provides authority
      to a
      corporation to indemnify a person made a party to a proceeding because the
      person is or was a director against liability incurred in the proceeding
      if:





(a)
            the
                person’s conduct was in good faith;


(b)
            the
                person reasonably believed: (I) in the case of conduct in an official
                capacity with the corporation, that such conduct was in the corporation’s
                best interests; and (II) in all other cases, that such conduct was
                at
                least not opposed to the corporation’s best interests;
                and


(c)
            in
                the case of any criminal proceeding, the person had no reasonable
                cause to
                believe the person’s conduct was
                unlawful.





A
      director’s conduct with respect to an employee benefit plan for a purpose the
      director reasonably believed to be in the interests of the participants in
      or
      beneficiaries of the plan is conduct that satisfies the requirement of
      subparagraph (II) of paragraph (b) of subsection (1) of Section 7-109-102.
      A
      director’s conduct with respect to an employee benefit plan for a purpose that
      the director did not reasonably believe to be in the interests of the
      participants in or beneficiaries of the plan shall be deemed not to satisfy
      the
      requirements of paragraph (a) of subsection (1) of Section
      7-109-102.




46




The
      termination of a proceeding by judgment, order, settlement, conviction, or
      upon
      a plea of nolo contendere or its equivalent is not, of itself, determinative
      that the director did not meet the standard of conduct described in Section
      7-109-102.


A
      corporation may not indemnify a director:





(a)
            in
                connection with a proceeding by or in the right of the corporation
                in
                which the director was adjudged liable to the corporation; or


(b)
            in
                connection with any other proceeding charging that the director derived
                an
                improper personal benefit, whether or not involving action in an
                official
                capacity, in which proceeding the director was adjudged liable on
                the
                basis that the director derived an improper personal
                benefit.





Indemnification
      permitted in connection with a proceeding by or in the right of the corporation
      is limited to reasonable expenses incurred in connection with the
      proceeding.





Section
      7-109-103 of the Colorado Business Corporations statute provides that unless limited
      by its articles of incorporation, a corporation shall indemnify a person who
      was
      wholly successful, on the merits or otherwise, in the defense of any proceeding
      to which the person was a party because the person is or was a director, against
      reasonable expenses incurred by the person in connection with the
      proceeding.





Section
      7-109-104 of the Colorado Business Corporations statute states that a
      corporation may pay for or reimburse the reasonable expenses incurred by a
      director who is a party to a proceeding in advance of final disposition of
      the
      proceeding if:





(a)
            the
                director furnishes to the corporation a written affirmation of the
                director’s good faith belief that the director has met the standard of
                conduct described in Section
                7-109-102;


(b)
            the
                director furnishes to the corporation a written undertaking, executed
                personally or on the director’s behalf, to repay the advance if it is
                ultimately determined that the director did not meet the standard
                of
                conduct; and


(c)
            a
                determination is made that the facts then known to those making the
                determination would not preclude indemnification under this
                article.





The
      undertaking required by paragraph (b) of subsection (1) of Section 7-109-104 shall
      be
      an unlimited general obligation of the director but need not be secured and
      may
      be accepted without reference to financial ability to make
      repayment.


Section
      7-109-105 of the Colorado Business Corporations statute provides that
      u nless
      otherwise provided in the articles of incorporation, a director who is or was
      a
      party to a proceeding may apply for indemnification to the court conducting
      the
      proceeding or to another court of competent jurisdiction. On receipt of an
      application, the court, after giving any notice the court considers necessary,
      may order indemnification in the following manner:





(a)
            if
                it determines that the director is entitled to mandatory indemnification
                under Section 7-109-103, the court shall order indemnification, in
                which
                case the court shall also order the corporation to pay the director’s
                reasonable expenses incurred to obtain court-ordered indemnification;
                and


(b)
            if
                it determines that the director is fairly and reasonably entitled
                to
                indemnification in view of all the relevant circumstances, whether
                or not
                the director met the standard of conduct set forth in Section 7-109-102
                (1) or was adjudged liable in the circumstances described in Section
                7-109-102 (4), the court may order such indemnification as the court
                deems
                proper; except that the indemnification with respect to any proceeding
                in
                which liability shall have been adjudged in the circumstances described
                in
                Section 7-109-102 (4) is limited to reasonable expenses incurred
                in
                connection with the proceeding and reasonable expenses incurred to
                obtain
                court-ordered indemnification.





Section
      7-109-106 of the Colorado Business Corporations statute states that
      a corporation may not indemnify a director under Section 7-109-102 unless
      authorized in the specific case after a determination has been made that
      indemnification of the director is permissible in the circumstances because
      the
      director has met the standard of conduct set forth in Section 7-109-102. A
      corporation shall not advance expenses to a director under Section 7-109-104
      unless authorized in the specific case after the written affirmation and
      undertaking required by Section 7-109-104 (1) (a) and (1) (b) are received
      and
      the determination required by Section 7-109-104 (1) (c) has been
      made.




47




The
      immediately above described determinations shall be made:





(a)
            by
                the board of directors by a majority vote of those present at a meeting
                at
                which a quorum is present, and only those directors not parties to
                the
                proceeding shall be counted in satisfying the quorum;
                or


(b)
            if
                a quorum cannot be obtained, by a majority vote of a committee of
                the
                board of directors designated by the board of directors, which committee
                shall consist of two or more directors not parties to the proceeding;
                except that directors who are parties to the proceeding may participate
                in
                the designation of directors for the
                committee.





If
      a
      quorum cannot be obtained as contemplated in paragraph (a) of subsection (2)
      of Section
      7-109-106 ,
      and a
      committee cannot be established under paragraph (b) of subsection (2) of Section
      7-109-106 ,
      or,
      even if a quorum is obtained or a committee is designated, if a majority of
      the
      directors constituting such quorum or such committee so directs, the
      determination required to be made by subsection (1) of Section
      7-109-106 shall
      be
      made:





(a)
            by
                independent legal counsel selected by a vote of the board of directors
                or
                the committee in the manner specified in paragraph (a) or (b) of
                subsection (2) ofSection
                7-109-106or,
                if a quorum of the full board cannot be obtained and a committee
                cannot be
                established, by independent legal counsel selected by a majority
                vote of
                the full board of directors; or


(b)
            by
                the shareholders.





Authorization
      of indemnification and advance of expenses shall be made in the same manner
      as
      the determination that indemnification or advance of expenses is permissible;
      except that, if the determination that indemnification or advance of expenses
      is
      permissible is made by independent legal counsel, authorization of
      indemnification and advance of expenses shall be made by the body that selected
      such counsel.





Section
      7-109-107 of the Colorado Business Corporations statute provides that
      u nless
      otherwise provided in the articles of incorporation:





(a)
            an
                officer is entitled to mandatory indemnification under Section 7-109-103,
                and is entitled to apply for court-ordered indemnification under
                Section
                7-109-105, in each case to the same extent as a
                director;


(b)
            a
                corporation may indemnify and advance expenses to an officer, employee,
                fiduciary, or agent of the corporation to the same extent as to a
                director; and


(c)
            a
                corporation may also indemnify and advance expenses to an officer,
                employee, fiduciary, or agent who is not a director to a greater
                extent,
                if not inconsistent with public policy, and if provided for by its
                bylaws,
                general or specific action of its board of directors or shareholders,
                or
                contract.





Section
      7-109-108 of the Colorado Business Corporations statute provides that
      a
      corporation may purchase and maintain insurance on behalf of a person who is
      or
      was a director, officer, employee, fiduciary, or agent of the corporation,
      or
      who, while a director, officer, employee, fiduciary, or agent of the
      corporation, is or was serving at the request of the corporation as a director,
      officer, partner, trustee, employee, fiduciary, or agent of another domestic
      or
      foreign entity or of an employee benefit plan, against liability asserted
      against or incurred by the person in that capacity or arising from the person’s
      status as a director, officer, employee, fiduciary, or agent, whether or not
      the
      corporation would have power to indemnify the person against the same liability
      under Section 7-109-102, 7-109-103, or 7-109-107. Any such insurance may be
      procured from any insurance company designated by the board of directors,
      whether such insurance company is formed under the law of this state or any
      other jurisdiction of the United States or elsewhere, including any insurance
      company in which the corporation has an equity or any other interest through
      stock ownership or otherwise.




48




Section
      7-109-109 of the Colorado Business Corporations statute states that
      a provision treating a corporation’s indemnification of, or advance of expenses
      to, directors that is contained in its articles of incorporation or bylaws,
      in a
      resolution of its shareholders or board of directors, or in a contract, except
      an insurance policy, or otherwise, is valid only to the extent the provision
      is
      not inconsistent with Sections 7-109-101 to 7-109-108. If the articles of
      incorporation limit indemnification or advance of expenses, indemnification
      and
      advance of expenses are valid only to the extent not inconsistent with the
      articles of incorporation. Sections 7-109-101 to 7-109-108 do not limit a
      corporation’s power to pay or reimburse expenses incurred by a director in
      connection with an appearance as a witness in a proceeding at a time when the
      director has not been made a named defendant or respondent in the
      proceeding.





Section
      7-109-110 of the Colorado Business Corporations statute states that
      i f
      a
      corporation indemnifies or advances expenses to a director under this article
      in
      connection with a proceeding by or in the right of the corporation, the
      corporation shall give written notice of the indemnification or advance to
      the
      shareholders with or before the notice of the next shareholders’ meeting. If the
      next shareholder action is taken without a meeting at the instigation of the
      board of directors, such notice shall be given to the shareholders at or before
      the time the first shareholder signs a writing consenting to such
      action.





Insofar
      as indemnification for liabilities arising under the Securities Act of 1933,
      as
      amended, may be permitted to directors or officers pursuant to the foregoing
      provisions, we are informed that, in the opinion of the SEC, such
      indemnification is against public policy, as expressed in said Act and is,
      therefore, unenforceable.


**Item 13.**
                **Exhibits**





(a)
            Exhibits.
                The following exhibits are filed as part of this Report or incorporated
                herein by reference:





**Exhibit
                No.**
            
            **Description**
            
            **Location**2.1
            
            Plan
                of Merger Enclave Products, Ltd. by and between Enclave Products,
                Ltd., a
                Colorado corporation, and Enclave Products, Ltd., a Colorado corporation,
                dated as of March 29, 2004.
            
            (2)3.1
            
            Articles
                of Incorporation and amendments thereto.
            
            (2)3.2
            
            Bylaws
                and amendments thereto.
            
            (2)10.1
            
            Letter
                Agreement by and between Osmotex AS and Centre Suisse d’Electronique at de
                Microtechnique SA, dated as of April 11, 2005.
            
            (2)10.2
            
            Management
                Agreement between IQ Micro Inc. and D.P. Martin & Associates Inc.,
                effective as of May 1, 2005.
            
            (2)10.3
            
            Capital
                Contribution Agreement by and among IQ Medical Corp. and Osmotex
                USA,
                Inc., entered into on June 9, 2005.
            
            (2)10.4
            
            Financing
                and Listing Agreement by and among IQ Medical Corp., Osmotex USA,
                Inc. and
                D.P. Martin & Associates, Inc., entered into on June 9,
                2005.
            
            (2)10.5
            
            Description
                of Verbal Lease Agreement by and between IQ Micro Inc. and D.P. Martin
                & Associates, Inc., effective July 1, 2005.
            
            (2)




49




10.6
            
            Description
                of Verbal Lease Agreement by and between IQ Micro Inc. and Jochri
                Consult
                AS (now Visionaire Consult AS), effective August 1, 2005.
            
            (2)10.7
            
            Letter
                Agreement between Hawk Associates, Inc. and IQ Micro, Inc. for investor
                relations and financial media relations services, made as of August
                1,
                2005.
            
            (2)10.8
            
            Escrow
                Agreement by and among IQ Medical Corp. and David Gonzalez, Esq.,
                made and
                entered into as of August 12, 2005.
            
            (2)10.9
            
            Investor
                Registration Rights Agreement by and among IQ Medical Corp. and Cornell
                Capital Partners, LP, dated as of August 12, 2005.
            
            (2)10.10
            
            Secured
                Convertible Debenture issued by IQ Medical Corp. to Cornell Capital
                Partners, LP, dated as of August 12, 2005.
            
            (2)10.11
            
            Securities
                Purchase Agreement by and among IQ Medical Corp. and Cornell Capital
                Partners, LP, dated as of August 12, 2005.
            
            (2)10.12
            
            Security
                Agreement by and between IQ Medical Corp. and Cornell Capital Partners,
                LP, entered into and made effective on August 12, 2005.
            
            (2)10.13
            
            Warrant
                issued by IQ Medical Corp. to Cornell Capital Partners, LP, dated
                as of
                August 12, 2005.
            
            (2)10.14
            
            Agreement
                by and between Osmotex AS and Centre Suisse d’Electronique at de
                Microtechnique SA for office space, lab usage, lab and research and
                development support, dated as of September 1, 2005.
            
            (2)10.15
            
            Letter
                Agreement between Hawk Associates, Inc. and IQ Micro Inc. for website
                design, construction, delivery and maintenance, entered into as of
                September 1, 2005.
            
            (2)10.16
            
            Management
                Agreement between I.Q. Micro Inc. and Jochri Consult AS (now Visionaire
                Consult AS), effective as of October 1, 2005.
            
            (2)10.17
            
            Amended
                and Restated Investor Registration Rights Agreement by and among
                IQ Micro
                Inc. and Cornell Capital Partners, LP, dated as of November 30,
                2005.
            
            (2)10.18
            
            Amended
                and Restated Security Agreement by and between IQ Micro Inc. and
                Cornell
                Capital Partners, LP, entered into and made effective on November
                30,
                2005.
            
            (2)10.19
            
            Escrow
                Agreement by and among IQ Micro Inc. and David Gonzalez, Esq., made
                and
                entered into as of November 30, 2005.
            
            (2)10.20
            
            Secured
                Convertible Debenture issued by IQ Micro Inc. to Cornell Capital
                Partners,
                LP, dated as of November 30, 2005.
            
            (2)10.21
            
            Securities
                Purchase Agreement by and among IQ Micro Inc. and Cornell Capital
                Partners, LP, dated as of November 30, 2005.
            
            (2)10.22
            
            Warrant
                issued by IQ Micro Inc. to Cornell Capital Partners, LP, dated as
                of
                November 30, 2005.
            
            (2)10.23
            
            Amendment
                to Financing and Listing Agreement by and among IQ Micro Inc., Osmotex
                USA, Inc. and D.P. Martin & Associates, Inc., entered into on December
                30, 2005.
            
            (2)10.24
            
            Amended
                and Restated Technology License Agreement by and among IQ Micro Inc.,
                Osmotex AS and Osmotex USA, Inc. entered into on January 12,
                2006.
            
            (2)10.25
            
            Amendment
                to Capital Contribution Agreement by and between IQ Micro Inc. and
                Osmotex
                USA, Inc., dated as of January 12, 2006.
            
            (2)10.26
            
            Management
                Agreement between I.Q. Micro Inc. and Jochri Consult AS (now Visionaire
                Consult AS), effective as of March 1, 2006.
            
            (2)10.27
            
            Second
                Amended and Restated Investor Registration Rights Agreement by and
                between
                IQ Micro Inc. and Cornell Capital Partners, LP, dated as of March
                29,
                2006.
            
            (2)




50




10.28
            
            Second
                Amended and Restated Security Agreement by and between IQ Micro Inc.
                and
                Cornell Capital Partners, LP, entered into and made effective on
                March 29,
                2006.
            
            (2)10.29
            
            Secured
                Convertible Debenture issued by IQ Micro Inc. to Cornell Capital
                Partners,
                LP, dated as of March 29, 2006.
            
            (2)10.30
            
            Securities
                Purchase Agreement by and among IQ Micro Inc. and Cornell Capital
                Partners, LP, dated as of March 29, 2006.
            
            (2)10.31
            
            Warrant
                issued by IQ Micro Inc. to Cornell Capital Partners, LP, dated as
                of March
                29, 2006.
            
            (2)10.32
            
            Securities
                Purchase Agreement by and between IQ Micro Inc. and Cornell Capital
                Partners, LP, dated as of February 15, 2007
            
            (1)10.33
            
            Secured
                Convertible Debenture issued by IQ Micro Inc. to Cornell Capital
                Partners,
                LP, dated as of February 15, 2007
            
            (1)10.34
            
            Registration
                Rights Agreement by and between IQ Micro Inc. and Cornell Capital
                Partners, LP, dated as of February 15, 2007
            
            (1)10.35
            
            Security
                Agreement by and between IQ Micro Inc. and Cornell Capital Partners,
                LP,
                dated as of February 15, 2007
            
            (1)10.36
            
            Warrant
                issued by IQ Micro Inc. to Cornell Capital Partners, LP, dated as
                of
                February 15, 2007
            
            (1)10.37
            
            Pledge
                and Escrow Agreement by and among IQ Micro Inc., D.P. Martin &
                Associates, Inc., Cornell Capital Partners, LP, and David Gonzalez,
                Esq.
                (as escrow agent), dated as of February 15, 2007
            
            (1)31.1
            
            Certification
                of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley
                Act
                of 2002
            
            (1)31.2
            
            Certification
                of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley
                Act
                of 2002
            
            (1)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
            
            (1)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
            
            (1)





(1)
            Filed
                herewith.





(2)
            Filed
                as an exhibit to our Registration Statement on Form 10-SB filed with
                the
                Securities and Exchange Commission on July 17, 2006 and incorporated
                herein by reference.





(b)
      Reports on Form 8-K. During the quarter ended September 30, 2006, the Company
      did not file any reports on Form 8-K.


**Item 14.**
                **Principal Accountant Fees
                  and
                  Services**


***Audit
        Fees*** **.** Daszkal
        Bolton LLP (“Daszkal”), our independent auditors, charged us an aggregate of
        $5,000 in the 2005 financial year and $64,123 in the 2006 financial year
        in
        connection with professional services rendered for the audit of our annual
        consolidated financial statements and services normally provided by them
        in
        connection with statutory and regulatory filings or other compliance
        engagements. These are fees for professional services performed by Daszkal
        for
        the audit of our annual consolidated financial statements and review of our
        consolidated financial statements included in our registration statement
        on Form
        10-SB.





51


***Audit-Related
        Fees*** **.** In
        addition to the amounts described above, Daszkal charged us an aggregate
        of $-0-
        in the 2005 financial year and $24,482 in the 2006 financial year for assurance
        and related services in connection with the performance of our audit. These
        services consisted of transaction and accounting advisory services.
 
 ***Tax
        Fees*** **.** No
        fees
        were charged by Daszkal in each of the 2005 and 2006 financial years for
        professional services related primarily to tax compliance.
 
 ***All
        Other Fees*** **.** No fees
        were charged by Daszkal in each of the 2005 and 2006 financial years for
        other
        services.
 
 The
        above
        services fall within the scope of audit and permitted non-audit services
        within
        the meaning of Section 201 of the Sarbanes-Oxley Act of 2002.




**Pre-Approval
      Policies and Procedures**





The
      decision to retain Daszkal Bolton LLP as our principal accountant for the audit
      of our financial statements for the year ended September 30, 2006 was approved
      by our Board of Directors. We did not have a separate audit committee at such
      time. At that time, our entire Board of Directors performed all the functions
      that may be delegated to an audit committee.





We
      currently do not have a separate audit committee. Currently our entire Board
      of
      Directors perform all the functions that may be delegated to an audit committee.
      We intend to establish an audit committee during the fiscal year ending
      September 30, 2007 and are currently assessing which current and potential
      members of our Board are best qualified, based on their accounting or related
      financial management expertise, independence, time availability, corporate
      experience and other relevant factors, to serve on our audit committee. Based
      on
      our small size, early development stage and limited financial and human
      resources, we did not believe that creating an audit committee separate and
      distinct from our full Board of Directors would have been cost-effective price
      to the fiscal year ending September 30, 2007.





52








SIGNATURES





In
      accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
      the
      registrant caused this Report to be signed on its behalf by the undersigned,
      thereunto duly authorized.





IQ
              MICRO
              INC.Date:
              February 16, 2007
            By:
            /s/
                Johnny
                ChristiansenJohnny
              Christiansen, President andChief
                Executive Officer
              (Principal Executive
                Officer)


Date: February
              16, 2007
            By:
            /s/ Robert
                RudmanRobert
              Rudman, Chief Financial Officer,Secretary
                and
                Treasurer
              (Principal Financial Officer
              and Principal Accounting
                Officer)





In
      accordance with the Securities and Exchange Act of 1934, this report has been
      signed below by the following persons on behalf of the registrant and in the
      capacities and on the dates indicated.


Signature
              
              Title
              
              Date/s/
                  Svein Milford
              
              Chairman
              
              February
                  16, 2007Svein
                  Milford/s/
                  Johnny Christiansen
              
              President,
                  Chief Executive Officer
              
              February
                  16, 2007Johnny
                  Christiansen
              
              and
                Director/s/
                  Robert Rudman
              
              Chief
                  Financial Officer, Secretary,
              
              February
                  16, 2007Robert
                  Rudman
              
              Treasurer
                  and Director/s/
                  Trond Eidsnes
              
              Director
              
              February
                  16, 2007Trond
                  Eidsnes
 53
   **IQ
                  MICRO INC.**
                **(A
                  Development Stage Company)**
                
                
                
                **CONSOLIDATED
                  FINANCIAL**
                **STATEMENTS**
                
                
                
                
                
                **AS
                  OF SEPTEMBER 30, 2006 AND 2005, AND FOR THE**
                **PERIODS
                  FROM OCTOBER 1, 2004 TO JUNE 8, 2005,****FROM**
                **JUNE
                  9, 2005 TO SEPTEMBER 30, 2005, FOR THE YEAR**
                **ENDED
                  SEPTEMBER 30, 2006 AND FOR THE PERIOD FROM**
                **JUNE
                  9, 2005 TO SEPTEMBER 30, 2006 (DEVELOPMENT**
                **STAGE
                  PERIOD)**
 
 
 **TABLE
        OF CONTENTS**
 
 
 
 Report
                  of Independent Registered Public Accounting Firm
              F-1Consolidated
                  Financial Statements:Consolidated
                  Balance Sheets as of September 30, 2006 and 2005
              F-2Consolidated
                  Statements of Operations for the periods from October 1, 2004 toJune
                  8, 2005, from June 9, 2005 to September 30, 2005, for the year
                  endedSeptember
                  30, 2006 and for the period from June 9, 2005 to September 30,
                  2006,(Development
                  Stage Period)
              F-3Consolidated
                  Statements of Changes In Stockholders’ Deficit for the periods from
                October
                  1, 2004 to June 8, 2005, from June 9, 2005 to September 30, 2005,
                  for
                the
                  year ended September 30, 2006, and for the period from June 9,
                  2005 to
                September
                  30, 2006 (Development Stage Period)
              F-4Consolidated
                  Statements of Cash Flows for the year ended September 30,
                  2004and
                  for the periods from October 1, 2004 to June 8, 2005, and from
                  June 9,
                  2005
                to
                  September 30, 2005, for the year ended September 30, 2006, and
                  for the
                period
                  from June 9, 2005 to September 30, 2006 (Development Stage
                  Period)
              F-5Notes
                  to Consolidated Financial Statements
              F-6
                  - 15
 
 
 
 **Report
          of Independent Registered Public Accounting Firm**
 
 IQ
          Micro
          Inc.
 To
          the
          Board of Directors
 500
          Australian Ave., Suite 700
 West
          Palm
          Beach, Florida
 
 We
          have
          audited the consolidated balance sheets of IQ Micro Inc. and subsidiary
          (a
          development stage company) as of September 30, 2006 and 2005, and the related
          consolidated statements of operations, changes in stockholders’ deficit and cash
          flows for the periods from October 1, 2004 to June 8, 2005, for the year
          ended
          September 30, 2006 and the period from June 9, 2005 to September 30, 2006
          (development stage period). These financial statements are the responsibility
          of
          the Company's management. Our responsibility is to express an opinion on
          these
          financial statements based on our audits.
 
 We
          conducted our audits in accordance with the standards of the Public Company
          Accounting Oversight Board (United States). Those standards require that
          we plan
          and perform the audit to obtain reasonable assurance about whether the
          financial
          statements are free of material misstatement. An audit includes examining,
          on a
          test basis, evidence supporting the amounts and disclosures in the financial
          statements. An audit also includes assessing the accounting principles
          used and
          significant estimates made by management, as well as evaluating the overall
          financial statement presentation. We believe that our audits provided a
          reasonable basis for our opinion.
 
 In
          our
          opinion, the consolidated financial statements referred to above present
          fairly,
          in all material respects, the financial position of IQ Micro Inc. and subsidiary
          as of September 30, 2006 and 2005, and the results of their operations
          and their
          cash flows for the periods from October 1, 2004 to June 8, 2005, from June
          9,
          2005 to September 30, 2005, for the year ended September 30, 2006 and the
          period
          from June 9, 2005 to September 30, 2006 (development stage period), in
          conformity with U.S. generally accepted accounting principles.
 
 The
          accompanying financial statements have been prepared assuming that the
          Company
          will continue as a going concern.  As discussed in Note 2 to the financial
          statements, the Company has no revenue and is dependent on external financing
          to
          fund operations.  This raises substantial doubt about the Company's ability
          to continue as a going concern.  Management's plans in regard to these
          matters are also described in Note 2.  The financial statements do not
          include any adjustments that might result from the outcome of this
          uncertainty.
  /s/
          Daszkal Bolton LLP
 Boca
          Raton, Florida
 February
          15, 2007
  2401
            NW
            Boca Raton Boulevard  ̈ Boca
            Raton, FL 33431-6632  ̈  **t:** 561.367.1040  ̈  **f:** 561.750.3236
 2401
            PGA
            Boulevard, Suite 196  ̈ Palm
            Beach Gardens, FL 33410-3500  ̈  **t:** 561.367.1040  ̈  **f:** 561.624.1151
 2700
            West
            Cypress Creek Road, Suite D 126  ̈ Fort
            Lauderdale, FL 33309-1751  ̈  **t:** 954.974.3544  ̈  **f:** 954.974.3680
 *PCA
            OB Registered*  **www.daszkalbolton.com**  *Affiliated Offices Worldwide*
  
  **IQ
        MICRO INC.**
 **(A
          Development Stage Company)**
 **CONSOLIDATED
          BALANCE SHEETS**
 
 **ASSETS****September
                  30,**
              
              **September
                  30,****2006**
              
              **2005**Current
                  assetsCash
              
              $
              6,473
              
              $
              92,214Prepaid
                  expenses
              
              
              2,500
              
              
              7,500Total
                  current assets
              
              
              8,973
              
              
              99,714Licensed
                  rights, net
              
              
              255,552
              
              
              288,888Deferred
                  finance charges, net
              
              
              147,681
              
              
              111,091Total
                  assets
              
              $
              412,206
              
              $
              499,693**LIABILITIES
                  AND STOCKHOLDERS' DEFICIT**Current
                  liabilitiesTrade
                  payables
              
              $
              338,282
              
              $
              36,987Accrued
                  interest
              
              
              95,222
              
              
              5,370Shareholder
                  advance
              
              
              44,876
              
              
              -Accounts
                  payable to parent company
              
              
              62,255
              
              
              -License
                  fee payable to parent company
              
              
              20,280
              
              
              80,280Total
                  current liabilities
              
              
              560,906
              
              
              122,637Long-term
                  liabilitiesSecured
                  convertible debenture, net $685,166 and $313,968 discounts
              
              
              814,834
              
              
              186,032Beneficial
                  conversion liability
              
              
              530,187
              
              
              302,084Total
                  long-term liabilities
              
              
              1,345,021
              
              
              488,116Total
                  liabilities
              
              
              1,905,927
              
              
              610,753Commitments
                  and contingenciesStockholders’
                  deficitPreferred
                  stock, $0.0001 par valueAuthorized
                  25,000,000 shares none issued and outstanding
              
              
              -
              
              
              -Common
                  stock, $0.0001 par valueAuthorized
                  300,000,000 shares; 50,199,500 issuedand
                  outstanding, respectively
              
              
              5,020
              
              
              5,020Additional
                  paid-in capital in excess of par value
              
              
              214,240
              
              
              98,728Deficit
                  accumulated
              
              
              (17,488
              )
              
              (17,488
              )Deficit
                  accumulated during the development stage
              
              
              (1,695,493
              )
              
              (197,320
              )Total
                  stockholders' deficit
              
              
              (1,493,721
              )
              
              (111,060
              )Total
                  liabilities and stockholders' deficit
              
              $
              412,206
              
              $
              499,693
  See
          accompanying notes to consolidated financial statements.
 
 F-2
 **IQ
          MICRO INC.**
 **(A
          Development Stage Company)**
 **CONSOLIDATED
          STATEMENTS OF OPERATIONS**
 **(Development**
                  **Stage
                    Period)****October
                    1, 2004**
                  **to**
                  **June
                    8, 2005**
                
                **June
                    9, 2005**
                  **to**
                  **September
                    30, 2005**
                
                **October
                    1, 2005**
                  **to**
                  **September
                    30, 2006**
                
                **June
                    9, 2005**
                  **to**
                  **September
                    30, 2006**Revenues
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -Operating
                    expensesGeneral
                    and administrative
                
                
                -
                
                
                12,715
                
                
                107,712
                
                
                120,427Management
                    and consulting fees
                
                
                -
                
                
                62,025
                
                
                568,619
                
                
                630,644Legal
                    and audit fees
                
                
                2,500
                
                
                48,288
                
                
                408,116
                
                
                456,404Investor
                    relations
                
                
                -
                
                
                47,259
                
                
                152,075
                
                
                199,334Loan
                    interest and finance fees
                
                
                -
                
                
                18,716
                
                
                507,655
                
                
                526,371Amortization
                    of license fee
                
                
                -
                
                
                11,112
                
                
                33,336
                
                
                44,448(Gain)
                    loss on fair value adjustmentsto
                    beneficial conversion feature
                
                
                
                
                
                (2,795
                )
                
                (387,442
                )
                
                (390,237
                )Travel
                
                
                -
                
                
                -
                
                
                108,102
                
                
                108,102Total
                    expenses
                
                
                2,500
                
                
                197,320
                
                
                1,498,173
                
                
                1,695,493Net
                    (loss)
                
                $
                (2,500
                )
                $
                (197,320
                )
                $
                (1,498,173
                )
                $
                (1,695,493
                )(Loss)
                    per weighted averagecommon
                    share (basic and diluted)
                
                $
                -
                
                $
                -
                
                $
                (0.03
                )Number
                    of weighted average commonShares
                    outstanding
                
                
                28,287,908
                
                
                48,066,668
                
                
                50,199,500
 
 See
        accompanying notes to consolidated financial
        statements.
   F-3
  **IQ
          MICRO INC.**
 **(A
          Development Stage Company)**
 **CONSOLIDATED
          STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT**
  **Common
                    Stock**
                
                **Additional**
                
                **Accumulated****Shares**
                
                **Amount**
                
                **Paid-in**
                  **Capital**
                
                **Deficit**
                
                **Total****PRE-DEVELOPMENT
                    STAGE PERIOD****Balance
                    at October 1, 2004**
                
                
                60,377
                
                $
                6
                
                $
                1,182
                
                $
                (14,988
                )
                $
                (13,800
                )Restricted
                    shares issued for services (October 20/04)
                
                
                25,000,000
                
                
                2,500
                
                
                -
                
                
                -
                
                
                2,500Restricted
                    shares issued to settle debt (March 4/05)
                
                
                13,800,000
                
                
                1,380
                
                
                12,420
                
                
                -
                
                
                13,800Net
                    loss: October 1, 2004 to March 31,2005
                
                
                -
                
                
                -
                
                
                -
                
                
                (2,500
                )
                
                (2,500
                )**Balance
                    at March 31, 2005 and June 8, 2005**
                
                
                38,860,377
                
                
                3,886
                
                
                13,602
                
                
                (17,488
                )
                
                -**DEVELOPMENT
                    STAGE PERIOD**Balance
                    at June 9, 2005
                
                
                38,860,377
                
                
                3,886
                
                
                13,602
                
                
                (17,488
                )
                
                -Cancellation
                    of restricted shares (June 9/05)
                
                
                (31,330,877
                )
                
                (3,133
                )
                
                3,133
                
                
                -
                
                
                -New
                    restricted shares issued (June 9/05)
                
                
                42,670,000
                
                
                4,267
                
                
                (4,267
                )
                
                -
                
                
                -Warrants
                    issued (August 1/05)
                
                
                -
                
                
                -
                
                
                18,060
                
                
                -
                
                
                18,060Warrants
                    issued (August 12/05)
                
                
                -
                
                
                -
                
                
                68,200
                
                
                -
                
                
                68,200Net
                    loss: June 9, 2005 to September 30, 2005
                
                
                -
                
                
                -
                
                
                -
                
                
                (197,320
                )
                
                (199,620
                )**Balance
                    at September 30, 2005**
                
                
                50,199,500
                
                
                5,020
                
                
                98,728
                
                
                (214,808
                )
                
                (111,060
                )Warrants
                    issued (November 30, 2005)
                
                
                -
                
                
                -
                
                
                15,954
                
                
                -
                
                
                15,954Warrants
                    issued (March 29, 2006)
                
                
                
                
                
                
                
                
                99,558
                
                
                
                
                
                99,558Net
                    loss: October 1, 2005 to September 30, 2006
                
                
                -
                
                
                -
                
                
                -
                
                
                (1,498,173
                )
                
                (1,498,173
                )**Balance
                    at September 30, 2006**
                
                
                50,199,500
                
                $
                5,020
                
                $
                214,240
                
                $
                (1,712,981
                )
                $
                (1,493,721
                )
  See
          accompanying notes to consolidated financial
          statements.
   F-4
  **IQ
            MICRO INC.**
 **(A
            Development Stage Company)**
 **CONSOLIDATED
              STATEMENTS OF CASH FLOW**
  **(Development**
                    **Stage
                      Period)****October
                      1, 2004**
                    **to**
                    **June
                      8, 2005**
                  
                  **June
                      9, 2005**
                    **to**
                    **September
                      30, 2005**
                  
                  **October
                      1, 2005**
                    **to**
                    **September
                      30, 2006**
                  
                  **June
                      9, 2005**
                    **to**
                    **September
                      30, 2006**Cash
                      flows from operating activities:Net
                      loss
                  
                  $
                  (2,500
                  )
                  $
                  (197,320
                  )
                  $
                  (1,498,173
                  )
                  $
                  (1,695,493
                  )Items
                      not affecting cash:Amortization
                      of license fee
                  
                  
                  -
                  
                  
                  11,112
                  
                  
                  33,336
                  
                  
                  44,448Amortization
                      of deferred financing costs
                  
                  
                  -
                  
                  
                  4,375
                  
                  
                  57,944
                  
                  
                  62,319Amortization
                      of warrants for investor relations
                  
                  
                  
                  
                  
                  22,734
                  
                  
                  45,466
                  
                  
                  68,200Common
                      stock issued for services
                  
                  
                  2,500
                  
                  
                  
                  
                  
                  
                  
                  
                  (390,235
                  )Change
                      in fair value of the beneficial conversion feature
                  
                  
                  -
                  
                  
                  (2,795
                  )
                  
                  (387,440
                  )
                  
                  368,828Amortization
                      of discount on debentures
                  
                  
                  -
                  
                  
                  8,971
                  
                  
                  359,857
                  
                  
                  -Changes
                      in non-cash working capital:Prepaid
                      expenses
                  
                  
                  -
                  
                  
                  (7,500
                  )
                  
                  5,000
                  
                  
                  (2,500
                  )Trade
                      payables
                  
                  
                  -
                  
                  
                  36,987
                  
                  
                  301,295
                  
                  
                  338,282Accrued
                      interest
                  
                  
                  -
                  
                  
                  5,370
                  
                  
                  89,852
                  
                  
                  95,222Net
                      cash used in operating activities
                  
                  
                  -
                  
                  
                  (118,066
                  )
                  
                  (992,863
                  )
                  
                  (1,110,929
                  )Cash
                      flows from investing activities:Purchase
                      of licensed rights
                  
                  
                  -
                  
                  
                  (219,720
                  )
                  
                  (60,000
                  )
                  
                  (279,720
                  )Cash
                      flows from financing activites:Shareholder
                      advance
                  
                  
                  -
                  
                  
                  -
                  
                  
                  44,867
                  
                  
                  44,867Increase
                      in deferred financing costs
                  
                  
                  -
                  
                  
                  (70,000
                  )
                  
                  (140,000
                  )
                  
                  (210,000
                  )Accounts
                      payable to parent company
                  
                  
                  
                  
                  
                  
                  
                  
                  62,255
                  
                  
                  62,255Proceeds
                      from issuance ofsecured
                      convertible debentures
                  
                  
                  -
                  
                  
                  500,000
                  
                  
                  1,000,000
                  
                  
                  1,500,000Net
                      cash provided by financing activities
                  
                  
                  -
                  
                  
                  430,000
                  
                  
                  967,122
                  
                  
                  1,397,122Net
                      increase (decrease) in cash
                  
                  
                  -
                  
                  
                  92,214
                  
                  
                  (85,741
                  )
                  
                  6,473Cash,
                      beginning of period
                  
                  
                  -
                  
                  
                  -
                  
                  
                  92,214
                  
                  
                  -Cash,
                      end of period
                  
                  $
                  -
                  
                  $
                  92,214
                  
                  $
                  6,473
                  
                  $
                  6,473Supplemental
                      cash flow information:cash
                      paid during the period:Interest
                  
                  $
                  -
                  
                  $
                  -
                  
                  $
                  -
                  
                  $
                  -Income
                      taxes
                  
                  $
                  -
                  
                  $
                  -
                  
                  $
                  -
                  
                  $
                  -Non-cash
                      investing and financing activities:Acquisition
                      of license through payable to parent
                  
                  $
                  -
                  
                  $
                  80,280
                  
                  $
                  -
                  
                  $
                  80,280Issuance
                      of warrants in exhange for services
                  
                  $
                  -
                  
                  $
                  68,200
                  
                  $
                  -
                  
                  $
                  68,200Issuance
                      of warrants with debentures
                  
                  $
                  -
                  
                  $
                  18,060
                  
                  $
                  115,512
                  
                  $
                  133,572
 See
        accompanying notes to consolidated financial
        statements.
  F-5
  **IQ
          MICRO INC.**
 **(A
          Development Stage Company)**
 **CONSOLIDATED
          BALANCE SHEETS**
 **NOTE
        1 - Description of the Planned Business and Basis of
        Presentation**
 
 IQ
        Micro
        Inc. (the “Company”) is an international licensing company established to
        commercialize technology that precisely controls the movement of fluids on
        a
        micro scale. The Company was originally formed as Enclave Products, Ltd.
        (the
“Old Corporation”), a Colorado corporation, on March 22, 1996. Pursuant to a
        Plan of Merger dated March 29, 2004, on April 21, 2004 the Old Corporation
        filed
        Articles and Certificate of Merger with the Secretary of State of the State
        of
        Colorado merging the Old Corporation into Enclave Products, Ltd., a Colorado
        corporation (the “Surviving Corporation”). A previous controlling shareholder
        group of the Old Corporation arranged the merger for business reasons that
        did
        not materialize.
 
 On
        October 18, 2004, a Florida-based shareholder group acquired controlling
        interest in the Surviving Corporation and on November 5, 2004, affected a
        1-for-200 reverse stock split. On November 5, 2004, the Surviving Corporation
        changed its name to IQ Medical Corp. and then, on October 3, 2005, to IQ
        Micro
        Inc. The Company became qualified to do business in Florida on October 12,
        2005.
        The Company’s common stock is currently trading on the Pink Sheets under the
        symbol “IQMC.” All common stock share amounts have been restated to reflect the
        reverse stock split.
 
 Until
        June 8, 2005, the Company had no operations. On June 9, 2005, the Company
        commenced development activities when it acquired exclusive, worldwide sales
        and
        marketing licensing rights to microfluidics technology developed and patented
        by
        Osmotex AS ("Osmotex"), incorporated in Norway in 1999, as well as additional
        intellectual property rights of Osmotex together with such patents, (the
        "Licensed Rights").
 
 The
        Company acquired the Licensed Rights through the issuance of shares representing
        approximately 85% of the outstanding shares of the Company, in addition to
        a
        cash payment of $300,000.
 
 The
        Company has established a sales and marketing office in West Palm Beach,
        Florida
        and is actively pursuing global licensing opportunities. Microfluidics
        technology has a wide range of consumer, medical and industrial applications.
        The Company intends to become a specialized supplier of low voltage
        microfluidics technology.
 
 The
        Company’s fiscal year-end is September 30 for financial reporting purposes. The
        consolidated statement of operations has been bifurcated to separately present
        activities while in the development stage.
 
 **NOTE
        2 - Going Concern**
 
 As
        reflected in the accompanying consolidated financial statements, the Company
        is
        a Development Stage Corporation and has incurred substantive losses during
        the
        development stage period and had a stockholders’ deficit of $(1,493,721) at
        September 30, 2006. These conditions raise substantial doubt as to the ability
        of the Company to continue as a going concern. The ability of the Company
        to
        continue as a going concern is dependent upon generating revenues and obtaining
        additional capital and financing.
   F-6
 **IQ
            MICRO INC.**
 **(A
            Development Stage Company)**
 **CONSOLIDATED
            BALANCE SHEETS**
 **NOTE
        2 - Going Concern, continued**
 
 The
        Company is pursuing various alternatives to meet its capital requirements.
        During the period from June 9, 2005 to September 30, 2006, the Company realized
        net cash proceeds of $1,337,255 from financing activities substantially from
        the
        issuance of Secured Convertible Debentures. However, there can be no assurance
        that the Company will be able to continue arranging the capital necessary
        to
        meet its requirements until revenues are generated to the level adequate
        to fund
        cash outflows. The consolidated financial statements do not include any
        adjustments that might be necessary if the Company is unable to continue
        as a
        going concern.
 
 **Note
        3 - Significant Accounting Policies**
 
 *Principles
        of Consolidation*
 These
        consolidated financial statements include the accounts of the Company and
        its
        wholly-owned subsidiary, IQ Micro USA, Inc. All inter-company balances and
        transactions have been eliminated.
 
 *Cash
        and Cash Equivalents*
 The
        Company defines cash and cash equivalents as investments in short-term
        investments with a term to maturity when acquired of three months or less.
        At
        September 30, 2005 and September 30, 2006, the Company had no cash equivalents.
 
 *Long-Lived
        Assets*
 The
        Company reviews its long-lived assets for possible impairment whenever events
        or
        changes in circumstances indicate that the carrying amount of an asset may
        not
        be recoverable. In evaluating the fair value and future benefits of its
        intangible assets, management performs an analysis of the anticipated
        undiscounted future net cash flows of the individual assets over the remaining
        amortization period. The Company recognizes an impairment loss if the carrying
        value of the asset exceeds the expected future cash flows. As of September
        30,
        2005 and September 30, 2006 the Company determined that there was no
        impairment.
 
 *Warrant
        Valuation*
 The
        fair
        value of the warrants issued is valued using the Black Scholes-Merton
        methodology without a vesting period. The related expenses are being amortized
        over the term of the contract.
 
 *Fair
        Value of Financial Instruments*
 The
        carrying amounts of the Company’s financial instruments, including cash and cash
        equivalents, accounts payable and accrued expenses at September 30, 2005
        and
        September 30, 2006 approximate their fair value because of their relatively
        short-term nature.
 
 *Derivatives*
 The
        Company accounts for the conversion feature of the Secured Convertible Debenture
        issued in a private placement as a derivative under the guidance of Statement
        of
        Financial Accounting Standards (“SFAS”) No. 133, *Accounting
        for Derivative Instruments and Hedging Activities.* The
        conversion feature is treated as a liability in the consolidated balance
        sheet
        for the periods presented and is recorded at fair value. The change in fair
        value for each reporting period is recorded as a loan interest and financing
        expense in the consolidated statements of operations.
 
 F-7
  **IQ
            MICRO INC.**
 **(A
            Development Stage Company)**
 **CONSOLIDATED
            BALANCE SHEETS**
  **Note
            3 - Significant Accounting Policies,
            continued**
 
 *Loss
        Per Common Share*
 Net
        loss
        per common share (basic and diluted) is based on the net loss, divided by
        the
        weighted average number of common shares outstanding during each period.
        Certain
        common stock equivalents and 1,000.000 shares held in escrow were not included
        in the calculation of diluted loss per share as their effect would not be
        dilutive. As at September 30, 2005, there were 10,900,000 anti-dilutive shares
        excluded from the computation of diluted EPS and as at September 30, 2006,
        there
        were 28,000,000 anti-dilutive shares.
 
 *Use
        of Estimates*
 The
        preparation of the consolidated financial statements in conformity with
        accounting principles generally accepted in the United States of America
        requires management to make estimates and assumptions that affect the reported
        amounts of assets and liabilities and of contingent assets and liabilities
        at
        the date of the consolidated financial statements and the reported amounts
        of
        revenues and expenses during the reporting period. Actual results could differ
        from those estimates.
 
 *Recent
        Pronouncements*
 In
        May
        2005, the FASB issued SFAS No. 154, *“Accounting
        Changes and Error Corrections”* .
        SFAS No. 154 replaces APB Opinion No. 20, *“Accounting
        Changes”* ,
        and
        SFAS No. 3, *“Reporting
        Accounting Changes in Interim Financial Statements”* ,
        and
        changes the requirements for the accounting and reporting of a change in
        accounting principle. The Company is required to adopt SFAS No. 154
        for accounting changes and error corrections that occur after September 30,
        2006. The Company’s results of operations and financial condition will only be
        impacted following the adoption of SFAS No. 154 if it implements
        changes in accounting principle that are addressed by the standard or corrects
        accounting errors in future periods.
  In
        September 2006, the FASB issued SFAS No. 157, “ *Fair
        Value Measurements”,* which
        defines fair value, provides a framework for measuring fair value, and expands
        the disclosures required for fair value measurements. SFAS No. 157 applies
        to other accounting pronouncements that require fair value measurements;
        it does
        not require any new fair value measurements. SFAS No. 157 is effective for
        fiscal years beginning after November 15, 2007 and is required to be
        adopted by the Company beginning in the first quarter of fiscal 2009. Although
        the Company will continue to evaluate the application of SFAS No. 157,
        management does not currently believe adoption will have a material impact
        on
        the Company’s results of operations or financial position.
  In
        September 2006, the SEC issued SAB No. 108, “ *Considering
        the Effects of Prior Year Misstatements when Quantifying Misstatements in
        Current Year Financial Statements”.* SAB
        No. 108 provides guidance on how prior year misstatements should be
        considered when quantifying misstatements in current year financial statements
        for purposes of determining whether the current year’s financial statements are
        materially misstated. SAB No. 108 is effective for fiscal years ending
        after November 15, 2006. Although the Company will continue to evaluate the
        application of SAB No. 108, management does not currently believe adoption
        will have a material impact on the Company’s results of operations or financial
        position.
  F-8
 **IQ
            MICRO INC.**
 **(A
            Development Stage Company)**
 **CONSOLIDATED
            BALANCE SHEETS**
 **Note
        3 - Significant Accounting Policies, continued**
 
 In
        June 2006, the FASB issued FASB Interpretation No. (“FIN”) 48,
“ *Accounting
        for Uncertainty in Income Taxes-an Interpretation of FASB Statement
        No. 109”* .
        FIN
        No. 48 clarifies the accounting for uncertainty in income taxes by creating
        a framework for how companies should recognize, measure, present, and disclose
        in their financial statements uncertain tax positions that they have taken
        or
        expect to take in a tax return. FIN No. 48 is effective for fiscal years
        beginning after December 15, 2006 and is required to be adopted by the
        Company beginning in the first quarter of fiscal 2008. Although the Company
        will
        continue to evaluate the application of FIN No. 48, management does not
        currently believe adoption will have a material impact on the Company’s results
        of operations or financial position.
 
 **Note
        4 - Licensed Rights**
 
 On
        June
        9, 2005, Osmotex entered into a Technology License Agreement with its
        wholly-owned subsidiary, Osmotex USA, Inc. (“Osmotex USA”). Under this
        agreement, the parent company granted the Licensed Rights to its subsidiary
        to
        commercialize its patented microfluidics technologies.
 
 Also
        on
        June 9, 2005, Osmotex entered into a Capital Contribution Agreement with
        the
        Company in which its wholly-owned subsidiary, Osmotex USA, contributed its
        Licensed Rights to the Company as a capital contribution in exchange for
        an 85%
        equity position in the Company. A total of 31,330,877 issued restricted shares
        were tendered for cancellation and 42,670,000 new restricted shares were
        issued
        in connection with the Capital Contribution Agreement.
 
 In
        an
        agreed-upon amendment to Capital Contribution Agreement prior to September
        30,
        2005, memorialized on January 12, 2006, the Company was required to pay Osmotex
        USA $300,000 in cash as an additional payment for the Licensed Rights. At
        September 30, 2006, the Company had paid $279,720 to Osmotex USA leaving
        a
        balance outstanding of $20,280.
 
 The
        Licensed Rights is carried at cost on the balance sheet less straight-line
        amortization based on nine years of life remaining on the Osmotex patent
        that
        expires in 2015. Amortization expense of the Licensed Rights for the period
        from
        June 9, 2005 to September 30, 2005 was $11,112 and from October 1, 2005 to
        September 30, 2006 was $33,336.
 
 Estimated
        annual amortization expense of its intangible Licensed Rights will be as
        follows
        for the years ending September 30, 2006 thru 2010 and thereafter:
 2007
                
                
                33,3332008
                
                
                33,3332009
                
                
                33,3332010
                
                
                33,3332011
                
                
                33,333Thereafter
                
                
                88,887$
                255,552
 
 F-9
 **IQ
          MICRO INC.**
 **(A
          Development Stage Company)**
 **CONSOLIDATED
          BALANCE SHEETS**
 **Note
        5 - Deferred Income Taxes**
 
 The
        Company recognizes the amount of taxes payable or refundable for the current
        year and recognizes deferred tax liabilities and assets for the expected
        future
        tax consequences of events and transactions that have been recognized in
        the
        Company’s consolidated financial statements or tax returns. The Company has a
        substantial net operating loss carry-forward of approximately $200,000 and
        $1,000,000  at
        September 30, 2005 and September 30, 2006, respectively. The carry-forwards
        begin to expire in 2024. The Company has a 100% valuation allowance against
        net
        deferred income tax assets due to the uncertainty of their ultimate
        realization.
 
 **Note
        6 - Secured Convertible Debentures**
 
 On
        August
        12, 2005, the Company closed its first private placement with Cornell Capital
        Partners, LP via the issuance of an 8% Secured Convertible Debenture pursuant
        to
        Section 4(2) and Rule 506 of Regulation D under the Securities Act of 1933,
        as
        amended, for gross proceeds of $500,000. Net cash proceeds from the Secured
        Convertible Debenture were $430,000. The term of the Secured Convertible
        Debenture is two years. In connection with the offering of this Secured
        Convertible Debenture, the Company issued 100,000 common share purchase warrants
        that are exercisable at a price of $0.001 per share and that expire on August
        12, 2008. Principal and interest on the Secured Convertible Debenture may
        be
        converted into an aggregate of up to 9,800,000 shares of common stock by
        the
        investor at a conversion price per share equal to the lesser of (a) $0.64
        or (b)
        an amount equal to 80% of the lowest closing bid price of the common stock
        (on
        the OTCBB or on the exchange which the common stock is then listed, including
        the "Pink Sheets"), as quoted by Bloomberg L.P for the five trading days
        proceeding the conversion date.
 
 The
        number of shares of common stock issuable upon conversion equals the quotient
        obtained by dividing the outstanding amount of the Secured Convertible Debenture
        to be converted by the conversion price.
 
 On
        November 30, 2005, the Company closed its second private placement with Cornell
        Capital Partners, LP via the issuance of an 8% Secured Convertible Debenture
        pursuant to Section 4(2) and Rule 506 of Regulation D under the Securities
        Act
        of 1933, as amended, for gross proceeds of $250,000. Net cash proceeds from
        the
        Secured Convertible Debenture were $205,000. The term of the Secured Convertible
        Debenture is two years. In connection with the offering of this Secured
        Convertible Debenture, the Company issued 100,000 common share purchase warrants
        which are exercisable at a price of $0.001 per share and which expire on
        November 30, 2008. The investor has the sole right to convert the principal
        and
        interest on the Secured Convertible Debenture into an aggregate of 4,900,000
        shares of common stock at the lesser of (a) $0.48 or (b) an amount equal
        to 80%
        of the lowest closing bid price of the common stock (on the OTCBB or on the
        exchange which the common stock is then listed, including the "Pink Sheets"),
        as
        quoted by Bloomberg L.P for the five trading days proceeding the conversion
        date. The number of shares of common stock issuable upon conversion equals
        the
        quotient obtained by dividing the outstanding amount of the Secured Convertible
        Debenture to be converted by the conversion price.
  F-10
  **IQ
            MICRO INC.**
 **(A
            Development Stage Company)**
 **CONSOLIDATED
            BALANCE SHEETS**
 **Note
        6 - Secured Convertible Debentures, continued**
 
 As
        part
        of the second private placement, the Company committed to issue to the same
        investor another Secured Convertible Debenture in the principal amount of
        $250,000 to the same investor upon the fulfilment of certain conditions set
        forth in the Securities Purchase Agreement. The second 8% Secured Convertible
        Debenture of $250,000 was issued on February 8, 2006 resulting in net proceeds
        of $225,000. The term of this Secured Convertible Debenture is two years.
 
 Principal
        and interest on this Secured Convertible Debenture may be converted into
        an
        aggregate of up to 4,900,000 shares of common stock by the investor at a
        conversion price per share equal to the lesser of (a) $0.42 or (b) an amount
        equal to 80% of the lowest closing bid price of the common stock (on the
        OTCBB
        or on the exchange which the common stock is then listed, including the "Pink
        Sheets"), as quoted by Bloomberg L.P. The number of shares of common stock
        issuable upon conversion equals the quotient obtained by dividing the
        outstanding amount of the Secured Convertible Debenture to be converted by
        the
        conversion price.
 
 On
        March
        29, 2006, the Company completed its third private placement with Cornell
        Capital
        Partners, LP via the issuance of an 8% Secured Convertible Debenture in the
        principal amount of $500,000 pursuant to Section 4(2) and Rule 506 of Regulation
        D under the Securities Act of 1933, as amended. Net cash proceeds from this
        Secured Convertible Debenture were $430,000. The term of the Secured Convertible
        Debenture is three years. In connection with the offering this Secured
        Convertible Debenture, the Company issued 3,000,000 common stock purchase
        warrants that are exercisable at a price of $0.30 per share and that expire
        on
        March 29, 2011. Principal and interest on the Secured Convertible Debentures
        may
        be converted into an aggregate of up to 7,400,000 shares of common stock
        by the
        investor at a conversion price per share equal to the lesser of (a) $0.42
        or (b)
        an amount equal to 80% of the lowest closing bid price of the common stock
        (on
        the OTCBB or on the exchange which the common stock is then listed, including
        the "Pink Sheets"), as quoted by Bloomberg L.P for the five trading days
        proceeding the conversion date. The number of shares of common stock issuable
        upon conversion equals the quotient obtained by dividing the outstanding
        amount
        of the Secured Convertible Debenture to be converted by the conversion price.
 
 As
        of
        September 30, 2006, the Company had issued four Secured Convertible Debentures
        to Cornell Capital Partners, LP resulting in the receipt of gross proceeds
        of
        $1,500,000 and net proceeds of $1,290,000. The maximum number of shares that
        these four debentures can be converted into is 27,000,000. The investor has
        been
        granted a security interest in the assets of the Company as evidenced by
        a UCC-1
        filing.
 
 The
        Company must redeem the Secured Convertible Debentures upon maturity. The
        Company has the right to redeem the Secured Convertible Debentures at any
        time
        prior to maturity based on a redemption price of 120% of the face amount
        plus
        any accrued interest.
 
 F-11
 **IQ
          MICRO INC.**
 **(A
          Development Stage Company)**
 **CONSOLIDATED
          BALANCE SHEETS**
 **Note
        6 - Secured Convertible Debentures, continued**
 
 The
        documents governing the issuance of the Secured Convertible Debentures contain
        restrictive covenants that among other things limit the Company’s ability to
        enter into capital transactions. In addition, the Company is required, no
        later
        than September 30, 2006, to file a registration statement on Form S-1 or
        Form
        SB-2 for the resale by Cornell Capital Partners, LP of up to 27,000,000 shares
        of common stock to be issued upon conversion of its Secured Convertible
        Debentures and Warrants. The Company expects to file a Form SB-2 and must
        use
        best efforts to ensure that it is effective within one hundred twenty (120)
        days
        after the date filed. The Company’s failure to file and ensure the effectiveness
        of the Form SB-2 would constitute an event of default that would require
        the
        payment of liquidated damages to Cornell Capital Partners, LP in either a
        cash
        amount or shares of our common stock within three (3) business days, after
        demand therefore, equal to 2% of the liquidated value of all of the Secured
        Convertible Debentures we issued to Cornell
        Capital Partners, LP outstanding for each thirty (30) day period from the
        date
        we were obligated to file the Form SB-2 or ensure effectiveness thereof,
        whichever is applicable.
 
 In
        addition, the company is obligated to obtain sponsorship for trading on the
        OTC
        Bulletin Board or listing our common stock on the Nasdaq SmallCap Market,
        New
        York Stock Exchange, American Stock Exchange or the Nasdaq National Market
        (each, a “Subsequent Market”). The Company’s failure to obtain OTC Bulletin
        Board sponsorship or listing on a Subsequent Market would constitute an event
        of
        default under the Secured Convertible Debentures. As such, and in the event
        of
        other events of default, as defined in the Secured Convertible Debentures,
        the
        Secured Convertible Debentures would become immediately payable in cash or,
        at
        the option Cornell Capital Partners, LP, in common stock of the Company.
        If an
        event of default, as defined in the Secured Convertible Debentures, occurs
        and
        remains uncured, the conversion price will be reduced by twenty percent (20%)
        of
        the conversion price.
 
 The
        beneficial conversion features relating to the Secured Convertible Debentures
        are treated as embedded derivatives and is therefore classified as a liability
        in accordance with SFAS 133, “Accounting for Derivative Instruments and Hedging
        Activities.” The beneficial conversion features were valued using the Black
        Scholes-Merton methodology. The total discount values assigned to the conversion
        features at the time of issuances were $920,424, yielding a remaining carrying
        value of $631,083 for the Secured Convertible Debentures and is included
        in long
        term liabilities. Due to the fluctuation in the fair value of the beneficial
        conversion feature between the issuance dates and September 30, 2005 and
        September 30, 2006, a gain of $2,795 and a charge of $387,442 were recorded,
        resulting in a total beneficial conversion liability of $530,187 as of September
        30, 2006.
  F-12
  **IQ
          MICRO INC.**
 **(A
          Development Stage Company)**
 **CONSOLIDATED
          BALANCE SHEETS**
 **Note
        7 - Share Capital**
 
 *Warrants*
 On
        August
        1, 2005, the Company engaged the firm of Hawk Associates, Inc. to provide
        a wide
        range of corporate communication services. In consideration for these services,
        the Company agreed to compensate Hawk Associates, Inc. with a monthly fee
        plus
        the issuance of 250,000 share purchase warrants with an exercise price of
        $0.51
        and a term of five years. The fair value of the warrants was established
        at
        $68,200 using the Black Scholes - Merton methodology without a vesting period.
        This value was recorded as a deferred finance charge and is being amortized
        over
        the six month initial term of the services contract. For the periods ended
        September 30, 2005 and September 30, 2006, $22,734 and $45,466, respectively
        was
        included in investor relations expense.
  On
        August
        12, 2005, the Company consummated its first private placement with Cornell
        Capital Partners, LP of an 8% Secured Convertible Debenture for gross proceeds
        of $500,000. In connection with the offering of this Secured Convertible
        Debenture, the Company issued 100,000 common share purchase warrants that
        are
        exercisable at a price of $0.001 per share and that expire on August 12,
        2008.
        The fair value of the warrants was established at $18,060 using the Black
        Scholes - Merton methodology without a vesting period. This value was recorded
        as a discount to the convertible debentures and is being amortized over the
        term
        of the Debenture.
 
 For
        the
        periods ended September 30, 2005 and September 30, 2006, $1,003 and $5,519,
        respectively, was included in interest expense with a deferred balance
        outstanding of $11,538 at September 30, 2006.
 
 On
        November 30, 2005, the Company consummated its second private placement with
        Cornell Capital Partners, LP of an 8% Secured Convertible Debenture for gross
        proceeds of $250,000. In connection with the offering of this Secured
        Convertible Debenture, the Company issued 100,000 common share purchase warrants
        that are exercisable at a price of $0.001 per share and that expire on November
        30, 2008. The fair value of the warrants was established at $15,954 using
        the
        Black Scholes - Merton methodology without a vesting period. This value was
        recorded as a discount to the convertible debentures and is being amortized
        over
        the term of the Debenture. For the period ended September 30, 2006, $4,432
        was
        charged to interest expense with a deferred balance outstanding of $11,522
        at
        September 30, 2006.
 
 On
        March
        29, 2006, the Company consummated its third private placement with Cornell
        Capital Partners, LP of an 8% Secured Convertible Debenture for gross proceeds
        of $500,000. In connection with the offering, the Company issued 3,000,000
        common share purchase warrants that are exercisable at a price of $0.30 per
        share and that expire on March 29, 2011. The fair value of the warrants was
        established at $99,558 using the Black Scholes - Merton methodology with
        out a
        vesting period. The value was recorded as a discount to the convertible
        debentures and is being amortized over the term of the Debenture at $2,766
        per
        month. At September 30, 2006 $16,593 was charged to interest expense and
        the
        balance of the discount was $82,964 at September 30, 2006.
 
 F-13
 **IQ
          MICRO INC.**
 **(A
          Development Stage Company)**
 **CONSOLIDATED
          BALANCE SHEETS**
 **Note
        7 - Share Capital, continued**
 
 Of
        the
        total warrant values of $133,572, $1,003 was expensed during the period ended
        September 30, 2005. During year ended September 30, 2006 $15,915 was expensed
        and $106,025 is included in the accompanying balance sheet as a discount
        to the
        convertible debt at September 30, 2006.
 
 *Capital
        Transactions*
 In
        connection with the June 9, 2005 Capital Contribution Agreement, as amended
        January 12, 2006, the Company entered into a Financing and Listing Agreement
        with Osmotex USA and D.P. Martin & Associates, Inc. that obligated D.P.
        Martin & Associates, Inc. to locate at least $500,000 in external financing
        for the Company by December 31, 2005. Pursuant to the Financing and Listing
        Agreement, D.P. Martin & Associates, Inc. (1) assisted the Company in
        establishing Osmotex USA’s approximate 85% of the Company’s outstanding common
        stock and (2) placed 1,000,000 shares of the Company’s common stock beneficially
        owned by D.P. Martin & Associates, Inc. into escrow to be released to D.P.
        Martin & Associates, Inc. if and when it fulfils its financing commitment
        under the Financing and Listing Agreement. These shares are not included
        in the
        calculation of earnings per share.
 
 On
        December 30, 2005 the Company amended the Financing and Listing Agreement
        to
        extend the December 31, 2005 deadline to April 30, 2006. Subsequent to March
        31,
        2006 the agreement was further extended to September 30, 2006.  See Note
        9.
 
  **Note
        8 - Related Party Transactions**
  *Management
        Agreements*
 The
        Company is party to a Management Agreement, dated May 1, 2005, with D.P.
        Martin
& Associates, Inc., a Florida financial advisory firm. In that agreement,
        the Company engaged and appointed Robert Rudman, an employee of D.P. Martin
        & Associates, Inc., as its Chief Financial Officer. Mr. Rudman is also one
        of the Company's directors. IQ USA pays a $10,000 monthly management fee
        to D.P.
        Martin & Associates, Inc. Mr. Rudman is a Canadian Chartered Accountant and
        a Canadian citizen. Mr. Rudman's H-1B work authorization status was granted
        with
        D.P. Martin & Associates, Inc. For
        the
        periods ended September 30, 2005 and September
        30, 2006 the
        Company paid D.P. Martin & Associates, Inc. $40,000 and $120,000, respectively.
 
 The
        Company is party to a Management Agreement, dated October 1, 2005, with
        Visionaire AS. In that agreement, the Company engaged and appointed Johnny
        Christiansen, who resides in Norway and is an employee of Visionaire AS,
        as its
        Chief Executive Officer. Mr. Christiansen is also one of the Company’s
        directors. In addition, he serves as a director of Osmotex. Mr. Christiansen
        performs management services for the Company in his capacity as Chief Executive
        Officer from Norway and also performs management services for IQ USA, which
        pays
        his $8,000 monthly management fee. Mr. Christiansen is also a director of
        Osmotex. For
        the
        period e nded September
        30, 2006 the
        Company paid Visionaire, AS $96,000 .
 
  F-14
 **IQ
          MICRO INC.**
 **(A
          Development Stage Company)**
 **CONSOLIDATED
          BALANCE SHEETS**
 **Note
          8 - Related Party Transactions** , **continued**
  On
        March
        1, 2006, the Company entered into a second Management Agreement with Visionaire
        AS. In that agreement, the Company engaged and appointed Per Arne Lislien,
        who
        resides in Norway and is an employee of Visionaire AS, as its Chief Operations
        Officer. Mr. Lislien performs management services for the Company in his
        capacity as Chief Operations Officer from Norway and also performs management
        services for IQ USA which pays his $10,000 monthly management fee. Under
        this agreement the Company paid Visionaire AS $70,000.
 
 *Lease
        Agreements*
 The
        Company is a party to a verbal lease agreement with D.P. Martin & Associates
        Inc. Under this arrangement, the Company leases one executive office including
        administrative support services in West Palm Beach, Florida at a monthly
        cost of
        $2,500. Total
        rent expense paid to D.P. Martin & Associates for the periods ending
        September 30, 2005 and September
        30, 2006 was $10,000 and $30,000, respectively.
 
 The
        Company is also a party to a verbal lease agreement with Visionaire AS. Under
        this arrangement, the Company leases two executive offices including
        administrative support in Horten, Norway at a monthly cost of $1,600. Total
        rent expense paid to Visionaire AS for the periods ending September 30, 2005
        and September
        30, 2006 was $-0- and $19,200, respectively.
 
 On
        January 12, 2006, the Company entered into an Amendment to Capital Contribution
        Agreement with Osmotex USA whereby the Company memorialized its agreement
        to pay
        the $300,000 License Fee to Osmotex, as partial consideration for the Licensed
        Rights, in addition to the Company’s issuance of the 42,760,000 common stock
        shares to Osmotex USA. As of September 30, 2006 the Company has paid $279,720
        of
        this amount.
 
 The
        Company’s shareholders, including a majority of the disinterested shareholders,
        ratified and approved the License Fee at a special meeting of the shareholders
        on January 12, 2006.
 
 Also
        on
        January 12, 2006, the Company entered into an Amended and Restated Technology
        License Agreement (the “A&R License Agreement”) to which Osmotex and Osmotex
        USA are also parties. In the A&R License Agreement, the Licensed Rights
        Osmotex granted to Osmotex USA in the License Agreement dated June 9, 2005
        remained the same, but Osmotex USA also sub-licensed to the Company the
        identical rights it had been granted from Osmotex.
 
  **Note
        9 - Subsequent Events**
  On
          February 15, 2007, the Company issued an 8% Secured Convertible Debenture
          in the
          principal amount of $95,000. This debenture matures in three years, and
          may be
          convertible into shares of common stock at a conversion price per share
          equal to
          the lesser of (a) $0.35 or (b) an amount equal to 80% of the lowest closing
          bid
          price of the common stock (on the OTC Bulletin Board or on the exchange
          on which
          the common stock is then listed, including the “Pink Sheets”), as quoted by
          Bloomberg, P.A. for the five (5) trading days immediately preceding the
          conversion date.
 
 In
          connection with the February 15, 2007 Secured Convertible Debenture (a)
          D.P.
          Martin & Associates (“DPM”) (a stockholder in the Company) pledged 1,000,000
          shares of the Company’s common stock owned by DPM; the proceeds from the sale of
          these shares, if and as liquidated, will reduce the indebtedness under
          the
          debenture and will be applied against an obligation due the Company from
          DPM,
          (b) the Company’s Chief Financial Officer provided his personal guaranty of up
          to $25,000; and (c) the Company issued to Cornell Capital Partners, LP
          212,000
          warrants exercisable at $0.001 per share. The net proceeds from the issuance
          of
          this Debenture were used to pay transaction costs and professional
          fees.
   F-15