U.S.
SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-K


(Mark
      One)x
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2008 ORo
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934 FOR THE TRANSITION PERIOD FROM ______________ TO
      ______________




COMMISSION
FILE NUMBER: 000-33039




INTERNATIONAL
AEROSPACE ENTERPRISES, INC.


(Exact
name of Company as specified in its charter)


Nevada
            86-0932112(State
      of incorporation)
            (I.R.S.
      Employer)
              Identification
      No.)




7407 East
Tanque Verde, Tucson, AZ 85715


(Address
of principal executive offices) (Zip Code)




Company’s
telephone number: (209)487-6449




Securities
registered pursuant to Section 12(b) of the Act: None




Securities
registered pursuant to Section 12(g) of the Act: Common


Stock,
$0.001 Par Value




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.




o  Yes  x  No




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.




x  Yes  o  No




Indicate
by check mark whether the Company (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Company was required to
file such reports), and (2) been subject to such filing requirements for the
past 90 days. Yes  x  No o




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Company’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K o.




Indicate
by checkmark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.


Large
      accelerated filer
                oAccelerated
      filer
                o





Non-accelerated
filer x (Do not
check if a smaller reporting company)
Smaller reporting company




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




The
aggregate market value of the voting stock held by non-affiliates of the Company
as of March 26, 2009: Common Stock, par value $0.001 per share -- $920,623. As
of March 26, 2009, the Company had 97,938,602 shares of common stock issued and
outstanding, of which 36,127,006 were held by non-affiliates.




There are
no documents incorporated by reference in this Form 10-K.












TABLE OF
CONTENTS


PAGEPART
      IITEM
      1.
            
            Description
      of Business
            
            3ITEM
      1A.
            
            Risk
      Factors
            
            4ITEM
      1B.
            
            Unresolved
      Staff Comments
            
            5ITEM
      2.
            
            Description
      of Properties
            
            5ITEM
      3.
            
            Legal
      Proceedings
            
            5ITEM
      4.
            
            Submission
      of Matters to a Vote of Security Holders
            
            5PART
      IIITEM
      5.
            
            Market
      for Common Equity and Other Shareholder Matters
            
            6ITEM
      6
            
            Selected
      Financial Data
            
            7ITEM
      7.
            
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            
            8ITEM
      7A.
            
            Quantitative
      and Qualitative Disclosures About Market Risk
            
            10ITEM
      8.
            
            Financial
      Statements and Supplementary Data
            
            15ITEM
      9.
            
            Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
            
            15ITEM
      9A(T).
            
            Controls
      and Procedures
            
            15ITEM
      9B.
            
            Other
      Information
            
            17PART
      IIIITEM
      10.
            
            Directors,
      Executive Officers, and Corporate Governance
            
            17ITEM
      11.
            
            Executive
      Compensation
            
            19ITEM
      12.
            
            Security
      Ownership of Certain Beneficial Owners and Management
            
            22ITEM
      13.
            
            Certain
      Relationships and Related Transactions And Director
      Independence
            
            23ITEM
      14.
            
            Principal
      Accountant Fees and Services
            
            23PART
      IVITEM
      15.
            
            Exhibits
      and Financial Statements
            
            23Signatures
            
            
            
            23







PART
I.




CAUTIONARY
NOTE CONCERNING FORWARD-LOOKING STATEMENTS:




Certain
statements in this Form 10-K constitute forward-looking statements within the
meaning of the Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Forward-looking statements include all
statements that do not relate solely to the historical or current facts, and can
be identified by the use of forward looking words such as “may”, “believe”,
“will”, “expect”, “expected”, “project”, “anticipate”, “anticipated”,
“estimates”, “plans”, “strategy”, “target”, “prospects” or “continue”. These
forward looking statements are based on the current plans and expectations of
our management and are subject to a number of uncertainties and risks that could
significantly affect our current plans and expectations, as well as future
results of operations and financial condition and may cause our actual results,
performances or achievements to be materially different from any future results,
performances or achievements expressed or implied by such forward-looking
statements. This Form 10-K contains important information as to risk factors
under Item 1A. In making these forward-looking statements, we claim the
protection of the safe-harbor for forward-looking statements contained in the
Private Securities Reform Act of 1995. Although we believe that the expectations
reflected in such forward-looking statements are reasonable, there can be no
assurance that such expectations will prove to have been correct. We do not
assume any obligation to update these forward-looking statements to reflect
actual results, changes in assumptions, or changes in other factors affecting
such forward-looking statements.




ITEM 1.
BUSINESS.




International
Aerospace Enterprises, Inc., (formerly Traffic Technology Inc., CalbaTech, Inc.,
and LifeStem International, Inc.) (“Company”) was organized on in January, 2007,
and incorporated in Nevada on October 6, 2008. International Aerospace
Enterprises, Inc (“IAE”) is an innovative and aggressive provider of military
aircraft spare parts who offers inexpensive aircraft spare parts that meet
quality manufacturing standards required by the worldwide military/industrial
complex establishment. This is a viable, highly profitable industry with
excellent fundamentals to create value for current and future shareholders.
IAE’s dedication to provide military aircraft spare parts to the U.S. Defense
Department and its International Allies is built on a platform of integrity and
national respect for the end users requiring spare parts in order to maintain
their military aircraft.




IAE
currently owns approximately $1,247,500 of in-house inventory and has under
option purchase contracts or consignment agreements of approximately $100
million USD in aircraft spare parts. The company is also in negotiations with
several entities in order to access additional military spare parts inventory.
The company’s owned inventory is currently warehoused in Covina, California. The
company intends to relocate its corporate office and parts warehouse to a new
location of approximately 10,000 too 15,000 sq. feet and is looking in the area
of either Rancho Cucamonga or Ontario, California. They are negotiating for
modern offices and warehouse manufacturing space that is climate controlled,
sprinkler equipped, and equipped with electronic surveillance security
system.




The
company’s available inventories are ready for sale to military aircraft spare
parts customers throughout the world. IAE believes that the sales of their
inventories will result in significant revenue and profitability. The sales will
be accomplished through IAE’s strategic Marketing, Sales and Distribution
Consignment relationships with several national and internationally recognized
companies as well as the company’s experienced management and
personnel.




IAE’s
management has conducted primary and secondary research in the military aircraft
spare parts industry for aftermarket sales opportunities. The research clearly
points to unmet demands of military aircraft spare parts in the worldwide
marketplace. IAE has identified a significant number of opportunities within
this arena of the worldwide market which are not currently being met. The sheer
size of the worldwide military/industrial complex market and the demand for
products and services to meet the needs of both the United States Military and
its Allies is significant - exceeding $439.3 billion for the fiscal year
2006.


3




Acting on
this research data, IAE has purchased in excess of $1,247,500 USD in new surplus
military aircraft spare parts and is in negotiations for additional military
aircraft spare parts available for purchase, consignment, or option
purchasing.




ITEM 1A.
RISK FACTORS.




An
investment in our common stock involves risks and uncertainties. While we
attempt to identify and mitigate risks to our business to the extent practical
under the circumstances, some level of risk and uncertainty will always be
present. You should consider the following factors carefully in addition to the
other information contained in this form 10-K before deciding to purchase our
securities.




Our
existing, manufactured, on-the-shelf, ready to ship inventories of military
aircraft spare parts is finite (currently consisting of 4,987 itemized parts
independently determined to be approximately $1,247,500 USD) combined with an
additional 6,578 military aircraft spare parts under final negotiations at a
cost of $5 million USD. There are no guarantees that the company will be able to
find additional manufactured military aircraft spare parts on the open market at
a discounted price with quality standards and proper certification equal to
those parts currently on hand that can be purchased and resold through our
distribution network.




Changes
in global security strategy and planning may affect future procurement
priorities.




We cannot
predict whether potential changes in security defense and maintenance schedules
on military aircraft will afford sales opportunities for our business in terms
of replacement parts for F-16, F-5 and other replacement parts held in our
existing inventories.




As
a U.S. government contractor serving U.S. Allied Countries, we are subject to a
number of repairman rules and regulations.




We must
comply with and are affected by laws and regulations relating to the award
administration and performance of U.S. Government contracts including those
Allied Countries flying U.S. military aircraft. Government contract laws and
regulations affect how we do business with our customers and, in some instances,
impose added costs on our business. A violation of specific laws and regulations
could result in the imposition of fines and penalties, which would be
detrimental for bidding on contracts.




International
sales and suppliers may pose potentially greater risks.




Our
international business may pose greater risk than our domestic business due to
the potential for greater volatility in foreign economic and political
environments. In return, those greater risks are often accompanied by the
potential to earn a higher profit from our domestic businesses. Our
international business also is highly sensitive to changes in foreign national
priorities and government budgets which may be further impacted by global
economic conditions. Sales of military products are affected by defense budgets
(both in the United States and abroad) and U.S. foreign policy.




In
international sales, we face substantial competition from both the domestic
military aircraft parts suppliers and foreign manufacturers of governments
sometimes provide marketing subsidies and other assistances for their
product.




The
uncertain U.S. economy and changing lending conditions and policies may affect
the company’s ability to purchase additional manufactured spare parts
inventories available on the open market.




We
operate in highly competitive markets with competitors who may have greater
resources than we possess which could reduce the volume of products we can sell
and our operating margins. Many of our products are sold in highly competitive
markets. Some of our competitors are larger, more diversified corporations and
have greater financial and marketing resources. As a result they may be better
able to withstand the affects of periodic economic turn down as our operations
and financial performance will be negatively impacted if we do not aggressively
approach growth through acquisitions of products and possibly private
manufacturing companies available for purchase.


4




Our
future growth and continued success is dependent on key personnel.




Our
future success depends to a significant degree upon the continued contribution
of our management team. The loss of members of our management team could have a
material and adverse affect on the business. Our Chief Executive
Officer/President has over 30 years of experience in military aircraft spare
parts sales in both the domestic and international markets. In addition to top
executive personnel the competition for qualified technical personnel in our
industry is intense and we believe our future growth and success will depend on
our ability to attract, train and retrain such personnel.




Our
growth strategy as described by management in PART I. ITEM 1. BUSINESS of this
filing relies heavily on identifying and purchasing existing manufactured and
certified military parts throughout the United States. It also suggests that
there are private military aircraft spare parts manufacturing companies
available for purchase. Our company intends to use a mixture of both stock and
cash to attract the sellers for acquisitions.




ITEM 1B.
UNRESOLVED STAFF COMMENTS




There are
no unresolved staff comments for this filer.




ITEM 2.
PROPERTIES.




Corporate




The
Company’s temporary office location is at 7407 East Tanque Verde, Tucson,
Arizona 85715.  The Company considers this location to be adequate
pending its relocation to California as further explained below.
  The
Company’s assembly, inventory storage and shipping facilities is currently
located in Covina, California. The 4,400 square foot facility consists of two
buildings located on 0.39 acres and is approximately one-half mile from the
Interstate 10 freeway. The Company leases the approximate 700 square foot office
space and 3,600 square feet of warehouse space currently housing the company’s
owned inventory consisting of 4,982 spare parts. The Company also has an Option
Purchase Agreement for an additional 6,578 military aircraft spare parts located
in northern California.




The
Company’s management is currently in negotiations to lease 10,000 to 15,000 sq.
feet of modern office and warehouse space in order to relocate its current
facility to accommodate additional inventories of military aircraft spare parts
and the anticipated addition of both management and other needed personnel. The
new corporate and inventory warehouse facility will be located in either Rancho
Cucamonga or Ontario, California. The move is expected to occur within the next
three months and will be a facility that is climate controlled with sprinkler
fire protection and an electronic surveillance security system.




ITEM 3.
LEGAL PROCEEDINGS.




Other
than as set forth below, the Company is not a party to any material pending
legal proceedings and, to the best of its knowledge, no such action by or
against the Company has been threatened. The Company is subject to legal
proceedings and claims that arise in the ordinary course of its business.
Although occasional adverse decisions or settlements may occur, the Company
believes that the final disposition of such matters will not have material
adverse effect on its financial position, results of operations or
liquidity.




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




Other
than as reported in Form 8-K there were no matters submitted to security
holders.


5




PART
II.




ITEM 5.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.




Market
Information




The
Company’s Common Stock has been and is currently traded on the over-the-counter
market and quotations are published on the OTC Bulletin Board under the symbol
“LSTM”. The following table sets forth the range of high and low bid prices of
the Common Stock for each fiscal quarterly period. Prices reported represent
prices between dealers, do not include retail markups, markdowns or commissions
and do not represent actual transactions.




Per Share
Common Stock Bid Prices by Quarter


For the
Fiscal Year Ended on December 31, 2008


High
                
                
                LowQuarter
      Ended December 31, 2008
                
                
                .011
                
                
                
                .0013Quarter
      Ended September 30, 2008
                
                
                .038
                
                
                
                .0018Quarter
      Ended June 30, 2008
                
                
                11.40
                
                
                
                .025Quarter
      Ended March 31, 2008
                
                
                12.60
                
                
                
                2.10




Per Share
Common Stock Bid Prices by Quarter


For the
Fiscal Year Ended on December 31, 2007


High
                
                
                LowQuarter
      Ended December 31, 2007
                
                
                .017
                
                
                
                .003Quarter
      Ended September 30, 2007
                
                
                .026
                
                
                
                .010Quarter
      Ended June 30, 2007
                
                
                .037
                
                
                
                .013Quarter
      Ended March 31, 2007
                
                
                .050
                
                
                
                .033




The
ability of individual stockholders to trade their shares in a particular state
may be subject to various rules and regulations of that state. A number of
states require that an issuer’s securities be registered in their state or
appropriately exempted from registration before the securities are permitted to
trade in that state. Presently, the Company has no plans to register its
securities in any particular state. Further, most likely the Company’s shares
will be subject to the provisions of Section 15(g) and Rule 15g-9 of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), commonly
referred to as the “penny stock” rule. Section 15(g) sets forth certain
requirements for transactions in penny stocks and Rule 15g-9(d)(1) incorporates
the definition of penny stock as that used in Rule 3a51-1 of the Exchange
Act.




The
Commission generally defines penny stock to be any equity security that has a
market price less than $5.00 per share, subject to certain exceptions. Rule
3a51-1 provides that any equity security is considered to be a penny stock
unless that security is: registered and traded on a national securities exchange
meeting specified criteria set by the Commission; authorized for quotation on
The NASDAQ Stock Market; issued by a registered investment company; excluded
from the definition on the basis of price (at least $5.00 per share) or the
issuer’s net tangible assets (at least $2 million); or exempted from the
definition by the Commission. If the Company’s shares are deemed to be a penny
stock, trading in the shares will be subject to additional sales practice
requirements of broker-dealers who sell penny stocks to persons other than
established customers and accredited investors.




For
transactions covered by these rules, broker-dealers must make a special
suitability determination for the purchase of such securities and must have
received the purchaser’s written consent to the transaction prior to the
purchase. Additionally, for any transaction involving a penny stock, unless
exempt, the rules require the delivery, prior to the first transaction, of a
risk disclosure document relating to the penny stock market. A broker-dealer
also must disclose the commissions payable to both the broker-dealer and the
registered representative, and current quotations for the securities. Finally,
monthly statements must be sent disclosing recent price information for the
penny stocks held in the account and information on the limited market in penny
stocks. Consequently, these rules may restrict the ability of broker-dealers to
trade and/or maintain a market in the Company’s Common Stock and may affect the
ability of stockholders to sell their shares.


6




Holders
of Common Equity




As of
December 31, 2008, the Company’s transfer agent shows 226 shareholders of record
of the Company’s common stock.




Dividend
Information




The
Company has not declared or paid cash dividends on its Common Stock or made
distributions in the past, and the Company does not anticipate that it will pay
cash dividends or make cash distributions in the foreseeable future, other than
non cash dividends described below. The Company currently intends to retain and
invest future earnings, if any, to finance its operations.




Transfer
Agent




The
Company has designated Transfer Online as its transfer agent for the common
stock.




ITEM 6.
SELECTED FINANCIAL DATA.


2008
                        
                        
                        2007
                        
                        
                        2006
                        
                        
                        2005
                        
                        
                        2004$
                        0
                        
                        
                        $
                        1,148,529
                        
                        
                        $
                        1,292,167
                        
                        
                        $
                        300,633
                        
                        
                        $
                        0Net
      Income/(Loss)
                        
                        $
                        (1,535,222
                        )
                        
                        $
                        27,940
                        
                        
                        $
                        13,801
                        
                        
                        $
                        (5,011,116
                        )
                        
                        $
                        (2,700,598
                        )Net
      Income per Common Share
                        
                        $
                        (0.03
                        )
                        
                        $
                        0.00
                        
                        
                        $
                        0.00
                        
                        
                        $
                        (0.12
                        )
                        
                        $
                        (0.11
                        )Total
      Assets
                        
                        $
                        1,265,392
                        
                        
                        $
                        575,817
                        
                        
                        $
                        520,443
                        
                        
                        $
                        1,038,495
                        
                        
                        $
                        393,883




Revenue




Revenues
reflect the acquisition of Molecula Research Laboratories, LLC, as a subsidiary
in October 2003 and the acquisition of KD Medical, Inc. in November
2004.




Net
Income




Net
income/loss has been reflective of a Securities Purchase Agreement the Company
entered into with four accredited investors on May 23, 2005 for the issuance of
an aggregate of $2,000,000 of convertible notes (“Convertible Notes”), and
attached to the Convertible Notes were warrants to purchase 12,143,290 shares of
the Company’s common stock. The Convertible Notes accrue interest at 10% per
annum, payable quarterly, and are due three years from the date of the note. The
note holder has the option to convert any unpaid note principal to the Company’s
common stock at a rate of the lower of (i) $0.14 or (ii) 50% of the average of
the three lowest intraday trading prices for the common stock on a principal
market for the 20 trading days before but not including conversion date. The
effective interest rate at the date of inception was 23.47% per
annum.




As of
December 31, 2007, the Company issued to the investors Convertible Notes in a
total amount of $2,000,000 in exchange for net proceeds of $1,635,667. The
proceeds that the Company received were net of prepaid interest of $133,333
representing the first eight month’s interest calculated at 10% per annum for
the aggregate of $2,000,000 of convertible notes, and related fees and costs of
$255,000. Prepaid interest is amortized over the first eight months of the note
and capitalized financing costs were amortized over the maturity period (three
years) of the convertible notes.




The
Company’s identified embedded derivatives related to the Securities Purchase
Agreement entered into on May 23, 2005. These embedded derivatives included
certain conversion features, variable interest features, call options and
default provisions. The accounting treatment of derivative financial instruments
requires that the Company allocate the relative fair values of the derivatives
and related warrants as of the inception date of the Securities Purchase
Agreement up to the proceeds amount and to fair value as of each subsequent
balance sheet date. At the inception of the Securities Purchase Agreement, the
Company allocated $1,147,698 and $852,302 to the embedded derivatives and
related warrants, respectively.


7




The
Company entered into a Securities Purchase Agreement with four accredited
investors on July 13, 2007 for the issuance of an aggregate of $535,000 of
convertible notes (“Convertible Notes”), and attached to the Convertible Notes
were warrants to purchase 10,000,000 shares of the Company’s common stock. The
Convertible Notes accrue interest at 8% per annum, payable quarterly, and are
due three years from the date of the note. The note holder has the option to
convert any unpaid note principal to the Company’s common stock at a rate of the
lower of (i) $0.14 or (ii) 40% of the average of the three lowest intraday
trading prices for the common stock on a principal market for the 20 trading
days before but not including conversion date. The effective interest rate at
the date of inception was 63.23% per annum.




In 2005,
the Company incurred an unrealized loss in recording the fair value of the
debenture and related warrant derivatives relating to the convertible notes it
obtained in 2005. The total non cash financial impact to the Company’s income
statement amounted to $2,303,555. Additionally, we incurred non cash interest
costs of $916,232 relating to the convertible debt accretion as required under
FAS 133 along with debt conversions to common shares. As a result, the Company
realized a net loss of $5,011,116.




The net
income at December 31, 2006 was due primarily to an unrealized gain on
adjustment of derivative and warrant liability to fair value of underlying
securities related to the convertible notes the Company obtained in 2005 of
$2,007,730. Net income at December 31, 2007 was due to two factors: 1) an
unrealized gain on adjustment of derivative and warrant liability to fair value
of underlying securities related to the convertible notes the Company obtained
in 2005 of $657,349; and 2) income derived from the settlement of debt of
$999,926




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




When used
in this Form 10-K and in our future filings with the Securities and Exchange
Commission, the words or phrases will likely result, management expects, or we
expect, will continue, is anticipated, estimated or similar expressions are
intended to identify forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Readers are cautioned not to
place undue reliance on any such forward-looking statements, each of that speak
only as of the date made. These statements are subject to risks and
uncertainties, some of which are described below. Actual results may differ
materially from historical earnings and those presently anticipated or
projected. We have no obligation to publicly release the result of any revisions
that may be made to any forward-looking statements to reflect anticipated events
or circumstances occurring after the date of such statements.




General
Overview




International
Aerospace Enterprises Inc. (“IAE”, “we”, “ us”, or the “company”), specializes
in the sales and marketing of military aircraft spare parts on a worldwide
basis. The company has directly purchased approximately $11 million USD of
finished military goods/manufactured aircraft parts and has either taken on
consignment, developed option purchase agreements, or other business procedures
and means and arranged for the marketing, sales and processing of bids amassed
nearly $100,000,000.00 USD of military aircraft spare parts that meet the
quality standards necessary to be sold to the military industrial complex
serving the U.S. government and or its U.S. Allies. The company’s management
intends to directly sell and market these military aircraft spare parts in
concert with international marketing and sales companies already existing with a
worldwide network of sales and marketing personnel.




Results
of Operations




The
Company’s revenues are difficult to forecast and may vary significantly from
quarter to quarter and year to year. In addition, the Company’s expense levels
for each quarter are, to a significant extent, fixed in advance based upon the
Company’s expectation as to the net revenues to be generated during that
quarter. The Company therefore is generally unable to adjust spending in a
timely manner to compensate for any unexpected shortfall in net revenues.
Further as a result of these factors any delay in product introductions, whether
due to internal delays or delays caused by third party difficulties, or any
significant shortfall in demand in relation to the Company’s expectations, would
have an almost immediate adverse impact on the Company’s operating results and
on its ability to maintain profitability in a quarter.


8




Comparison
of the Year Ended December 31, 2008 with the Year Ended December 31,
2007




During
the fourth quarter 2008, KD Medical, Inc., Molecula, Inc., Molecularware, Inc.
and LifeStem, Inc., wholly owned subsidiaries of the Company, met all the
criteria of SFAS No. 144, “Accounting for the Impairment and Disposal of
Long-Lived Assets” to be classified as held for sale.




In
December 2008, the Company concluded the sale of the stock of KD Medical, Inc.,
Molecula, Inc., Molecularware, Inc. and LifeStem, Inc. to officers and majority
shareholders in exchange for the forgiveness of approximately $664,000 in
deferred compensation, the waiving of $460,000 in fees due to a change in
ownership of the Company, 49,000,000 shares of the Company’s common stock,
5,000,000 shares of the Company’s preferred stock, net with a issuance of two
promissory notes payable in an aggregate amount of $150,000, due in monthly
installments over six months with interest of 6% per annum. The related gain on
the sale of $1,009,241 was recorded as an adjustment to equity due to the
related party transaction.




In 2007,
the Company had revenues from subsidiary companies that were no longer
subsidiary companies as of December 31, 2008. Therefore, during the year ending
December 31, 2008 the Company had no revenue as compared to $1,148,529 in the
year ending December 31, 2007.




In 2007,
the Company had costs of revenues from subsidiary companies that were no longer
subsidiary companies as of December 31, 2008. Therefore, there were no cost of
revenues in 2008. In the year ended December 31, 2007 cost of revenues as a
percentage of net revenues were 42%.




Operating
expenses were $1,151,842 in the year ended December 31, 2008 as compared to
$989,612 in the year ended December 31, 2007.




Net
Income (Loss)




The
Company produced a net loss of $1,535,322 in the year ended December 31, 2008 as
compared to net income of $27,940 for the same period in 2007. Net income at
December 31, 2007 was due to two factors: 1) an unrealized gain on adjustment of
derivative and warrant liability to fair value of underlying securities related
to the convertible notes the Company obtained in 2005 of $657,349; and 2) income
derived from the settlement of debt of $999,926 as management worked to reduced
the Company’s outstanding debt.




Liquidity
and Capital Resources




The
Current Assets of the Company increased from $448,014 at December 31, 2007 to
$1,247,500 at December 31, 2008. As a result of our operating losses for the
year ended December 31, 2008, we generated a cash flow deficit of $29,084 from
operating activities. The Company has used its working capital to finance
ongoing operations and the development and marketing of its
products.




The
Company’s success and ongoing financial viability is contingent upon its selling
of its products and the related generation of cash flows. The Company evaluates
its liquidity and capital needs on a continuous basis, and based on the
Company’s requirements and capital market conditions, the Company may, from time
to time, raise working capital through additional debt or equity financing.
There is no assurance that such financing will be available in the future to
meet additional capital needs of the Company, or that any such terms or
conditions of any such financing would be favorable to the Company. Both the
management of the Company’s current growth and the expansion of the Company’s
current business involve significant financial risk and require significant
capital investment. Management believes that it will meet is capital needs
through debt and equity financing.


9




New
Accounting Pronouncements




In
January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable
Interest Entities.” Interpretation 46 changes the criteria by which one company
includes another entity in its consolidated financial statements. Previously,
the criteria were based on control through voting interest. Interpretation 46
requires a variable interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable interest
entity’s activities or entitled to receive a majority of the entity’s residual
returns or both. A company that consolidates a variable interest entity is
called the primary beneficiary of that entity. The consolidation requirements of
Interpretation 46 apply immediately to variable interest entities created after
January 31, 2003. The consolidation requirements apply to older entities in the
first fiscal year or interim period beginning after June 15, 2003. Certain of
the disclosure requirements apply in all financial statements issued after
January 31, 2003, regardless of when the variable interest entity was
established. The Company does not expect the adoption to have a material impact
to the Company’s financial position or results of operations.




In April
2003, the FASB issued Statement of Financial Accounting Standards (SFAS) No.
149, AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES. SFAS 149 amends SFAS No. 133 to provide clarification on the
financial accounting and reporting of derivative instruments and hedging
activities and requires that contracts with similar characteristics be accounted
for on a comparable basis. The provisions of SFAS 149 are effective for
contracts entered into or modified after June 30, 2003, and for hedging
relationships designated after June 30, 2003. The adoption of SFAS 149 will not
have a material impact on the Company’s results of operations or financial
position.




In May
2003, the FASB issued SFAS No. 150, ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS
WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY. SFAS 150 establishes
standards on the classification and measurement of certain financial instruments
with characteristics of both liabilities and equity. The provisions of SFAS 150
are effective for financial instruments entered into or modified after May 31,
2003 and to all other instruments that exist as of the beginning of the first
interim financial reporting period beginning after June 15, 2003. The adoption
of SFAS 150 will not have a material impact on the Company’s results of
operations or financial position.




Acquisition
or Disposition of Plant and Equipment




Other
than as provided herein, we do not anticipate the sale or acquisition of any
significant property, plant or equipment during the next twelve months. We do
not anticipate the acquisition of any significant property, plant or equipment
during the next 12 months.




Number of
Employees




As of
March 23, 2009, the Company has two employees. In order for us to attract and
retain quality personnel, we anticipate we will have to offer competitive
salaries to future employees. Other than through acquisition, we do not
anticipate our employment base will significantly change during the next 12
months. As we continue to expand, we expect to incur additional costs for
personnel. This projected increase in personnel is dependent upon our generating
revenues and obtaining sources of financing. There is no guarantee that we will
be successful in raising the funds required or generating revenues sufficient to
fund the projected increase in the number of employees.




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




Forward
Looking Statements.




The
foregoing Managements Discussion and Analysis of Financial Condition and Results
of Operations “forward looking statements” within the meaning of Rule 175 under
the Securities Act of 1933, as amended, and Rule 3b-6 under the Securities Act
of 1934, as amended, including statements regarding, among other items, the
Company’s business strategies, continued growth in the Company’s markets,
projections, and anticipated trends in the Company’s business and the industry
in which it operates. The words “believe,” “expect,” “anticipate,” “intends,”
“forecast,” “project,” and similar expressions identify forward-looking
statements. These forward-looking statements are based largely on the Company’s
expectations and are subject to a number of risks and uncertainties, including
but not limited to, those risks associated with economic conditions generally
and the economy in those areas where the Company has or expects to have assets
and operations; competitive and other factors affecting the Company’s
operations, markets, products and services; those risks associated with the
Company’s ability to successfully negotiate with certain customers, risks
relating to estimated contract costs, estimated losses on uncompleted contracts
and estimates regarding the percentage of completion of contracts, associated
costs arising out of the Company’s activities and the matters discussed in this
report; risks relating to changes in interest rates and in the availability,
cost and terms of financing; risks related to the performance of financial
markets; risks related to changes in domestic laws, regulations and taxes; risks
related to changes in business strategy or development plans; risks associated
with future profitability; and other factors discussed elsewhere in this report
and in documents filed by the Company with the Securities and Exchange
Commission. Many of these factors are beyond the Company’s control. Actual
results could differ materially from these forward-looking statements. In light
of these risks and uncertainties, there can be no assurance that the
forward-looking information contained in this Form 10-KSB will, in fact, occur.
The Company does not undertake any obligation to revise these forward-looking
statements to reflect future events or circumstances and other factors discussed
elsewhere in this report and the documents filed or to be filed by the Company
with the Securities and Exchange Commission.


10




Inflation




In the
opinion of management, inflation has not had a material effect on the operations
of the Company.




Cautionary
Factors that may Affect Future Results




We
provide the following cautionary discussion of risks, uncertainties and possible
inaccurate assumptions relevant to our business and our products. These are
factors that we think could cause our actual results to differ materially from
expected results. Other factors besides those listed here could adversely affect
us.




Trends,
Risks and Uncertainties




The
Company has sought to identify what it believes to be the most significant risks
to its business as discussed in “Risk Factors” above, but cannot predict whether
or to what extent any of such risks may be realized nor can there be any
assurances that the Company has identified all possible risks that might arise.
Investors should carefully consider all of such risk factors before making an
investment decision with respect to the Company’s stock.




Limited
operating history; anticipated losses; uncertainly of future
results




The
Company has only a limited operating history upon which an evaluation of the
Company and its prospects can be based. The Company’s prospects must be
evaluated with a view to the risks encountered by a company in an early stage of
development, particularly in light of the uncertainties relating to the business
model that the Company intends to market and the potential acceptance of the
Company’s business model. The Company will be incurring costs to develop,
introduce and enhance its products, to establish marketing relationships, to
acquire and develop products that will complement each other, and to build an
administrative organization. To the extent that such expenses are not
subsequently followed by commensurate revenues, the Company’s business, results
of operations and financial condition will be materially adversely affected.
There can be no assurance that the Company will be able to generate sufficient
revenues from the sale of its products and services. The Company expects that
negative cash flow from operations may exist for the next 12 months as it
continues to develop and market its products and services. If cash generated by
operations is insufficient to satisfy the Company’s liquidity requirements, the
Company may be required to sell additional equity or debt securities. The sale
of additional equity or convertible debt securities would result in additional
dilution to the Company’s shareholders.




Potential
fluctuations in quarterly operating results may fluctuate significantly in the
future as a result of a variety of factors, most of which are outside the
Company’s control, including: the demand for the Company’s products and
services; seasonal trends in demand and pricing of products and services; the
amount and timing of capital expenditures and other costs relating to the
expansion of the Company’s operations; the introduction of new services and
products by the Company or its competitors; price competition or pricing changes
in the industry; political risks and uncertainties involving the world’s
markets; technical difficulties and general economic conditions. The Company’s
quarterly results may also be significantly affected by the impact of the
accounting treatment of acquisitions, financing transactions or other matters.
Due to the foregoing factors, among others, it is possible that the Company’s
operating results may fall below the expectations of the Company and/or
investors in some future quarter.


11




Management
of Growth




The
Company expects to experience growth in the number of employees relative to its
current levels of employment and the scope of its operations. In particular, the
Company may need to hire sales, marketing and administrative personnel.
Additionally, acquisitions could result in an increase in employee headcount and
business activity. Such activities could result in increased responsibilities
for management. The Company believes that its ability to attract, train, and
retain qualified technical, sales, marketing, and management personnel, will be
a critical factor to its future success. During strong business cycles, the
Company may experience difficulty in filling its needs for qualified
personnel.




The
Company’s future success will be highly dependent upon its ability to
successfully manage the expansion of its operations. The Company’s ability to
manage and support its growth effectively will be substantially dependent on its
ability to implement adequate financial and management controls, reporting
systems, and other procedures and hire sufficient numbers of financial,
accounting, administrative, and management personnel. The Company is in the
process of establishing and upgrading its financial accounting and procedures.
There can be no assurance that the Company will be able to identify, attract,
and retain experienced accounting and financial personnel. The Company’s future
operating results will depend on the ability of its management and other key
employees to implement and improve its systems for operations, financial
control, and information management, and to recruit, train, and manage its
employee base. There can be no assurance that the Company will be able to
achieve or manage any such growth successfully or to implement and maintain
adequate financial and management controls and procedures, and any inability to
do so would have a material adverse effect on the Company’s business, results of
operations, and financial condition.




The
Company’s future success depends upon its ability to address potential market
opportunities while managing its expenses to match its ability to finance its
operations. This need to manage its expenses will place a significant strain on
the Company’s management and operational resources. If the Company is unable to
manage its expenses effectively, the Company’s business, results of operations,
and financial condition may be materially adversely affected.




Risks
associated with acquisitions




As a
major component of its business strategy, the Company expects to acquire assets
and businesses relating to or complementary to its operations. Any acquisitions
by the Company would involve risks commonly encountered in acquisitions of
companies. These risks would include, among other things, the following: the
Company could be exposed to unknown liabilities of the acquired companies; the
Company could incur acquisition costs and expenses higher than it anticipated;
fluctuations in the Company’s quarterly and annual operating results could occur
due to the costs and expenses of acquiring and integrating new businesses or
technologies; the Company could experience difficulties and expenses in
assimilating the operations and personnel of the acquired businesses; the
Company’s ongoing business could be disrupted and its management’s time and
attention diverted; the Company could be unable to integrate
successfully.




Liquidity
and Working Capital Risks; Need for Additional Capital to Finance Growth and
Capital Requirements




We have
had limited working capital and we may rely upon notes (borrowed funds) to
operate. We may seek to raise capital from public or private equity or debt
sources to provide working capital to meet our general and administrative costs
until net revenues make the business self-sustaining. We cannot guarantee that
we will be able to raise any such capital on terms acceptable to us or at all.
Such financing may be upon terms that are dilutive or potentially dilutive to
our stockholders. If alternative sources of financing are required, but are
insufficient or unavailable, we will be required to modify our growth and
operating plans in accordance with the extent of available
funding.


12




Potential
fluctuations in quarterly operating results




Our
quarterly operating results may fluctuate significantly in the future as a
result of a variety of factors, most of which are outside our control,
including: the demand for our products; seasonal trends in purchasing, the
amount and timing of capital expenditures and other costs relating to the
development of our products; price competition or pricing changes in the
industry; technical difficulties or system downtime; general economic
conditions, and economic conditions specific to the healthcare industry. Our
quarterly results may also be significantly impacted by the impact of the
accounting treatment of acquisitions, financing transactions or other matters.
Particularly at our early stage of development, such accounting treatment can
have a material impact on the results for any quarter. Due to the foregoing
factors, among others, it is likely that our operating results will fall below
our expectations or those of investors in some future quarter.




Dependence
Upon Management




Our
future performance and success are dependant upon the efforts and abilities of
our Management. To a very significant degree, we are dependent upon the
continued services of John Peck and Sylvia Quintero, Don Ross, and David
McLarney our executives and Directors. If we lost the services of Mr. Peck or
Ms. Quintero or other key employees before we could get a qualified replacement,
that loss could materially adversely affect our business.




Lack of
Independent Directors




We cannot
guarantee that our Board of Directors will have a majority of independent
directors in the future. In the absence of a majority of independent directors,
our executive officers, who are also principal stockholders and directors, could
establish policies and enter into transactions without independent review and
approval thereof. This could present the potential for a conflict of interest
between the Company and its stockholders generally and the controlling officers,
stockholders or directors.




Limitation
of Liability and Indemnification of Officers and Directors




Our
officers and directors are required to exercise good faith and high integrity in
our Management affairs. Our Articles of Incorporation provide, however, that our
officers and directors shall have no liability to our shareholders for losses
sustained or liabilities incurred which arise from any transaction in their
respective managerial capacities unless they violated their duty of loyalty, did
not act in good faith, engaged in intentional misconduct or knowingly violated
the law, approved an improper dividend or stock repurchase, or derived an
improper benefit from the transaction. Our Articles and By-Laws also provide for
the indemnification by us of the officers and directors against any losses or
liabilities they may incur as a result of the manner in which they operate our
business or conduct the internal affairs, provided that in connection with these
activities they act in good faith and in a manner that they reasonably believe
to be in, or not opposed to, the best interests of the Company, and their
conduct does not constitute gross negligence, misconduct or breach of fiduciary
obligations. To further implement the permitted indemnification, we have entered
into Indemnity Agreements with our officers and directors.




Continued
Control by Current Officers and Directors




As of
March 23, 2009, the present officers and directors own approximately 50% of the
outstanding shares of Common Stock, and therefore are in a position to elect all
of our Directors and otherwise control the Company, including, without
limitation, authorizing the sale of equity or debt securities of the Company,
the appointment of officers, and the determination of officers’ salaries.
Shareholders have no cumulative voting rights. (See Security Ownership of
Certain Beneficial Owners and Management) Audit’s Opinion Expresses Doubt About
The Company’s Ability To Continue As a “Going Concern”.




Delays in
the Introduction of Our Products or Services




The
Company may be subject to regulation by numerous governmental authorities.
Failure to obtain regulatory approvals or delays in obtaining regulatory
approvals by the Company, its collaborators or licensees would adversely affect
the marketing of products or services developed by the Company, as well as
hinder the Company’s ability to generate product revenues. Further, there can be
no assurance that the Company, its collaborators or licensees will be able to
obtain the necessary regulatory approvals. Although the Company does not
anticipate problems satisfying any of the regulations involved, the Company
cannot foresee the possibility of new regulations that could adversely affect
the business of the Company.


13




Government
Regulation and Legal Uncertainties




The
Company is not currently subject to many direct government regulations, other
than the securities laws, the regulations thereunder applicable to all publicly
owned companies, and the laws and regulations applicable to businesses
generally. It is possible that certain laws and regulations may be adopted at
the local, state, national and international level that could effect the
Company’s operations. Changes to such laws could create uncertainty in the
marketplace which could reduce demand for the Company’s products or increase the
cost of doing business as a result of costs of litigation or a variety of other
such costs, or could in some other manner have a material adverse effect on the
Company’s business, financial condition, results of operations and prospects. If
any such law or regulation is adopted it could limit the Company’s ability to
operate and could force the business operations to cease, which would have a
significantly negative effect on the shareholder’s investment. The integrated
disclosure system for small business issuers adopted by the Securities and
Exchange Commission in Release No. 34-30968 and effective as of August 13, 1992,
substantially modified the information and financial requirements of a “Small
Business Issuer,” defined to be an issuer that has revenues of less than
$25,000,000; is a U.S. or Canadian issuer; is not an investment company; and if
a majority-owned subsidiary, the parent is also a small business issuer;
provided, however, an entity is not a small business issuer if it has a public
float (the aggregate market value of the issuer’s outstanding securities held by
non-affiliates) of $25,000,000 or more. The Company is deemed to be a “small
business issuer.” The Securities and Exchange Commission, state securities
commissions and the North American Securities Administrators Association, Inc.
(“NASAA”) have expressed an interest in adopting policies that will streamline
the registration process and make it easier for a small business issuer to have
access to the public capital markets. The Company can make no assurances that
any of these agencies will adopt any such policies. Also, an agency could adopt
such policy that may have a detrimental effect to the Company’s operations and
it could have a significantly negative effect on the value of the Company’s
equity.




Limited
Market Due To Penny Stock




The
Company’s stock differs from many stocks, in that it is a “penny stock.” The
Securities and Exchange Commission has adopted a number of rules to regulate
“penny stocks.” These rules include, but are not limited to, Rules 3a5l-l,
15g-1, 15g-2, 15g-3, 15g-4, 15g-5, 15g-6 and 15g-7 under the Securities and
Exchange Act of 1934, as amended. Because our securities probably constitute
“penny stock” within the meaning of the rules, the rules would apply to us and
our securities. The rules may further affect the ability of owners of our stock
to sell their securities in any market that may develop for them. There may be a
limited market for penny stocks, due to the regulatory burdens on
broker-dealers. The market among dealers may not be active. Investors in penny
stock often are unable to sell stock back to the dealer that sold them the
stock. The mark-ups or commissions charged by the broker-dealers may be greater
than any profit a seller may make. Because of large dealer spreads, investors
may be unable to sell the stock immediately back to the dealer at the same price
the dealer sold the stock to the investor. In some cases, the stock may fall
quickly in value. Investors may be unable to reap any profit from any sale of
the stock, if they can sell it at all. Stockholders should be aware that,
according to the Securities and Exchange Commission Release No. 34- 29093, the
market for penny stocks has suffered in recent years from patterns of fraud and
abuse. These patterns include:- - Control of the market for the security by one
or a few broker-dealers that are often related to the promoter or issuer;
-Manipulation of prices through prearranged matching of purchases and sales and
false and misleading press releases; - “Boiler room” practices involving high
pressure sales tactics and unrealistic price projections by inexperienced sales
persons; - Excessive and undisclosed bid-ask differentials and markups by
selling broker- dealers; and - The wholesale dumping of the same securities by
promoters and broker- dealers after prices have been manipulated to a desired
level, along with the inevitable collapse of those prices with consequent
investor losses. Furthermore, the “penny stock” designation may adversely affect
the development of any public market for the Company’s shares of common stock
or, if such a market develops, its continuation. Broker-dealers are required to
personally determine whether an investment in “penny stock” is suitable for
customers. Penny stocks are securities (i) with a price of less than five
dollars per share; (ii) that are not traded on a “recognized” national exchange;
(iii) whose prices are not quoted on the NASDAQ automated quotation system
(NASDAQ-listed stocks must still meet requirement (i) above); or (iv) of an
issuer with net tangible assets less than $2,000,000 (if the issuer has been in
continuous operation for at least three years) or $5,000,000 (if in continuous
operation for less than three years), or with average annual revenues of less
than $6,000,000 for the last three years. Section 15(g) of the Exchange Act, and
Rule 15g-2 of the Commission require broker-dealers dealing in penny stocks to
provide potential investors with a document disclosing the risks of penny stocks
and to obtain a manually signed and dated written receipt of the document before
effecting any transaction in a penny stock for the investor’s account. Potential
investors in the Company’s common stock are urged to obtain and read such
disclosure carefully before purchasing any shares that are deemed to be “penny
stock.” Rule 15g-9 of the Commission requires broker- dealers in penny stocks to
approve the account of any investor for transactions in such stocks before
selling any penny stock to that investor. This procedure requires the
broker-dealer to (i) obtain from the investor information concerning his or her
financial situation, investment experience and investment objectives; (ii)
reasonably determine, based on that information, that transactions in penny
stocks are suitable for the investor and that the investor has sufficient
knowledge and experience as to be reasonably capable of evaluating the risks of
penny stock transactions; (iii) provide the investor with a written statement
setting forth the basis on which the broker-dealer made the determination in
(ii) above; and (iv) receive a signed and dated copy of such statement from the
investor, confirming that it accurately reflects the investor’s financial
situation, investment experience and investment objectives. Compliance with
these requirements may make it more difficult for the Company’s stockholders to
resell their shares to third parties or to otherwise dispose of
them.


14




ITEM 8.
FINANCIAL STATEMENTS.




Financial
statements as of and for the year ended December 31, 2008, and for the ended
December 31, 2007 are presented in a separate section of this report following
Part IV.




ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.




There
were no disagreements with auditors for the period ended December 31,
2008.




ITEM
9A(T). CONTROLS AND PROCEDURES.




Disclosure
controls and procedures are controls and other procedures that are designed to
ensure that information required to be disclosed by us in the reports that we
file or submit under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission’s rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by us in the reports that we file under the Exchange
Act is accumulated and communicated to our management, including our principal
executive and financial officers, as appropriate to allow timely decisions
regarding required disclosure.




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) of the Exchange Act. Internal control over financial reporting is
a process designed by, or under the supervision of, our principal executive and
principal financial officers, or persons performing similar functions, and
effected by our board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. Internal control over financial
reporting includes those policies and procedures that:


●
            pertain
      to the maintenance of records that, in reasonable detail, accurately and
      fairly reflect transactions and dispositions of
  assets;


15





●
              provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures are being made
      only in accordance with authorizations of management and the board of
      directors; and●
              provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use, or disposition of assets that could have a
      material effect on the financial
statements.




Because
of their inherent limitations, any system of internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.




Our
management, including the chief executive officer and chief financial officer,
evaluated the effectiveness of our internal control over financial reporting as
of December 31, 2008 based on the framework defined in Internal Control – Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).




Management’s
assessment of the control environment included all significant locations and
subsidiaries.




Material
Weaknesses




Based on
our evaluation under COSO, management concluded that our internal control over
financial reporting was not effective as of December 31, 2008, due to
control deficiencies in three areas that we believe should be considered
material weaknesses. A material weakness is defined within the Public Company
Accounting Oversight Board’s Auditing Standard No. 5 as a deficiency, or a
combination of deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material misstatement of the
company’s annual or interim financial statements will not be prevented or
detected on a timely basis.


1.
            The
      company did not sufficiently segregate duties over incompatible functions
      at the corporate headquarters.The
      company’s inability to sufficiently segregate duties is due to a staff
      vacancy at the corporate headquarters, which management expects to fill
      during the current year. Further, management has increased the frequency
      of independent reconciliations of significant accounts, which will
      mitigate the lack of segregation of duties until the accounting department
      at the corporate headquarters is fully staffed2.
            In
      conjunction with the lack of segregation of duties, the company did not
      institute specific anti-fraud controls.While
      management found no evidence of fraudulent activity, the chief accounting
      officer has access to both accounting records and corporate assets,
      principally the operating bank account. Management believes this exposure
      to fraudulent activity is not material either to the operations of the
      company or to the financial reporting; however, management has instituted
      Key Controls specifically designed to prevent and detect—on a timely
      basis—any potential loss due to fraudulent activity.In
      addition, management is in the process of instituting whistle-blower
      policies and procedures, see material weakness 3, following. This policy
      and procedure will further strengthen the anti-fraud controls at the
      corporate headquarters.3.
            The
      company did not institute, as of December 31, 2008, a whistle-blower
      policy and procedure as required by Section 301 of the Sarbanes-Oxley
      Act.


16




Management
has drafted a whistle-blower policy, and will communicate the policy as soon as
it is approved by the Board of Directors. In addition, management is compiling
specific procedures for the Chairman of the Audit Committee to independently
investigate and resolve any issues or concerns raised. Management expects that
this material weakness will be fully remedied during the second quarter of
2009.




Limitations
on Effectiveness of Controls and Procedures




Our
management, including our chief executive officer and chief financial officer,
does not expect that our disclosure controls and procedures or our internal
controls will prevent all error and all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource constraints
and the benefits of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within the Company have been detected. These inherent limitations
include, but are not limited to, the realities that judgments in decision-making
can be faulty and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control. The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions; over time, control may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may
deteriorate.




This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit us to provide only management’s report in this annual
report.




ITEM 9B.
OTHER INFORMATION




Other
than set forth herein, there in no other information required to be
disclosed.




PART
III.




ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERANCE




Officers
and Directors.




The names
and respective positions of the directors, executive officers, and key employees
of the Company are set forth below; there are no other promoters or control
persons of the Company. The directors named below will serve until the next
annual meeting of the Company’s stockholders or until their successors are duly
elected and have qualified. Directors are elected for a one-year term at the
annual stockholders’ meeting. Officers will hold their positions at the will of
the board of directors, absent any employment agreement. There are no
arrangements, agreements or understandings between non-management shareholders
and management under which non-management shareholders may directly or
indirectly participate in or influence the management of the Company’s affairs.
The directors and executive officers of the Company are not a party to any
material pending legal proceedings.




John M.
Peck – Chief Executive Officer, Director




John M.
Peck, age 63, was President/CEO of JOLIN Industries, Inc., from 2006 to 2009.
Mr. Peck provided marketing and consulting services to aerospace companies and
countries where he was involved in the purchasing and sales of military aircraft
parts. From 2005 to 2006, Mr. Peck was a consultant to ACTMI where he was
involved in the creation of, and expansion thereafter, of ACTMI’s International
customer base. From 2002 through 2005, Mr. Peck was a Procurement and Supply
Chain Account Analyst and Buyer to Technical and Management Services Corporation
(TAMSCO) as the Program Manager of Saudi Arabian Operations (in country) where
he managed an annual budget of over $500,000,000.00 USD as a subcontractor to
the United States Air Force headed by the United States State Department. From
1995 to 2001 Mr. Peck worked as a consultant to the Senior Vice President of
Operations and Business Development for SR (Sperry Rand Corporation) on a
systems development project designed to track the status of worldwide hardware
purchases for the Kingdom of Saudi Arabia, United Kingdom and the United States.
From 1993 to 1995 Mr. Peck worked with Hughes Aircraft Systems International on
the “Peace Shield Program” with an annual operating budget of over $1 Billion
USD.


17




Mr. Peck
attended University of Maryland from 1963-1966, LaSalle Institute in 1969, Troy
State from 1978-1981, Calhoun College from 1983-1984 and California Coast
College from 1992-1994. Mr. Peck earned Military Schooling Diplomas in more than
forty individual classes, with concentrations in computer science and
logistics.




Sylvia C.
Quintero, MBA – Secretary, Treasurer, Director




Ms.
Quintero, age 50, is currently the Senior Business Manager at the University of
Arizona, Department of Immunobiology. She also has served as Director of Finance
for Arizona Aircraft Spares from 2003 to 2004. Prior to that, Ms. Quintero was
the Business Manager for the University of Arizona Department of Journalism
where her duties included supervision, oversight of daily business operations
including accounting, payroll, budget and finance projections, purchasing and
personnel hiring.




Ms.
Quintero earned a Masters in Business administration from the University of
Phoenix in 1993 and her Bachelor of Science in Business Administration from the
University of Phoenix in 1990.




Ms.
Quintero brings a number specialized skills to the Secretary/Treasurer role with
the Company. The following is a rendition of a few of her skills: Bilingual -
English and Spanish; Extensive PC and Macintosh knowledge; software experience
including word processing, spreadsheets and website research; and accounting
training for SEC filings. In her roles as the Senior Business Manager at the
University of Arizona Departments of Journalism and Immunobiology, she has
gained extensive online experience in payroll/ PSOS, SIS, FRS, PET and Pcard
including UMS purchasing requisitions.




Donald R.
Ross, Ed D. – Director




Dr. Ross,
age 66, has been the Research Specialist and Principle with the Disability
Assessment Research Clinic with the Department of Medicine, University of
Arizona Medical Center in Tucson, Arizona. Dr. Ross was a practicing, Board
Certified, Licensed Psychologist by the State of Arizona from 1992 to 2007. From
1987 through 1997 he also focused his career activities on being a Professor at
the University of Arizona, College of Education where he concurrently served as
Project Director with the National Library of Medicine, National Institute of
Health, and the Department of Health and Human Services.




Dr.
Ross’s extensive background in human services, teaching at both the Master’s and
Doctoral level, at the University of Arizona has provided him insight into
personnel development, hiring procedures and identifying management aptitudes
skills and talents. Combining these talents with his research and statistical
analysis skills provides the Company’s principals and management a unique pool
of skills to draw upon when growing the company to meets its personnel
requirements in the future. His extensive involvement in studying the U.S.
economy and labor market for the U.S. Department of Labor, Washington, DC has
also provided him an insightful perspective on employment and career development
in the United States. Dr. Ross brings to the Board of Directors of IAE the
capacity to understand and implement employment packages, incentive programs,
stock bonus programs and the ability to explain how each directly or indirectly
impacts hiring motivations and base salaries. Dr. Ross’s educational background
and employment history provides the Board of Directors an excellent candidate to
head its compensation committee and serve its shareholders.




David W.
McLarney, MBA – Director




Mr.
McLarney, age 51, will serve as Head of the Company’s audit committee providing
Board oversight for the company and its shareholders. Mr. McLarney is currently
a senior airline Check Pilot and Flight Test Analyst for A 321, B 737/757
aircraft for U.S. Airways, Inc. He has been employed by U.S. Airways, Inc. since
1986.




He has
also held the position of Deputy Director of Government Aerospace contracting.
In that position he managed over 80 contracting officers buying for 30 Federal
Stock Supply classifications for the Joint Defense major deviation weapons
system operations, support and maintenance. He was the Director of annual
procurement for the U.S. Air Force which entailed purchasing over $35 million
USD annually. While in that capacity he established the software procedures and
audited DOD Prime Vendor Program aircraft part acquisitions and aerospace
contracts.


18




Mr.
McLarney was Executive Administrator for the U.S. Air Force squadron finance,
human relations and training functions each under his command.




Mr.
McLarney earned a Master’s in Business Administration from Saint Mary’s
University, San Antonio, Texas and his Bachelor of Science degree in engineering
and management while at the U.S. Naval Academy, Annapolis, Maryland. Mr.
McLarney also attended Louisiana State University in Louisiana as a CPA Prep.
Candidate. Mr. McLarney’s background as a Government Contract Officer with
studies at the Defense Acquisition University, Washington DC has provided him
with excellent credentials to help direct the Company’s management in its future
expansion and growth. He will provide the Company an Independent Board member
with a unique capacity for integrating his extensive aerospace experience and
direct procurement knowledge along with his finance and accounting education to
assist in the guidance of the Board of Directors and corporate
management.




ITEM 11.
EXECUTIVE COMPENSATION.




Pursuant
to his employment agreement in December 2008, Mr. Peck, the Company’s Chairman
and Chief Executive Officer received an annual base salary established initially
at $126,000 with a provision for annual review of compensation. The term of the
agreement is for a three years commencing January 1, 2009 with annual
reviews.




Executive
Compensation Philosophy




The
Company’s board of directors is committed to establishing and maintaining
executive compensation practices designed to support the development of the
company’s capabilities and business objectives, enhance our profitability and
enhance long-term shareholder value. Toward these aims, in March 2009, the board
of directors established a compensation committee. This committee reports to the
board on executive compensation matters.




Compensation
Committee - Membership




It is
planned that the committee be comprised of three independent members of the
Board. Director independence is, at a minimum, consistent with applicable rules
for NASDAQ-traded issuers, Rule 16b-3 of the Exchange Act, and Section 162(m) of
the Internal Revenue Code. Currently, the only member of the committee is Dr.
Donald R Ross (chairman). Dr. Ross was appointed to and has served as chairman
of the Compensation Committee since March, 2009.




Process and procedures for
considering and determining executive and director compensation.




Among
other things, the committee has the authority and responsibility under its
charter to:


●
                    Approve
      our compensation philosophy.●
                    Formulate,
      evaluate, and approve compensation for our officers, as defined in Section
      16 of the Securities and Exchange Act of 1934 and rules and regulations
      promulgated therein.●
                    Formulate,
      approve, and administer cash incentives and deferred compensation plans
      for executives. Cash incentive plans are based on specific performance
      objectives defined in advance of approving and administering the
      plan.●
                    Oversee
      and approve all compensation programs involving the issuance of our stock
      and other equity securities.●
                    Review
      executive supplementary benefits, as well as our retirement, benefit, and
      special compensation programs involving significant cost to us, as
      necessary and appropriate.●
                    Review
      compensation for terminated executives.●
                    Oversee
      funding for all executive compensation
programs.


19





●
                  Review
      compensation practices and trends of other companies to assess the
      adequacy of our executive compensation programs and
    policies.●
                  Secure
      the services of external compensation consultants or other experts, as
      necessary and appropriate. These services, as required, will be paid from
      funds provided by the company. This system is designed to ensure the
      independence of such external advisors.●
                  Approve
      employment contracts, severance agreements, change in control provisions,
      and other compensatory arrangements with our
  executives.




Role of
Chief Executive Officer in Recommending Executive Compensation.




The
committee makes all compensation decisions related to our named executive
officers. However, our Chief Executive Officer regularly provides information
and recommendations to the committee on the performance of the executive
officers, appropriate levels and components of compensation, including equity
grants as well as other information as the committee may request.




Compensation
Goals




Our
compensation policies are intended to achieve the following
objectives:


●
              reward
      executives and employees for their contributions to our growth and
      profitability, recognize individual initiative, leadership, achievement,
      and other valuable contributions to our company;●
              to
      link a portion of the compensation of officers and employees with the
      achievement of our achievement of our overall performance goals, to ensure
      alignment with the our strategic direction and values, and to ensure that
      individual performance is directed towards the achievement of our
      collective goals;●
              to
      enhance alignment of individual performance and contribution with
      long-term stockholder value and business objectives by providing equity
      awards;●
              to
      motivate and provide incentives to our named executive officers and
      employees to continually contribute superior job performance throughout
      the year; and●
              to
      obtain and retain the services of skilled employees and executives so that
      they will continue to contribute to and be a part of our long-term
      success.




Compensation
programs and policies are reviewed and approved annually but could be adjusted
more frequently if determined by the committee. Included in this process is
establishing the goals and objectives by which employee and executive
compensation is determined. Executive officers’ performance is evaluated in
light of these performance goals and objectives. The committee consults the
Chief Executive Officer on the performance of other company
executives.




Compensation
Surveys and Compensation Consultants




In
determining compensation levels, we review compensation levels of companies that
we deem to be similar to our company regardless of their location, competitive
factors to enable us to attract executives from other companies, and
compensation levels that we deem appropriate to retain and motivate our
executives. From time to time, we retain the services of independent
compensation consultants to review a wide variety of factors relevant to
executive compensation, trends in executive compensation, and the identification
of relevant peer companies. The committee makes all determinations regarding the
engagement, fees, and services of our compensation consultants, and our
compensation consultants report directly to our committee.




Elements
of Compensation




Compensation
for our executives is generally comprised of:


●
            base
      salary which is targeted at a competitive level and used to reward
      superior individual job performance of each named executive officer and to
      encourage continued superior job performance;●
            Cash
      bonuses which are tied to specific, quantifiable and objective performance
      measures based on a combination of corporate and individual goals, and
      discretionary bonuses;●
            equity
      compensation which is based on corporate and individual performance, and
      discretionary equity awards.


20





●
                severance
      and change of control agreements; and●
                Other
      benefits plan and
programs.




The
principles which serve as the basis for executive compensation practices apply
to the compensation structures for all employees. Namely, corporate and
individual performance are the key factors which determine incentive
compensation.




The
committee considers each component of executive compensation in light of total
compensation. In considering adjustments to the total compensation of each named
executive officer, the committee also considers the value of previous
compensation, including outstanding equity grants and equity
ownership.




Compensation
paid to executive officers must be approved by our board of directors or by the
committee. The committee conducts several meetings in person or telephonically
to review and consider our compensation program and policies, as well as
specific elements of executive compensation.




Compensation
Considerations




In
setting compensation levels for a particular executive, the committee takes into
consideration:


●
                      the
      proposed compensation package as a whole●
                      each
      element of compensation individually●
                      the
      executive’s past and expected future contributions to our
      business●
                      our
      overall company performance;●
                      our
      financial conditions and prospects;●
                      the
      need to retain key employees; and●
                      general
      economic
conditions.




In order
to enable the company to hire and retain talented executives, the committee may
determine that it is in the best interests of the company to negotiate packages
that may deviate from the company’s standard practices in setting the
compensation for certain of its executive officers when such deviation is
required by competitive or other market forces.




Base
Salary




Base
salaries for the named executive officers and other executives are determined
based on market data analysis of comparable positions in the identified
compensation peer group. A competitive base salary is provided to each executive
officer to recognize the skills and experience each individual brings to the
company and the performance contributions they make. When determining the base
salary for an executive, we reference a target of the base salaries of similar
positions in the identified compensation peer group. Other factors are also
taken into account such as internal comparisons, individual skills and
experience, length of time with the company, performance contributions and
competitiveness of the marketplace. Salaries are reviewed on an annual basis,
taking into account the factors described above, and are made in connection with
annual performance reviews. The amounts of such adjustments are calculated using
merit increase guidelines based on the employee’s position within the relevant
compensation range and the results of his or her performance review. The
recommended percentage increases are established annually and reflect the
committee’s assessment of appropriate salary adjustments based on competitive
surveys and general economic conditions.




Cash
Bonus




Our
practice is to periodically consider awarding cash bonuses based upon, among
other things, accomplishment of key objectives and overall performance. In
addition, from time-to-time the committee may approve payment of bonuses to
executives or key contributors for special accomplishment or other reasons.
These goals may include progress made in technical programs and technology and
product development, improved utilization of company resources and progress in
relationships with key customers and strategic alliances and financing
activities and the financial results of the company. Generally, the company does
not disclose specific targets relating to these goals, because doing so may
disclose confidential business information.


21




Severance
and Change in Control Agreements.




Pursuant
to Mr. Peck’s employment agreement, if Mr. Peck’s employment is terminated by us
without “cause”, or by Mr. Peck for “good reason”, he would receive payment of
his base salary and benefits for 12 months, in monthly
installments.




Insurance
Plans




The
Company currently does not provide medical and/or dental plan benefits to any of
its employees, but at such time as the Company has the resources necessary to
provide such benefits, intends to provide these benefits to its full-time
employees.




Other
Benefit Plans




Stock
Option Plan.




The
Company adopted a Stock Option Plan in 2003 and allocated 10,000,000 shares to
this plan. The purpose of this plan will be as follows:




A.
Encourage selected employees, directors and consultants to improve operations
and increase profits of the Company;




B.
Encourage selected employees, directors and consultants to accept or continue
employment or association with the Company; and




C.
Increase the interest of selected employees, directors and consultants in the
Company’s welfare through participation in the growth in value of the common
stock of the Company. The Company had not issued any Stock Options pursuant to
the Plan included therein to any employees as of December 31, 2003.




ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.




The
following table sets forth certain information regarding the beneficial
ownership of the Company’s Common Stock as of March 23, 2009. This chart
reflects the number of shares held by those shareholders controlling more than
five percent, those shareholders that are officers and/or directors, as well as
a collective group of all of the above.




OWNERSHIP


Name
            
            
            
            Number
      of Shares
              of
      Common Stock
            
            Approximate
              Percent
              of
      Common
              Shares
              OwnedJohn
      M. Peck
            
            
            49,000,000
            
            50
            %Group:
      All Officers/Directors (1)
            
            
            49,000,000
            
            50
            %All
      Shares Outstanding
            
            
            97,938,602
            
            100
            %




1. This
total number encompasses one person.




(1) Each
person has sole voting power and sole dispositive power as to all of the shares
shown as beneficially owned by them.




(2) Other
than as provided for in Employment Agreements, previously filed, none of these
security holders has the right to acquire any amount of the shares within sixty
days from options, warrants, rights, conversion privilege, or similar
obligations. The amount owned is based on issued common stock, as well as stock
options that are currently exercisable.


22




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




During
the past two years, and not as otherwise disclosed of in any other filing, there
have not been any transactions that have occurred between the Company and its
officers, directors, and five percent or greater shareholders, unless listed
below.




ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES




The following table sets forth
fees billed to us by our auditors during the years ended December 31, 2008 and
2007 for: (i) services rendered for the audit of our annual financial statements
and the review of our quarterly financial statements, (ii) services by our
auditor that are reasonably related to the performance of the audit or review of
our financial statements and that are not reported as Audit Fees, (iii) services
rendered in connection with tax compliance, tax advice and tax planning, and
(iv) all other fees for services rendered.


December
      31, 2007
                                  
                                  
                                  December
      31, 2008(i)
      Audit Fees
                                  
                                  $
                                  54,700
                                  
                                  
                                  $
                                  45,442(ii)
      Audit Related Fees
                                  
                                  $
                                  0
                                  
                                  
                                  $
                                  0(iii)
      Tax Fees
                                  
                                  $
                                  0
                                  
                                  
                                  $
                                  0(iv)
      All Other Fees
                                  
                                  $
                                  0
                                  
                                  
                                  $
                                  0Total
      fees
                                  
                                  $
                                  54,700
                                  
                                  
                                  $
                                  45,442




AUDIT
FEES. Consists of fees billed for professional services rendered for the audit
of the Company’s consolidated financial statements and review of the interim
consolidated financial statements included in quarterly reports and services
that are normally provided by our auditors in connection with statutory and
regulatory filings or engagements.




AUDIT-RELATED
FEES. Consists of fees billed for assurance and related services that are
reasonably related to the performance of the audit or review of the Company’s
consolidated financial statements and are not reported under “Audit Fees.” There
were no Audit-Related services provided in fiscal 2008 or 2007.




TAX FEES.
Consists of fees billed for professional services for tax compliance, tax advice
and tax planning. There were no tax services provided in fiscal 2008 or
2007.




ALL OTHER
FEES. Consists of fees for products and services other than the services
reported above. There were no management consulting services provided in fiscal
2008 or 2007.




POLICY ON
AUDIT COMMITTEE PRE-APPROVAL OF AUDIT AND PERMISSIBLE NON-AUDIT SERVICES OF
INDEPENDENT AUDITORS




Although
one will be formed soon, the Company currently does not have a designated Audit
Committee, and accordingly, the Company’s Board of Directors’ policy is to
pre-approve all audit and permissible non-audit services provided by the
independent auditors. These services may include audit services, audit-related
services, tax services and other services. Pre-approval is generally provided
for up to one year and any pre-approval is detailed as to the particular service
or category of services and is generally subject to a specific budget. The Board
of Directors may also pre-approve particular services on a case-by-case
basis.




PART
IV.




ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES




Exhibits.




Exhibits
included or incorporated by reference in this document are set forth in the
Exhibit Index.




SIGNATURES




Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Company and in the
capacities and on the date indicated:


Signature
            
            Title
            
            Date/s/
      John M. Peck
            
            CEO/Director
            
            March
      30, 2009John
      M. Peck/s/Sylvia
      Quintero
            
            Secretary/Treasurer/Director
            
            March
      30, 2009Sylvia
      Quintero


23




SECURITIES
AND EXCHANGE COMMISSION




WASHINGTON,
D.C. 20549




FINANCIAL
STATEMENTS AND SCHEDULES




DECEMBER
31, 2008 AND 2007




FORMING A
PART OF ANNUAL REPORT


PURSUANT
TO THE SECURITIES EXCHANGE ACT OF 1934


INTERNATIONAL
AEROSPACE ENTERPRISES, INC.


24




INTERNATIONAL
AEROSPACE ENTERPRISES, INC.


Index
      to Financial Statements
            
            
            PAGEReports
      of Independent Registered Certified Public Accountants
            
            26Balance
      Sheets at December 31, 2008 and 2007
            
            27Statements
      of Losses for the year ended December 31, 2008 and December 31,
      2007
            
            28Statements
      of Deficiency in Stockholders’ Equity for the years ended December 31,
      2008 and December 31, 2007
            
            29Statements
      of Cash Flows for the year ended December 31, 2008 and December 31,
      2007
            
            34Notes
      to Financial Statements
            
            35


25




Turner,
Jones & Associates, P.L.L.C.
 Certified
Public Accountants
 108
Center Street, North, 2nd
Floor
 Vienna,
Virginia 22180-5712
 (703)
242-6500
 FAX (703)
242-1600
  
 REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 To the
Board of Directors and Stockholders of
 International
Aerospace Enterprises, Inc.
 7407 East
Tanque Verde
 Tucson,
AZ 85715
 
 We have audited the accompanying
consolidated balance sheets of International Aerospace Enterprises, Inc. (a
Nevada Incorporation) as of December 31, 2008 and 2007, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the two years in the period ended December 31, 2008.  These
consolidated financial statements are the responsibility of the Company’s
management.  Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
 
 We conducted our audit in accordance
with the standards of the Public Company Accounting Oversight Board (United
States).  Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement.  An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements.  An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation.  We believe
that our audit provides a reasonable basis for our opinion.
 
 In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects,
the financial position of International Aerospace Enterprises, Inc. as of
December 31, 2008 and 2007, and the results of its operations and its cash flows
for each of the two years in the period ended December 31, 2008, in conformity
with accounting principles generally accepted in the United States of
America.
 
 The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern.  As discussed in the footnotes,
conditions exist that raise substantial doubt about the Company’s ability to
continue as a going concern. The accompanying consolidated financial statements
do not include any adjustments that might result from the outcome of this
uncertainty
 
 /s/ Turner, Jones &
Associates, PLLC
 Vienna,
Virginia
 March 30,
2009


26




INTERNATIONAL
AEROSPACE ENTERPRISES, INC.


CONSOLIDATED
BALANCE SHEETS


DECEMBER
31, 2008 AND 2007


2008
                      
                      
                      2007ASSETSCURRENT
      ASSETS:Cash
                      
                      $
                      —
                      
                      
                      $
                      111,150Inventory
                      
                      
                      1,247,500
                      
                      
                      
                      —Prepaid
      expenses
                      
                      
                      —
                      
                      
                      
                      5,000Current
      assets, discontinued operations
                      
                      
                      —
                      
                      
                      
                      331,864Total
      current assets
                      
                      
                      1,247,500
                      
                      
                      
                      448,014Fixed
      assets, net
                      
                      
                      —
                      
                      
                      
                      698Fixed
      assets, net-discontinued operations
                      
                      
                      —
                      
                      
                      
                      88,858Total
      fixed assets
                      
                      
                      —
                      
                      
                      
                      89,556Other
      assets:Unamortized
      financing costs, net of accumulated amortization and write off of $272,108
      and $234,439, respectively
                      
                      
                      17,892
                      
                      
                      
                      38,247$
                      1,265,392
                      
                      
                      $
                      575,817LIABILITIES
      AND DEFICIENCY IN STOCKHOLDERS’ EQUITYCURRENT
      LIABILITIES:Cash
      overdraft
                      
                      $
                      559
                      
                      
                      $
                      —Accounts
      payable and accrued expenses
                      
                      
                      346,411
                      
                      
                      
                      1,043,782Notes
      payable, including $39,948 to related parties
                      
                      
                      189,948
                      
                      
                      
                      39,948Convertible
      notes payable
                      
                      
                      585,712
                      
                      
                      
                      743,927Current
      liabilities, discontinued operations
                      
                      
                      —
                      
                      
                      
                      454,323Total
      current liabilities
                      
                      
                      1,122,630
                      
                      
                      
                      2,281,980Long
      term debt, less current maturities:Derivative
      liability related to convertible debentures
                      
                      
                      2,266,930
                      
                      
                      
                      2,118,173Warrant
      liability related to convertible debentures
                      
                      
                      15
                      
                      
                      
                      55,336Convertible
      notes payable
                      
                      
                      338,511
                      
                      
                      
                      83,549Long
      term debt
                      
                      
                      1,000,000
                      
                      
                      
                      —Long
      term debt, discontinued operations
                      
                      
                      —
                      
                      
                      
                      17,745Total
      long term liabilities
                      
                      
                      3,605,456
                      
                      
                      
                      2,274,803Total
      liabilities
                      
                      
                      4,728,086
                      
                      
                      
                      4,556,783Commitments
      and contingenciesDEFICIENCY
      IN STOCKHOLDERS’ EQUITYPreferred
      stock, par value $0.001 per share; 25,000,000 shares authorized; 7,430,000
      and 1,250,000 shares issued and outstanding as of December 31, 2008 and
      2007, respectively
                      
                      
                      7,430
                      
                      
                      
                      1,250Common
      stock, par value $0.001 per share; 300,000,000 shares authorized,
      78,721,208 and 65,603 shares issued and outstanding as of December 31,
      2008 and 2007, respectively (See note F)
                      
                      
                      78,721
                      
                      
                      
                      66Additional
      paid in capital
                      
                      
                      9,539,140
                      
                      
                      
                      7,570,381Treasury
      stock, at cost
                      
                      
                      —
                      
                      
                      
                      —Accumulated
      deficit
                      
                      
                      (13,087,985
                      )
                      
                      
                      (11,552,663
                      )Total
      deficiency in stockholders’ equity
                      
                      
                      (3,462,694
                      )
                      
                      
                      (3,980,966
                      )$
                      1,265,392
                      
                      
                      $
                      575,817




See the
accompanying notes to the consolidated financial statements


27




INTERNATIONAL
AEROSPACE ENTERPRISES, INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS


YEARS
ENDED DECEMBER 31, 2008 AND 2007


2008
                
                
                2007OPERATING
      EXPENSES:Selling
      and administrative
                
                
                1,151,144
                
                
                
                987,905Depreciation
      and amortization
                
                
                698
                
                
                
                1,707Total
      operating expenses
                
                
                1,151,842
                
                
                
                989,612LOSS
      FROM OPERATIONS
                
                
                (1,151,842
                )
                
                
                (989,612
                )Income
      derived from settlement of debt
                
                
                —
                
                
                
                315,624Unrealized
      gain (loss) on adjustment of derivative and warrant liability to fair
      value of underlying securities
                
                
                134,954
                
                
                
                657,349Interest
      expense, net
                
                
                (551,942
                )
                
                
                (678,971
                )Net
      Loss from continuing operations before income taxes and discontinued
      operations
                
                
                (1,568,830
                )
                
                
                (695,610
                )Income
      taxes
                
                
                —
                
                
                
                —Net
      Loss from continuing operations before discontinued
    operations
                
                
                (1,568,830
                )
                
                
                (695,610
                )Income
      from discontinued operations, net of income tax provision of
      $-0-
                
                
                33,508
                
                
                
                723,550Gain
      on disposal of discontinued operations
                
                
                —
                
                
                
                —NET
      LOSS
                
                $
                (1,535,322
                )
                
                $
                27,940Basic
      income (loss) per share:Continuing
      operations
                
                $
                (0.02
                )
                
                $
                (15.42
                )Discontinued
      operations
                
                
                0.00
                
                
                
                16.04Basic
      income (loss) per share:
                
                $
                (0.03
                )
                
                $
                0.62Diluted
      income (loss) per share:Continuing
      operations
                
                $
                (0.02
                )
                
                $
                (15.42
                )Discontinued
      operations
                
                
                0.00
                
                
                
                1.43Diluted
      income (loss) per share:
                
                $
                (0.03
                )
                
                $
                (14.00
                )Weighted
      average number of common shares outstanding-basic
                
                
                78,721,208
                
                
                
                45,107Weighted
      average number of common shares outstanding-fully diluted
                
                
                78,721,208
                
                
                
                504,824




See the
accompanying notes to the consolidated financial statements


28




INTERNATIONAL
AEROSPACE ENTERPRISES, INC


STATEMENT
OF DEFICIENCY IN STOCKHOLDERS’ EQUITY


FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007


Preferred
                  Shares
                
                
                Stock
                  Amount
                
                
                Common
                  Shares
                
                
                Stock
                  Amount
                
                
                Additional
                  Paid
      in
                  Capital
                
                
                Treasury
                  Shares
                
                
                Treasury
                  Stock
                  Amount
                
                
                Accumulated
                  Deficit
                
                
                TotalBalance
      as of December 31, 2006
                
                
                1,250,000
                
                
                $
                1,250
                
                
                
                36,264
                
                
                $
                36
                
                
                $
                6,912,623
                
                
                $
                563,155
                
                
                $
                (87,647
                )
                
                $
                (11,580,603
                )
                
                $
                (4,754,341
                )Common
      stock issued on February 9, 2007 as payment towards convertible
      debentures
                
                
                —
                
                
                
                —
                
                
                
                326
                
                
                
                1
                
                
                
                18,005
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                18,006Common
      stock issued on February 13, 2007 to officers for prior year’s
      compensation at $0.0345 per share
                
                
                —
                
                
                
                —
                
                
                
                3,000
                
                
                
                3
                
                
                
                311,037
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                311,040Common
      stock issued on March 1, 2007 for services rendered at $0.036 per
      share
                
                
                —
                
                
                
                —
                
                
                
                833
                
                
                
                1
                
                
                
                90,000
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                90,001Common
      stock issued on April 16, 2007 for services rendered at $0.03 per
      share
                
                
                —
                
                
                
                —
                
                
                
                219
                
                
                
                —
                
                
                
                19,700
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                19,700Common
      stock issued on May 1, 2007 for services rendered at $0.028 per
      share
                
                
                —
                
                
                
                —
                
                
                
                500
                
                
                
                1
                
                
                
                41,999
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                42,000Common
      stock issued on May 3, 2007 for services rendered at $0.024 per
      share
                
                
                —
                
                
                
                —
                
                
                
                167
                
                
                
                1
                
                
                
                11,999
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                12,000Common
      stock issued on May 24, 2007 as payment towards convertible
      debentures
                
                
                —
                
                
                
                —
                
                
                
                167
                
                
                
                —
                
                
                
                5,500
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                5,500Common
      stock issued on June 6, 2007 as payment towards convertible
      debentures
                
                
                —
                
                
                
                —
                
                
                
                167
                
                
                
                —
                
                
                
                5,500
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                5,500Common
      stock issued on July 20, 2007 as payment towards convertible
      debentures
                
                
                —
                
                
                
                —
                
                
                
                83
                
                
                
                —
                
                
                
                1,375
                
                
                
                —
                
                
                
                —
                
                
                
                
                
                
                
                1,375Common
      stock issued on July 25, 2007 as payment towards convertible
      debentures
                
                
                —
                
                
                
                —
                
                
                
                83
                
                
                
                —
                
                
                
                1,400
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                1,400Subtotal
                
                
                1,250,000
                
                
                $
                1,250
                
                
                
                41,809
                
                
                $
                43
                
                
                $
                7,419,138
                
                
                $
                563,155
                
                
                $
                (87,647
                )
                
                $
                (11,580,603
                )
                
                $
                (4,247,819
                )




See the
accompanying notes to the consolidated financial statements


29




INTERNATIONAL
AEROSPACE ENTERPRISES, INC


STATEMENT
OF DEFICIENCY IN STOCKHOLDERS’ EQUITY


FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007


Preferred
                  Shares
                
                
                Stock
                  Amount
                
                
                Common
                  Shares
                
                
                Stock
                  Amount
                
                
                Additional
                  Paid
      in
                  Capital
                
                
                Treasury
                  Shares
                
                
                Treasury
                  Stock
                  Amount
                
                
                Accumulated
                  Deficit
                
                
                TotalBalance
      forward
                
                
                1,250,000
                
                
                $
                1,250
                
                
                
                41,809
                
                
                $
                43
                
                
                $
                7,419,138
                
                
                $
                563,155
                
                
                $
                (87,647
                )
                
                $
                (11,580,603
                )
                
                $
                (4,247,819
                )Common
      stock issued on August 3, 2007 as payment towards convertible
      debentures
                
                
                —
                
                
                
                —
                
                
                
                167
                
                
                
                —
                
                
                
                2,550
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                2,550Common
      stock issued on August 9, 2007 as payment towards convertible
      debentures
                
                
                —
                
                
                
                —
                
                
                
                167
                
                
                
                —
                
                
                
                2,250
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                2,250Common
      stock issued on August 16, 2007 as payment towards convertible
      debentures
                
                
                —
                
                
                
                —
                
                
                
                167
                
                
                
                —
                
                
                
                1,900
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                1,900Common
      stock issued on August 21, 2007 as payment towards convertible
      debentures
                
                
                —
                
                
                
                —
                
                
                
                167
                
                
                
                —
                
                
                
                1,900
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                1,900Common
      stock issued on August 27,, 2007 as payment towards convertible
      debentures
                
                
                —
                
                
                
                —
                
                
                
                167
                
                
                
                —
                
                
                
                2,150
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                2,150Common
      stock issued on September 5, 2007 as payment towards convertible
      debentures
                
                
                —
                
                
                
                —
                
                
                
                333
                
                
                
                1
                
                
                
                3,899
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                3,900Common
      stock issued on September 19, 2007 as payment towards convertible
      debentures
                
                
                —
                
                
                
                —
                
                
                
                2,074
                
                
                
                2
                
                
                
                32,970
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                32,972Common
      stock issued on September 26, 2007 as payment towards convertible
      debentures
                
                
                —
                
                
                
                —
                
                
                
                2,074
                
                
                
                2
                
                
                
                39,194
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                39,196Common
      stock issued on October 1, 2007 as payment towards convertible
      debentures
                
                
                —
                
                
                
                —
                
                
                
                2,074
                
                
                
                2
                
                
                
                30,483
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                30,485Common
      stock issued on October 11, 2007 as payment towards convertible
      debentures
                
                
                —
                
                
                
                —
                
                
                
                2,074
                
                
                
                2
                
                
                
                20,528
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                20,530Subtotal
                
                
                1,250,000
                
                
                $
                1,250
                
                
                
                51,273
                
                
                $
                52
                
                
                $
                7,556,962
                
                
                $
                563,155
                
                
                $
                (87,647
                )
                
                $
                (11,580,603
                )
                
                $
                (4,109,986
                )




See the
accompanying notes to the consolidated financial statements


30




INTERNATIONAL
AEROSPACE ENTERPRISES, INC


STATEMENT
OF DEFICIENCY IN STOCKHOLDERS’ EQUITY


FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007


Preferred
                  Shares
                
                
                Stock
                  Amount
                
                
                Common
                  Shares
                
                
                Stock
                  Amount
                
                
                Additional
                  Paid
      in
                  Capital
                
                
                Treasury
                  Shares
                
                
                Treasury
                  Stock
                  Amount
                
                
                Accumulated
                  Deficit
                
                
                TotalBalance
      forward
                
                
                1,250,000
                
                
                $
                1,250
                
                
                
                51,273
                
                
                $
                52
                
                
                $
                7,556,962
                
                
                $
                563,155
                
                
                $
                (87,647
                )
                
                $
                (11,580,603
                )
                
                $
                (4,109,986
                )Common
      stock issued on October 19, 2007 as payment towards convertible
      debentures
                
                
                —
                
                
                
                —
                
                
                
                1,200
                
                
                
                1
                
                
                
                11,159
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                11,160Common
      stock issued on October 22, 2007 as payment towards convertible
      debentures
                
                
                —
                
                
                
                —
                
                
                
                874
                
                
                
                1
                
                
                
                8,125
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                8,126Common
      stock issued on October 26, 2007 as payment towards convertible
      debentures
                
                
                —
                
                
                
                —
                
                
                
                1,200
                
                
                
                1
                
                
                
                11,879
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                11,880Common
      stock issued on October 30, 2007 as payment towards convertible
      debentures
                
                
                —
                
                
                
                —
                
                
                
                874
                
                
                
                1
                
                
                
                8,125
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                8,126Common
      stock issued on November 6, 2007 as payment towards convertible
      debentures
                
                
                —
                
                
                
                —
                
                
                
                1,200
                
                
                
                1
                
                
                
                11,879
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                11,880Common
      stock issued on November 7, 2007 as payment towards convertible
      debentures
                
                
                —
                
                
                
                —
                
                
                
                874
                
                
                
                1
                
                
                
                8,387
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                8,388Common
      stock issued on November 19, 2007 as payment towards convertible
      debentures
                
                
                —
                
                
                
                —
                
                
                
                2,074
                
                
                
                2
                
                
                
                16,795
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                16,797Common
      stock issued on November 26, 2007 as payment towards convertible
      debentures
                
                
                —
                
                
                
                —
                
                
                
                2,074
                
                
                
                2
                
                
                
                11,197
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                11,199Common
      stock issued on December 3, 2007 as payment towards convertible
      debentures
                
                
                —
                
                
                
                —
                
                
                
                2,074
                
                
                
                2
                
                
                
                7,463
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                7,465Common
      stock issued on December 17, 2007 as payment towards convertible
      debentures
                
                
                —
                
                
                
                —
                
                
                
                2,074
                
                
                
                2
                
                
                
                6,057
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                6,059Cancellation
      of treasury shares
                
                
                
                
                
                
                
                
                
                
                (188
                )
                
                
                —
                
                
                
                (87,647
                )
                
                
                (563,155
                )
                
                
                87,647
                
                
                
                —
                
                
                
                —Net
      Income
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                27,940
                
                
                
                27,940Balance
      as of December 31, 2007
                
                
                1,250,000
                
                
                $
                1,250
                
                
                
                65,603
                
                
                $
                66
                
                
                $
                7,570,381
                
                
                $
                —
                
                
                $
                —
                
                
                $
                (11,552,663
                )
                
                $
                (3,980,966
                )




See the
accompanying notes to the consolidated financial statements


31




INTERNATIONAL
AEROSPACE ENTERPRISES, INC


STATEMENT
OF DEFICIENCY IN STOCKHOLDERS’ EQUITY


FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007


Preferred
                  Shares
                
                
                Stock
                  Amount
                
                
                Common
                  Shares
                
                
                Stock
                  Amount
                
                
                Additional
                  Paid
      in
                  Capital
                
                
                Treasury
                  Shares
                
                
                Treasury
                  Stock
                  Amount
                
                
                Accumulated
                  Deficit
                
                
                TotalBalance
      as of December 31, 2007
                
                
                1,250,000
                
                
                $
                1,250
                
                
                
                65,603
                
                
                $
                66
                
                
                $
                7,570,381
                
                
                $
                —
                
                
                $
                —
                
                
                $
                (11,552,663
                )
                
                $
                (3,980,966
                )Fractional
      shares issued in connection with reverse split
                
                
                
                
                
                
                
                
                
                
                472Preferred
      stock issued in March 2008 for services rendered
                
                
                10,000,000
                
                
                
                10,000
                
                
                
                —
                
                
                
                —
                
                
                
                242,000
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                252,000Preferred
      stock issued in April 2008 for services rendered
                
                
                1,180,000
                
                
                
                1,180
                
                
                
                —
                
                
                
                —
                
                
                
                14,160
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                15,340Preferred
      stock converted to common shares
                
                
                (5,000,000
                )
                
                
                (5,000
                )
                
                
                50,000,000
                
                
                
                50,000
                
                
                
                (45,000
                )
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Common
      stock issued in May 2008 for services rendered
                
                
                —
                
                
                
                —
                
                
                
                230,361
                
                
                
                231
                
                
                
                460,918
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                461,149Common
      stock issued on May 12, 2008 as payment towards convertible
      debentures
                
                
                —
                
                
                
                —
                
                
                
                2,074
                
                
                
                2
                
                
                
                1,813
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                1,815Common
      stock issued on June 12, 2008 as payment towards convertible
      debentures
                
                
                —
                
                
                
                
                
                
                
                1,000,000
                
                
                
                1,000
                
                
                
                244,000
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                245,000Common
      stock issued on July 2008 as payment towards convertible
      debentures
                
                
                —
                
                
                
                —
                
                
                
                1,500,000
                
                
                
                1,500
                
                
                
                7,500
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                9,000Common
      stock issued on August 2008 as payment towards convertible
      debentures
                
                
                —
                
                
                
                —
                
                
                
                4,916,700
                
                
                
                4,916
                
                
                
                18,100
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                23,016Subtotal
                
                
                7,430,000
                
                
                $
                7,430
                
                
                
                57,715,210
                
                
                $
                57,715
                
                
                $
                8,513,872
                
                
                $
                —
                
                
                $
                —
                
                
                $
                (11,552,663
                )
                
                $
                (2,973,646
                )




See the
accompanying notes to the consolidated financial statements


32




INTERNATIONAL
AEROSPACE ENTERPRISES, INC


STATEMENT
OF DEFICIENCY IN STOCKHOLDERS’ EQUITY


FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007


Preferred
                      Shares
                    
                    
                    Stock
                      Amount
                    
                    
                    Common
                      Shares
                    
                    
                    Stock
                      Amount
                    
                    
                    Additional
                      Paid
      in
                      Capital
                    
                    
                    Treasury
                      Shares
                    
                    
                    Treasury
                      Stock
                      Amount
                    
                    
                    Accumulated
                      Deficit
                    
                    
                    TotalBalance
      forward
                    
                    
                    7,430,000
                    
                    
                    $
                    7,430
                    
                    
                    
                    57,715,210
                    
                    
                    $
                    57,715
                    
                    
                    $
                    8,513,872
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    (11,552,663
                    )
                    
                    $
                    (2,973,646
                    )Common
      stock issued on September 2008 as payment towards convertible
      debentures
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    6,600,100
                    
                    
                    
                    6,600
                    
                    
                    
                    20,401
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    27,001Common
      stock issued in October 2008 as payment towards convertible
      debentures
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    5,333,400
                    
                    
                    
                    5,334
                    
                    
                    
                    (2,134
                    )
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    3,200Common
      stock issued in November 2008 as payment towards convertible
      debentures
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    5,869,599
                    
                    
                    
                    5,869
                    
                    
                    
                    (1,919
                    )
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    3,950Common
      stock issued in December 2008 as payment towards convertible
      debentures
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    3,202,899
                    
                    
                    
                    3,203
                    
                    
                    
                    (321
                    )
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    2,882Treasury
      shares received in exchange for sale of subsidiaries
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (247,500
                    )
                    
                    
                    —
                    
                    
                    
                    (247,500
                    )Treasury
      shares issued in connection with acquisition of International Aerospace
      Enterprises, Inc,
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    247,500
                    
                    
                    
                    —
                    
                    
                    
                    247,500Gain
      on disposal of discontinued operations to related party
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    1,009,241
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    1,009,241Net
      loss
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (1,535,322
                    )
                    
                    
                    (1,535,322
                    )7,430,000
                    
                    
                    $
                    7,430
                    
                    
                    
                    78,721,208
                    
                    
                    $
                    78,721
                    
                    
                    $
                    9,539,140
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    (13,087,985
                    )
                    
                    $
                    (3,462,694
                    )




See the
accompanying notes to the consolidated financial statements


33




INTERNATIONAL
AEROSPACE ENTERPRISES, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


YEARS
ENDED DECEMBER 31, 2008 AND 2007


2008
                    
                    
                    2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss from continuing operations
                    
                    $
                    (1,568,830
                    )
                    
                    $
                    (695,610
                    )Net
      income from discontinued operations
                    
                    
                    33,508
                    
                    
                    
                    723,550Adjustments
      to reconcile net loss to net cash used in operating
      activities:Adjustments
      for depreciation and amortization
                    
                    
                    698
                    
                    
                    
                    1,707Common
      stock issued or subscribed in connection with services
      rendered
                    
                    
                    461,149
                    
                    
                    
                    163,701Common
      stock issued for officer compensation
                    
                    
                    —
                    
                    
                    
                    311,040Common
      stock issued in settlement of debt
                    
                    
                    315,863
                    
                    
                    
                    270,694Preferred
      stock issud for compensation
                    
                    
                    267,340
                    
                    
                    
                    —Income
      derived from settlement of debt
                    
                    
                    —
                    
                    
                    
                    (315,624
                    )Accretion
      of convertible notes payable
                    
                    
                    96,747
                    
                    
                    
                    233,815Unrealized
      losses (gains) on adjustment of derivative and warrant liability to fair
      value of underlying securities
                    
                    
                    (134,953
                    )
                    
                    
                    (657,349
                    )Amortization
      and write off of financing costs
                    
                    
                    20,355
                    
                    
                    
                    44,759(Increase)
      decrease in:Inventory
                    
                    
                    (50,000
                    )
                    
                    
                    —Prepaid
      expenses
                    
                    
                    5,000
                    
                    
                    
                    (1,524
                    )Increase
      (decrease) in:Cash
      overdraft
                    
                    
                    559
                    
                    
                    
                    —Accounts
      payable and accrued expenses
                    
                    
                    697,371
                    
                    
                    
                    246,963Net
      cash used in operating activities, discontinued operations
                    
                    
                    (173,891
                    )
                    
                    
                    (567,830
                    )Net
      cash used in operating activities
                    
                    
                    (29,084
                    )
                    
                    
                    (241,708
                    )CASH
      FLOWS FROM INVESTING ACTIVITIES:Cash
      disposed with discontinued operations
                    
                    
                    (3,854
                    )
                    
                    
                    —Net
      cash used in Investing activities
                    
                    
                    (3,854
                    )
                    
                    
                    —CASH
      FLOWS FROM FINANCING ACTIVITIES:Advances
      from (to) shareholders
                    
                    
                    
                    
                    
                    
                    (6,808
                    )Proceeds
      (payments) on convertible debentures
                    
                    
                    —
                    
                    
                    
                    500,000Proceeds
      (payments) on notes payable and capital leases, net
                    
                    
                    —
                    
                    
                    
                    (48,214
                    )Cash
      used in financing activities, discontinued operations
                    
                    
                    (101,685
                    )
                    
                    
                    (78,859
                    )Net
      cash provided by financing activities
                    
                    
                    (101,685
                    )
                    
                    
                    366,119Net
      increase (decrease) in cash and cash equivalents
                    
                    
                    (134,623
                    )
                    
                    
                    124,411Cash
      and cash equivalents at beginning of period, continuing
      operations
                    
                    
                    111,150
                    
                    
                    
                    5,336Cash
      and cash equivalents at beginning of period, discontinued
      operations
                    
                    
                    23,473
                    
                    
                    
                    4,876Total
      cash and cash equivalents at beginning of period
                    
                    
                    134,623
                    
                    
                    
                    10,212Cash
      and cash equivalents at end of period
                    
                    $
                    (0
                    )
                    
                    $
                    134,623SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:Cash
      paid during the period for interest
                    
                    $
                    2,388
                    
                    
                    $
                    3,595Cash
      paid during the period for taxes
                    
                    
                    —
                    
                    
                    
                    —Unrealized
      (gain) loss on adjustment of derivative and warrant liability to fair
      value of underlying securities
                    
                    $
                    (134,953
                    )
                    
                    $
                    (657,349
                    )NON
      - CASH FINANCING ACTIVITIES:Common
      stock issued in exchange for services
                    
                    $
                    461,149
                    
                    
                    $
                    474,741Preferred
      stock issued in exchange for services
                    
                    $
                    267,340
                    
                    
                    $
                    —




See the
accompanying notes to the consolidated financial statements


34




INTERNATIONAL
AEROSPACE ENTERPRISES, INC.


NOTES
TO FINANCIAL STATEMENTS


DECEMBER
31, 2008 AND 2007




NOTE
A - SUMMARY OF ACCOUNTING POLICIES




A summary
of the significant accounting policies applied in the preparation of the
accompanying financial statements follows.




Business and Basis of
Presentation




Calbatech
Inc, (formerly Traffic Technology Inc.) (“Company”) was organized on April 29,
2002 under the laws of the state of Nevada. The Company is provider of military
aircraft spare parts.




From its
inception through the date of these financial statements the Company has
incurred significant operating expenses. Consequently, its operations are
subject to all risks inherent in the establishment of a new business enterprise.
As of December 31, 2008, the Company has accumulated losses of
$13,087,985.




The
consolidated financial statements include the accounts of the Company, its
wholly owned subsidiary, International Aerospace Enterprises Inc. All
significant inter-company transactions and balances have been eliminated in
consolidation.




Acquisition




On
December 26, 2008, the Company consummated an acquisition by entering into an
Acquisition Agreement (“Acquisition”) with the stockholders of International
Aerospace Enterprises, Inc, pursuant to which the stockholders of International
Aerospace Enterprises, Inc. exchanged all of the issued and outstanding capital
stock of International Aerospace Enterprises, Inc. for 49,000,000 shares of
common stock and 5,000,000 shares of preferred stock held by two officers and
majority shareholders.




In
conjunction with the exchange, the two majority shareholders received one
hundred percent (100%) of the issued and outstanding shares of its subsidiaries
KD Medical, Inc., Molecula, Inc., Molecularware, Inc., LifeStem, Inc. and an
obligation of payment of $150,000.




Total
consideration paid was comprised of the following:


Net
      assets received:Inventory
                        
                        $
                        1,247,500Consideration:Fair
      value of common stock
                        
                        $
                        122,500Fair
      value of preferred stock
                        
                        
                        125,000Liabilities
      assumed
                        
                        
                        1,000,000Total
      consideration:
                        
                        $
                        1,247,500




Revenue
Recognition




For
revenue from product sales, the Company recognizes revenue in accordance with
Staff Accounting Bulletin No. 104, REVENUE RECOGNITION (“SAB104”), which
superseded Staff Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL
STATEMENTS (“SAB101”). SAB 101 requires that four basic criteria must be met
before revenue can be recognized: (1) persuasive evidence of an arrangement
exists; (2) delivery has occurred; (3) the selling price is fixed and
determinable; and (4) collectibility is reasonably assured. Determination of
criteria (3) and (4) are based on management’s judgments regarding the fixed
nature of the selling prices of the products delivered and the collectibility of
those amounts. Provisions for discounts and rebates to customers, estimated
returns and allowances, and other adjustments are provided for in the same
period the related sales are recorded.




SAB 104
incorporates Emerging Issues Task Force 00-21 (“EITF 00-21”),
MULTIPLE-DELIVERABLE REVENUE ARRANGEMENTS. EITF 00-21 addresses accounting for
arrangements that may involve the delivery or performance of multiple products,
services and/or rights to use assets. The effect of implementing EITF 00-21 on
the Company’s consolidated financial position and results of operations was not
significant.




Use of
Estimates




The
preparation of the financial statement in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.


35




Foreign Currency
Translation




The
Company translates the foreign currency financial statements in accordance with
the requirements of Statement of Financial Accounting Standards No. 52, “Foreign
Currency Translation.” Assets and liabilities are translated at current exchange
rates, and related revenue and expenses are translated at average exchange rates
in effect during the period. Resulting translation adjustments are recorded as a
separate component in stockholders’ equity. Foreign currency translation gains
and losses are included in the statement of operations.




Cash
Equivalents




For the
purpose of the accompanying financial statements, all highly liquid investments
with a maturity of three months or less are considered to be cash
equivalents.




Property and
Equipment




Property
and equipment are stated at cost. When retired or otherwise disposed, the
related carrying value and accumulated depreciation are removed from the
respective accounts and the net difference less any amount realized from
disposition, is reflected in earnings. For financial statement purposes,
property and equipment are recorded at cost and depreciated using the
straight-line method over their estimated useful lives as follows:


Furniture
      and fixtures
            5
      yearsOffice
      equipment
            3
      to 5 years




Impairment of Long-Lived
Assets




The
Company has adopted Statement of Financial Accounting Standards No. 144 (SFAS
144). The Statement requires that long-lived assets and certain identifiable
intangibles held and used by the Company be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Events relating to recoverability may include
significant unfavorable changes in business conditions, recurring losses, or a
forecasted inability to achieve break-even operating results over an extended
period. The Company evaluates the recoverability of long-lived assets based upon
forecasted discounted cash flows. Should impairment in value be indicated, the
carrying value of intangible assets will be adjusted, based on estimates of
future discounted cash flows resulting from the use and ultimate disposition of
the asset. SFAS No. 144 also requires assets to be disposed of be reported at
the lower of the carrying amount or the fair value less disposal
costs.




During
the year ended December 31, 2008, the Company management preformed an evaluation
of its intangible assets (Goodwill) for purposes of determining the implied fair
value of the assets at acquisition date. The tests indicated that the recorded
remaining book value of its goodwill exceeded the fair value, as determined by
discounted cash flows and accordingly recorded a impairment charge against
earnings of $1,197,500. Considerable management judgment is necessary to
estimate the fair value. Accordingly, actual results could vary significantly
from management’s estimates.




Income
Taxes




The
Company has adopted Financial Accounting Standards No. 109 (“SFAS 109”) which
requires the recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statement or tax returns. Under this method, deferred tax liabilities and assets
are determined based on the difference between financial statements and the tax
basis of assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse. Temporary differences between
taxable income reported for financial reporting purposes and income tax purposes
are insignificant.




Research and
Development




The
Company accounts for research and development costs in accordance with the
Financial Accounting Standards Board’s Statement of Financial Accounting
Standards No. 2 (“SFAS 2”), “Accounting for Research and Development Costs”.
Under SFAS 2, all research and development costs must be charged to expense as
incurred. Accordingly, internal research and development costs are expensed as
incurred. Third-party research and developments costs are expensed when the
contracted work has been performed or as milestone results have been achieved.
Company-sponsored research and development costs related to both present and
future products are expensed in the period incurred. The Company did not incur
expenditures on research and product development for the years ended December
31, 2008 and 2007.




Advertising




The
Company follows the policy of charging the costs of advertising to expenses as
incurred. The Company did not incur advertising costs in continuing operations
for the years ended December 31, 2008 and 2007, respectively.


36




Comprehensive
Income




Statement
of Financial Accounting Standards No. 130 (“SFAS 130”), “Reporting Comprehensive
Income,” establishes standards for reporting and displaying of comprehensive
income, its components and accumulated balances. Comprehensive income is defined
to include all changes in equity except those resulting from investments by
owners and distributions to owners. Among other disclosures, SFAS 130 requires
that all items that are required to be recognized under current accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. The Company does not have any items of comprehensive income in any
of the periods presented.




Segment
Information




The
Company has adopted Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information (“SFAS 131”)
in the years ended December 31, 2001 and subsequent years. SFAS 131 establishes
standards for reporting information regarding operating segments in annual
financial statements and requires selected information for those segments to be
presented in interim financial reports issued to stockholders. SFAS 131 also
establishes standards for related disclosures about products and services and
geographic areas. Operating segments are identified as components of an
enterprise about which separate discrete financial information is available for
evaluation by the chief operating decision maker, or decision making group, in
making decisions on how to allocate resources and assess
performance.




Stock Based
Compensation




Prior to
the January 1, 2006 adoption of the Financial Accounting Standards Board
(“FASB”) Statement No. 123(R), “Share-Based Payment” (“SFAS 123R”), the Company
accounted for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board (“APB”) Opinion No. 25, “Accounting
for Stock Issued to Employees,” and related interpretations. Accordingly,
because the stock option grant price equaled the market price on the date of
grant, and any purchase discounts under the Company’s stock purchase plans were
within statutory limits, no compensation expense was recognized by the Company
for stock-based compensation. As permitted by SFAS No. 123, “Accounting for
Stock-Based Compensation” (“SFAS 123”), stock-based compensation was included as
a pro forma disclosure in the notes to the consolidated financial statements.
The Company did not issue any stock options during the years ended December 31,
2007 and 2006.




Effective
January 1, 2006, the beginning of the Company’s first fiscal quarter of 2006,
the Company adopted the fair value recognition provisions of SFAS 123R, using
the modified-prospective transition method. Under this transition method,
stock-based compensation expense was recognized in the consolidated financial
statements for granted, modified, or settled stock options. Compensation expense
recognized included the estimated expense for stock options granted on and
subsequent to January 1, 2006, based on the grant date fair value estimated in
accordance with the provisions of SFAS 123R, and the estimated expense for the
portion vesting in the period for options granted prior to, but not vested as of
January 1, 2006, based on the grant date fair value estimated in accordance with
the original provisions of SFAS 123. Results for prior periods have not been
restated, as provided for under the modified-prospective method.




Total
stock-based compensation expense recognized in the consolidated statement of
earnings for the year ending December 31, 2008 and 2007 was $0, net of tax
effect.




SFAS
123(R) requires forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those
estimates. In the Company’s pro forma information required under SFAS 123 for
the periods prior to fiscal 2006, the Company accounted for forfeitures as they
occurred.




Liquidity




As shown
in the accompanying financial statements, the Company recorded a net loss from
continuing operations of $1,535,322 and $695,610 during the years ended December
31, 2008 and 2007, respectively. The Company’s total liabilities exceeded its
total assets by $3,462,694 as of December 31, 2008.




Concentration of Credit
Risk




Financial
instruments and related items, which potentially subject the Company to
concentrations of credit risk, consist primarily of cash, cash equivalents and
trade receivables. The Company places its cash and temporary cash investments
with high credit quality institutions. At times, such investments may be in
excess of the FDIC insurance limit. At December 31, 2008 and 2007, the Company
did not have outstanding accounts or notes receivable from continuing
operations.


37




Net income (loss) per
share




The
following reconciliation of net income and share amounts used in the computation
of income (loss) per share for the year ended December 31, 2007:


Year
      Ended
                        December
      31,
                        2007Net
      income used in computing basic net income per share
                      
                      $
                      27,940Impact
      of assumed assumptions:Amortization
      of debt discount (interest expense) on convertible
    debentures
                      
                      
                      233,815Impact
      of equity classified as liability:Gain
      on warrant liability and derivative to fair value
                      
                      
                      (657,349
                      )Net
      Income (loss) in computing diluted net income (loss) per
      share:
                      
                      $
                      (395,594
                      )




The
weighted average shares outstanding used in the basic net income per share
computations for the year ended December 31, 2007 was 45,107, respectively. In
determining the number of shares used in computing diluted loss per share, the
Company added approximately 459,717 potentially dilutive securities for the year
ended December 31, 2007. The potentially dilutive securities added were
attributable to the warrants and convertible debentures outstanding. As a
result, the diluted loss per share for the year ended December 31, 2007 was
$14.00.




Derivative Financial
Instruments




The
Company’s derivative financial instruments consist of embedded derivatives
related to the Secured Convertible Debentures (see Note F). These embedded
derivatives include certain conversion features, variable interest features,
call options and default provisions. The accounting treatment of derivative
financial instruments requires that the Company record the derivatives and
related warrants at their fair values as of the inception date of the Note
Agreement and at fair value as of each subsequent balance sheet date. In
addition, under the provisions of EITF Issue No. 00-19, “Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own Stock,” as a result of entering into the Notes, the Company is
required to classify all other non-employee stock options and warrants as
derivative liabilities and mark them to market at each reporting date. Any
change in fair value inclusive of modifications of terms will be recorded as
non-operating, non-cash income or expense at each reporting date. If the fair
value of the derivatives is higher at the subsequent balance sheet date, the
Company will record a non-operating, non-cash charge. If the fair value of the
derivatives is lower at the subsequent balance sheet date, the Company will
record non-operating, non-cash income. Conversion-related derivatives were
valued using the intrinsic method and the warrants using the Black Scholes
Option Pricing Model with the following assumptions: dividend yield of 0%;
annual volatility of 569%; and risk free interest rate from 0.37% to 1.55%. The
derivatives are classified as long-term liabilities.




Registration
rights




In with
raising capital through the issuance of Convertible Notes, the Company has
issued convertible debentures and warrants in that have registration rights with
liquidated damages for the underlying shares. As the contract must be settled by
the delivery of registered shares and the delivery of the registered shares is
not controlled by the Company, pursuant to EITF 00-19, “Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own Stock”, the net value of the of the underlying embedded derivative
and warrants at the date of issuance was recorded as liabilities on the balance
sheet. Liquidated damages are estimated and accrued as a liability at each
reporting date.




Fair
Values




In the
first quarter of fiscal year 2008, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 157, “Fair Value Measurements” (SFAS No. 157) as
amended by FASB Statement of Position (FSP) FAS 157-1 and FSP FAS 157-2. SFAS
No. 157 defines fair value, establishes a framework for measuring fair value,
and enhances fair value measurement disclosure. FSP FAS 157-2 delays, until the
first quarter of fiscal year 2009, the effective date for SFAS 157 for all
non-financial assets and non-financial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). The adoption of SFAS No. 157 did not have a material
impact on the Company’s financial position or operations.




Reclassifications




Certain
reclassifications have been made in prior year’s financial statements to conform
to classifications used in the current year.




New Accounting
Pronouncements




In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities.” SFAS 159 permits entities to choose
to measure many financial instruments, and certain other items, at fair value.
SFAS 159 applies to reporting periods beginning after November 15, 2007. The
adoption of SFAS 159 is not expected to have a material impact on the Company’s
financial condition or results of operations.




In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”
(“SFAS No. 141(R)”), which establishes principles and requirements for how an
acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any noncontrolling interest in an
acquiree, including the recognition and measurement of goodwill acquired in a
business combination. SFAS No. 141R is effective as of the beginning of the
first fiscal year beginning on or after December 15, 2008. Earlier adoption is
prohibited and the Company is currently evaluating the effect, if any that the
adoption will have on its consolidated financial position results of operations
or cash flows.


38




In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interest in
Consolidated Financial Statements, an amendment of ARB No. 51” (“SFAS No.
160”), which will change the accounting and reporting for minority interests,
which will be recharacterized as noncontrolling interests and classified as a
component of equity within the consolidated balance sheets. SFAS No. 160 is
effective as of the beginning of the first fiscal year beginning on or after
December 15, 2008. Earlier adoption is prohibited and the Company is currently
evaluating the effect, if any that the adoption will have on its consolidated
financial position results of operations or cash flows.




In
December 2007, the FASB ratified the consensus in Emerging Issues Task Force
(EITF) Issue No. 07-1, “Accounting for Collaborative Arrangements” (EITF 07-1).
EITF 07-1 defines collaborative arrangements and requires collaborators to
present the result of activities for which they act as the principal on a gross
basis and report any payments received from (made to) the other collaborators
based on other applicable authoritative accounting literature, and in the
absence of other applicable authoritative literature, on a reasonable, rational
and consistent accounting policy is to be elected. EITF 07-1 also provides for
disclosures regarding the nature and purpose of the arrangement, the entity’s
rights and obligations, the accounting policy for the arrangement and the income
statement classification and amounts arising from the agreement.




EITF 07-1
will be effective for fiscal years beginning after December 15, 2008, which will
be the Company’s fiscal year 2009, and will be applied as a change in accounting
principle retrospectively for all collaborative arrangements existing as of the
effective date. The Company has not yet evaluated the potential impact of
adopting EITF 07-1 on our consolidated financial position, results of operations
or cash flows.




In March
2008, the FASB” issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities - an amendment to FASB Statement No.
133” (“SFAS No. 161”). SFAS No. 161 is intended to
improve financial standards for derivative instruments and hedging activities by
requiring enhanced disclosures to enable investors to better understand their
effects on an entity’s financial position, financial performance, and cash
flows. Entities are required to provide enhanced disclosures about: (a) how and
why an entity uses derivative instruments; (b) how derivative instruments and
related hedged items are accounted for under SFAS No. 133 and its related
interpretations; and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance and cash flows. It
is effective for financial statements issued for fiscal years beginning after
November 15, 2008, with early adoption encouraged. The Company is currently
evaluating the impact of SFAS No. 161, if any, will have on its consolidated
financial position, results of operations or cash flows.




Recent accounting
pronouncements (continued)




In April
2008, the FASB issued FSP No. FAS 142-3,”Determination of the Useful Life of
Intangible Assets”. This FSP amends the factors that should be considered
in developing renewal or extension assumptions used to determine the useful life
of a recognized intangible asset under SFAS No. 142,“Goodwill and Other Intangible
Assets”. The Company is required to adopt FSP 142-3 on September 1, 2009,
earlier adoption is prohibited. The guidance in FSP 142-3 for determining the
useful life of a recognized intangible asset shall be applied prospectively to
intangible assets acquired after adoption, and the disclosure requirements shall
be applied prospectively to all intangible assets recognized as of, and
subsequent to, adoption. The Company is currently evaluating the impact of FSP
142-3 on its consolidated financial position, results of operations or cash
flows.




In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS No. 162”). SFAS No. 162 identifies the
sources of accounting principles and the framework for selecting the principles
used in the preparation of financial statements of nongovernmental entities that
are presented in conformity with generally accepted accounting principles (the
GAAP hierarchy). SFAS No. 162 will become effective 60 days following the SEC’s
approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, “The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles.” The Company does not expect the adoption of
SFAS No. 162 to have a material effect on its consolidated financial position,
results of operations or cash flows.




In May
2008, the FASB issued FSP Accounting Principles Board (“APB”) 14-1 “Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement) “ (“FSP APB 14-1”). FSP APB 14-1 requires the issuer of
certain convertible debt instruments that may be settled in cash (or other
assets) on conversion to separately account for the liability (debt) and equity
(conversion option) components of the instrument in a manner that reflects the
issuer’s non-convertible debt borrowing rate. FSP APB 14-1 is effective for
fiscal years beginning after December 15, 2008 on a retroactive basis. The
Company is currently evaluating the potential impact, if any, of the adoption of
FSP APB 14-1 on its consolidated financial position, results of operations or
cash flows.




In June
2008, the FASB issued FSP Emerging Issues Task Force (EITF) No. 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating
Securities.” Under the FSP, unvested share-based payment awards that
contain rights to receive nonforfeitable dividends (whether paid or unpaid) are
participating securities, and should be included in the two-class method of
computing EPS. The FSP is effective for fiscal years beginning after December
15, 2008, and interim periods within those years. The Company does not expect
the adoption of FSP EITF No. 03-6-1 to have a material effect on its
consolidated financial position, results of operations or cash
flows.




Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not, or are not believed by
management to, have a material impact on the Company’s present or future
consolidated financial statements.


39




NOTE
B - PROPERTY, PLANT, AND EQUIPMENT




Property,
plant and equipment at December 31, 2008 and 2007 are as follows:


2008
                    
                    
                    2007Furniture
      and fixtures
                    
                    $
                    1,658
                    
                    
                    $
                    1,658Computer
      equipment
                    
                    
                    7,250
                    
                    
                    
                    7,2508,908
                    
                    
                    
                    8,908Less:
      Accumulated depreciation
                    
                    
                    8,908
                    
                    
                    
                    8,210Net
      property and equipment
                    
                    $
                    -0-
                    
                    
                    $
                    698




The total
depreciation expense for the year ended December 31, 2008 and 2007 amounted to
$698 and $1,707, respectively.




NOTE
C - NOTES PAYABLE




Notes
payable at December 31, 2008 and 2007 consists of the following:


2008
                
                
                2007Note
      payable, due June 11, 2010; non interest bearing,
unsecured
                
                
                1,000,000
                
                
                
                —Notes
      payable, total monthly payments of $25,440 per month including interest at
      6% per annum, due June 2008; unsecured
                
                
                150,000
                
                
                
                —Notes
      payables-shareholders, accrues interest at 0% per annum,
      unsecured
                
                
                39,948
                
                
                
                39,948241,070
                
                
                
                554,689Less:
      current maturities:
                
                
                (189,948
                )
                
                
                (554,689
                )$
                1,000,000
                
                
                $
                —




On
December 11, 2008, the Company issued a promissory note payable due June 11,
2010 in connection with the acquisition of inventory. The note is non interest
bearing and unsecured.




On
December 26, 2008, the Company issued two $75,000 notes payable to former
officers and shareholders in connection with the sale of certain operating
subsidiaries. The notes bear interest of 6% per annum, payable in monthly
installments of $12,720 including interest and are unsecured.




NOTE
D - CONVERTIBLE NOTES PAYABLE




A summary
of convertible promissory notes payable at December 31, 2008 and 2007 is as
follows:




December
      31,
                          2008
                        
                        
                        December
      31,
                          200710%
      convertible debenture, with related party, is payable on demand, unpaid
      principal together with accrued and unpaid interest is, at the option of
      the holder, convertible into shares of the Company’s common stock at a
      time or conversion price equal to fifty percent of the closing price of
      the Company’s common stock on the date of conversion. The Company has
      recorded $100,000 as a beneficial conversion discount-interest expense
      during the year ended December 31, 2003. In 2005, the note was converted
      to a non-interest bearing debenture.
                        
                        $
                        53,577
                        
                        
                        $
                        53,57710%
      convertible debenture with interest due quarterly subject to certain
      conditions, due three years from the date of the note. The holder has the
      option to convert unpaid principal to the Company’s common stock at the
      lower of (i) $0.14 or (ii) 50% of the average of the three lowest intraday
      trading prices for the common stock on a principal market for the twenty
      days before, but not including, conversion date. The Company granted the
      note holder a security interest in substantially all of the Company’s
      assets and intellectual property and registration rights. (see
      below)
                        
                        
                        532,135
                        
                        
                        
                        690,350





40





December
      31,
                          2008
                        
                        
                        December
      31,
                          20078%
      convertible debenture with interest due quarterly subject to certain
      conditions, due three years from the date of the note. The holder has the
      option to convert unpaid principal to the Company’s common stock at the
      lower of (i) $0.14 or (ii) 40% of the average of the three lowest intraday
      trading prices for the common stock on a principal market for the twenty
      days before, but not including, conversion date. The Company granted the
      note holder a security interest in substantially all of the Company’s
      assets and intellectual property and registration rights. (see
      below)
                        
                        
                        262,370
                        
                        
                        
                        83,54910%
      convertible debenture with interest due quarterly subject to certain
      conditions, due three years from the date of the note. The holder has the
      option to convert unpaid principal to the Company’s common stock at the
      lower of (i) $0.14 or (ii) 40% of the average of the three lowest intraday
      trading prices for the common stock on a principal market for the twenty
      days before, but not including, conversion date. The Company granted the
      note holder a security interest in substantially all of the Company’s
      assets and intellectual property and registration rights. (see
      below)
                        
                        
                        76,141
                        
                        
                        
                        -0-924,223
                        
                        
                        
                        827,476Less:
      current maturities
                        
                        
                        (585,712
                        )
                        
                        
                        (743,927
                        )$
                        338,511
                        
                        
                        $
                        83,549




The
Company entered into a Securities Purchase Agreement with four accredited
investors on May 23, 2005 for the issuance of an aggregate of $2,000,000 of
convertible notes (“Convertible Notes”), and attached to the Convertible Notes
were warrants to purchase 12,143,290 shares of the Company’s common stock. The
Convertible Notes accrue interest at 10% per annum, payable quarterly, and are
due three years from the date of the note. The note holder has the option to
convert any unpaid note principal to the Company’s common stock at a rate of the
lower of (i) $0.14 or (ii) 50% of the average of the three lowest intraday
trading prices for the common stock on a principal market for the 20 trading
days before but not including conversion date. The effective interest rate at
the date of inception was 23.47% per annum.




As of
December 31, 2008, the Company issued to the investors Convertible Notes in a
total amount of $2,000,000 in exchange for net proceeds of $1,635,667. The
proceeds that the Company received were net of prepaid interest of $133,333
representing the first eight month’s interest calculated at 10% per annum for
the aggregate of $2,000,000 of convertible notes, and related fees and costs of
$255,000. Prepaid interest is amortized over the first eight months of the note
and capitalized financing costs were amortized over the maturity period (three
years) of the convertible notes.




The
Company’s identified embedded derivatives related to the Securities Purchase
Agreement entered into on May 23, 2005. These embedded derivatives included
certain conversion features, variable interest features, call options and
default provisions. The accounting treatment of derivative financial instruments
requires that the Company allocate the relative fair values of the derivatives
and related warrants as of the inception date of the Securities Purchase
Agreement up to the proceeds amount and to fair value as of each subsequent
balance sheet date. At the inception of the Securities Purchase Agreement, the
Company allocated $1,147,698 and $852,302 to the embedded derivatives and
related warrants, respectively.




For the
years ended December 31, 2008 and 2007, the Company amortized the debt discount
and charged to interest expense $20,607 and $150,266, respectively.




The
Company entered into a Securities Purchase Agreement with four accredited
investors on July 13, 2007 for the issuance of an aggregate of $535,000 of
convertible notes (“Convertible Notes”), and attached to the Convertible Notes
were warrants to purchase 10,000,000 shares of the Company’s common stock. The
Convertible Notes accrue interest at 8% per annum, payable quarterly, and are
due three years from the date of the note. The note holder has the option to
convert any unpaid note principal to the Company’s common stock at a rate of the
lower of (i) $0.14 or (ii) 40% of the average of the three lowest intraday
trading prices for the common stock on a principal market for the 20 trading
days before but not including conversion date. The effective interest rate at
the date of inception was 63.23% per annum.




As of
December 31, 2008, the Company issued to the investors Convertible Notes in a
total amount of $535,000 in exchange for net proceeds of $500,000. The proceeds
that the Company received were net of related fees and costs of $35,000.
Capitalized financing costs are amortized over the maturity period (three years)
of the convertible notes.




The
Company’s identified embedded derivatives related to the Securities Purchase
Agreement entered into on July 13, 2007. These embedded derivatives included
certain conversion features, variable interest features, call options and
default provisions. The accounting treatment of derivative financial instruments
requires that the Company allocate the relative fair values of the derivatives
and related warrants as of the inception date of the Securities Purchase
Agreement up to the proceeds amount and to fair value as of each subsequent
balance sheet date. At the inception of the Securities Purchase Agreement, the
Company allocated $467,310 and $67,690 to the embedded derivatives and related
warrants, respectively.


41




For the
years ended December 31, 2008 and 2007, the Company amortized the debt discount
and charged to interest expense $178,822 and $83,549, respectively.




The
Company entered into a Securities Purchase Agreement with four accredited
investors on January 1, 2008 for the issuance of an aggregate of $228,423 of
convertible notes (“Convertible Notes”). The Convertible Notes accrue interest
at 10% per annum, payable quarterly, and are due three years from the date of
the note. The note holder has the option to convert any unpaid note principal to
the Company’s common stock at a rate of the lower of (i) $0.14 or (ii) 40% of
the average of the three lowest intraday trading prices for the common stock on
a principal market for the 20 trading days before but not including conversion
date. The effective interest rate at the date of inception was
indeterminable.




As of
December 31, 2008, the Company issued to the investors Convertible Notes in a
total amount of $228,423 in exchange for reduction in interest liability of
$228,423.




For the
year ended December 31, 2008, the Company amortized the debt discount and
charged $76,141 to interest expense.




The
Company’s identified embedded derivatives related to the Securities Purchase
Agreement entered into on January 1, 2008. These embedded derivatives included
certain conversion features, variable interest features, call options and
default provisions. The accounting treatment of derivative financial instruments
requires that the Company allocate the fair values of the derivatives as of the
inception date of the Securities Purchase Agreement up to the proceeds amount
and to fair value as of each subsequent balance sheet date. At the inception of
the Securities Purchase Agreement, the Company allocated $228,423 to the
embedded derivatives.




The
accompanying financial statements comply with current requirements relating to
warrants and embedded derivatives as described in FAS 133, EITF 98-5 and 00-27,
and APB 14 as follows:


●
                  The
      Company allocated the proceeds received between convertible debt and
      detachable warrants based upon the relative fair market values on the
      dates the proceeds were received. The fair values of the detachable
      warrants and the embedded derivatives were determined under the
      Black-Scholes option pricing formula and the intrinsic method,
      respectively●
                  Subsequent
      to the initial recording, the increase (or decease) in the fair value of
      the detachable warrants, determined under the Black-Scholes option pricing
      formula and the increase (or decrease) in the intrinsic value of the
      embedded derivatives of the convertible debentures are recorded as
      adjustments to the liabilities at December 31, 2008 and 2007,
      respectively.●
                  The
      expense relating to the increase (or decrease) in the fair value of the
      Company’s stock reflected in the change in the fair value of the warrants
      and derivatives is included as other income item as a gain or loss arising
      from convertible financing on the Company’s balance
  sheet.●
                  Accreted
      principal of $924,223 and $827,476 as of December 31, 2008 and 2007,
      respectively.




NOTE
E – CONVERTIBLE PREFERRED STOCK




On April
15, 2004, the Company issued 1,250,000 shares of Preferred Stock at a price of
$0.20 per share to one entity. The preferred shares issued are convertible on a
1 to 1.5 basis of preferred stock to common shares.




On
January 2, 2008, the Company issued an aggregate of 10,000,000 shares of
Preferred Stock in exchange for officer’s accrued compensation totaling
$252,000. The preferred shares issued are convertible on a 1 to 10 basis of
preferred stock to common shares.




In April
2008, the Company issued an aggregate of 1,180,000 shares of Preferred Stock in
exchange for services rendered totaling $15,340. The preferred shares issued are
convertible on a 1 to 10 basis of preferred stock to common shares.




In May
2008, the shareholders of 5,000,000 shares of Preferred Stock converted to
50,000,000 of the Company’s common stock.




NOTE
F - COMMON STOCK




In
February 2007, the Company issued 9,000,000 shares of common stock for officer’s
prior year’s compensation, at $0.035 per share, which represented the value of
the services received and which did not differ materially from the value of the
stock when services were rendered.




In
February 2007, the Company issued 978,590 shares of common stock in exchange for
convertible notes payable of $18,006.




In March
2007, the Company issued 2,500,000 shares of common stock for services rendered
at $0.036 per share, which represents the value of the services received and
which did not differ materially from the value of the stock
issued.


42




In April
2007, the Company issued 656,653 shares of common stock for services rendered at
$0.03 per share, which represents the value of the services received and which
did not differ materially from the value of the stock issued.




In May
2007, the Company issued 2,000,000 shares of common stock for services rendered
at an average of $0.027 per share, which represents the value of the services
received and which did not differ materially from the value of the stock
issued.




In May
2007, the Company issued 500,000 shares of common stock in exchange for
convertible notes payable of $5,500.




In June
2007, the Company issued 500,000 shares of common stock in exchange for
convertible notes payable of $5,500.




In July
2007, the Company issued 500,000 shares of common stock in exchange for
convertible notes payable of $2,775.




In August
2007, the Company issued 2,500,000 shares of common stock in exchange for
convertible notes payable of $10,750.




In
September 2007, the Company issued 12,542,702 shares of common stock in exchange
for convertible notes payable of $76,065




In
October 2007, the Company issued 24,885,472 shares of common stock in exchange
for convertible notes payable of $90,307.




In
November 2007, the Company issued 18,664,050 shares of common stock in exchange
for convertible notes payable of $48.264.




In
December 2007, the Company issued 12,442,700 shares of common stock in exchange
for convertible notes payable of $13,524.




In May
2008 the Company issued an aggregate of 230,361 shares of common stock for
services rendered which represents the value of the services received and which
did not differ materially from the value of the stock issued




In May
2008, the Company issued 2,074 shares of common stock in exchange for
convertible notes payable of $1,815.




In June
2008, the Company issued an aggregate of 1,000,000 shares of common stock in
exchange for convertible notes payable of 245,000.




In July
2008, the Company issued an aggregate of 1,500,000 shares of common stock in
exchange for convertible notes payable of 9,000.




In August
2008, the Company issued an aggregate of 4,916,700 shares of common stock in
exchange for convertible notes payable of 23,016.




In
September 2008, the Company issued an aggregate of 6,600,100 shares of common
stock in exchange for convertible notes payable of 27,001.




In
October 2008, the Company issued an aggregate of 5,333,400 shares of common
stock in exchange for convertible notes payable of 3,200.




In
November 2008, the Company issued an aggregate of 5,869,599 shares of common
stock in exchange for convertible notes payable of 3,950.




In
December 2008, the Company issued an aggregate of 3,202,899 shares of common
stock in exchange for convertible notes payable of 2,882.




NOTE
G – OPTIONS AND WARRANTS




Non-Employee Stock
Options




On
December 1, 2002, the Company issued 80,000 options to a consultant as incentive
to enter into a consulting agreement with the Company for a period of one year.
The 80,000 options vest quarterly over a period of three years with an exercise
price of $.01 per share and a life of ten years from the date of
grant.




The
following table summarizes the changes in options outstanding and the related
prices for the shares of the Company’s common stock issued to consultants at
December 31, 2008.


Options
      Outstanding
            
            Options
      ExercisableExercise
              Price
            
            Number
              Outstanding
            
            Weighted
      Average
              Remaining
      Contractual
              Life
      (Years)
            
            Weighed
      Average
              Exercise
      Price
            
            Number
              Exercisable
            
            Weighted
      Average
              Exercise
      Price$0.001
            
            27
            
            3.92
            
            $3.00
            
            27
            
            $27




43




Transactions
involving stock options issued to consultants are summarized as
follows:


Number
      of
                  Shares
                
                
                Weighted
                  Average
                  Price
      Per
                  ShareOutstanding
      at December 31, 2006
                
                
                27
                
                
                $
                3.00Granted
                
                
                —
                
                
                
                —Exercised
                
                
                —
                
                
                
                —Canceled
      or expired
                
                
                —
                
                
                
                —Outstanding
      at December 31, 2007
                
                
                27
                
                
                
                3.00Granted
                
                
                —
                
                
                
                —Exercised
                
                
                —
                
                
                
                —Canceled
      or expired
                
                
                —
                
                
                
                —Outstanding
      at December 31, 2008
                
                
                27
                
                
                $
                3.00




NOTE
G – OPTIONS AND WARRANTS




Warrants




The
Company granted 3,333 warrants during the year ended December 31, 2007 in
connection with the issuance of convertible notes payable (see note E). The
Company did not grant any compensatory warrants during the nine month period
ended September 30, 2008 and 2007. The following table summarizes the changes in
warrants outstanding and the related prices for the shares of the Company’s
common stock.




Warrants
      Outstanding
                        
                        
                        
                        
                        
                        Warrants
      ExercisableExercise
      Price
                        
                        
                        Number
                          Outstanding
                        
                        
                        Weighted
      Average
                          Remaining
                          Contractual
      Life
                          (Years)
                        
                        
                        Weighted
                          Average
                          Exercise
      Price
                        
                        
                        Number
                          Exercisable
                        
                        
                        Weighted
                          Average
                          Exercise
      Price$0.02
                        
                        
                        3,333
                        
                        
                        
                        5.54
                        
                        
                        $
                        60.00
                        
                        
                        
                        3,333
                        
                        
                        $
                        60.00$0.20
                        
                        
                        2,024
                        
                        
                        
                        1.40
                        
                        
                        $
                        600.00
                        
                        
                        
                        2,024
                        
                        
                        $
                        600.00$0.35
                        
                        
                        2,024
                        
                        
                        
                        1.40
                        
                        
                        $
                        1,050.00.
                        
                        
                        
                        2,024
                        
                        
                        $
                        1,050.007,381
                        
                        
                        
                        3.32
                        
                        
                        $
                        455.13
                        
                        
                        
                        7,381




Transactions
involving warrants issued to non-employees are summarized as
follows:


Number
      of Shares
                
                
                Weighted
      Average Price
                  Per
      ShareOutstanding
      as of January 1, 2007
                
                
                4,048
                
                
                $
                822.97Granted
                
                
                —
                
                
                
                —Exercised
                
                
                —
                
                
                
                —Canceled
      or expired
                
                
                —
                
                
                
                —Outstanding
      as of December 31, 2007
                
                
                4,048
                
                
                
                822.97Granted
                
                
                3,333
                
                
                
                60.00Exercised
                
                
                —
                
                
                
                —Canceled
      or expired
                
                
                —
                
                
                
                —Outstanding
      as of December 31, 2008
                
                
                7,381
                
                
                $
                455.13




NOTE
H - RELATED PARTY TRANSACTIONS




On
December 26, 2008, the Company sold subsidiaries KD Medical, Inc., Molecula,
Inc., Molecularware, Inc. and LifeStem, Inc. to two officers and majority
shareholders in exchange for 49,000,000 shares of the Company’s common stock,
5,000,000 shares of the Company’s preferred stock and promissory notes payables
of $150,000.




From time
to time the Company’s officers and shareholders advance funds to the Company.
The notes payable-related parties balance outstanding was $39,948 as of December
31, 2008 and 2007, respectively. No formal arrangements or repayment terms exist
(see Note C).




NOTE
I - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES




Accounts
payable and accrued liabilities at December 31, 2008 and 2007 are as
follows:


2008
                
                
                2007Accounts
      payable
                
                $
                —
                
                
                $
                152,313Accrued
      salaries
                
                
                —
                
                
                
                456,540Payroll
      liabilities
                
                $
                178,430
                
                
                
                178,430Accrued
      Interest
                
                
                167,981
                
                
                
                256,499$
                346,411
                
                
                $
                1,043,782




44




NOTE
J - INCOME TAXES




The
Company has adopted Financial Accounting Standards No. 109, which requires the
recognition of deferred tax liabilities and assets for the expected future tax
consequences of events that have been included in the financial statement or tax
returns.




Under
this method, deferred tax liabilities and assets are determined based on the
difference between financial statements and tax basis of assets and liabilities
using enacted tax rates in effect for the year in which the differences are
expected to reverse. Temporary differences between taxable income reported for
financial reporting purposes and income tax purposes are insignificant. A
management estimates that at December 31, 2008, the Company has available for
federal income tax purposes a net operating loss carry forward of approximately
$14,000,000, expiring in the year 2023, that may be used to offset future
taxable income. Due to significant changes in the Company’s ownership, the
future use of its existing net operating losses may be limited.




The
Company has provided a valuation reserve against the full amount of the net
operating loss benefit, since in the opinion of management based upon the
earnings history of the Company; it is more likely than not that the benefits
will not be realized.




Components
of deferred tax assets as of December 31, 2008 and 2007 are as follows: Non
current:




2008
                                
                                
                                2007Net
      operating loss carry forward
                                
                                $
                                3,500,000
                                
                                
                                $
                                3,500,000Valuation
      allowance
                                
                                
                                (3,500,000
                                )
                                
                                
                                (3,500,000
                                )Net
      deferred tax asset
                                
                                
                                —
                                
                                
                                
                                —




NOTE
K - LOSSES PER SHARE




The
following table presents the computation of basic and diluted losses per share
as of December 31 2008 and 2007, respectively:




2008
                            
                            
                            2007Income
      (loss) available for common shareholders
                            
                            $
                            2,732,822
                            
                            
                            $
                            27,940Basic
      income (loss) per share
                            
                            $
                            (0.02
                            )
                            
                            $
                            0.00Fully
      diluted income (loss) per share
                            
                            $
                            (0.02
                            )
                            
                            $
                            (14.00
                            )Weighted
      average common shares outstanding-basic
                            
                            
                            78,721,208
                            
                            
                            
                            45,107Weighted
      average common shares-fully diluted
                            
                            
                            1,585,415,038
                            
                            
                            
                            504,824




Net loss
per share is based upon the weighted average shares of common stock
outstanding.




NOTE
L - COMMITMENTS AND CONTINGENCIES




Employment
Agreements




The
Company has employment agreements with key employees. In addition to salary and
benefit provisions, the agreements include defined commitments should the
employees terminate the employment with or without cause.




NOTE
M- FAIR VALUE




SFAS No.
157 defines fair value as the price that would be received from selling an asset
or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. When determining the fair value
measurements for assets and liabilities required or permitted to be recorded at
fair value, the Company considers the principal or most advantageous market in
which it would transact and considers assumptions that market participants would
use when pricing the asset or liability, such as inherent risk, transfer
restrictions, and risk of nonperformance. SFAS No. 157 establishes a fair value
hierarchy that requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value. SFAS No. 157
establishes three levels of inputs that may be used to measure fair
value:




Level 1 -
Quoted prices in active markets for identical assets or
liabilities.




Level 2 -
Observable inputs other than Level 1 prices such as quoted prices for similar
assets or liabilities; quoted prices in markets with insufficient volume or
infrequent transactions (less active markets); or model-derived valuations in
which all significant inputs are observable or can be derived principally from
or corroborated by observable market data for substantially the full term of the
assets or liabilities.




Level 3 -
Unobservable inputs to the valuation methodology that are significant to the
measurement of fair value of assets or liabilities.




45




To the
extent that valuation is based on models or inputs that are less observable or
unobservable in the market, the determination of fair value requires more
judgment. In certain cases, the inputs used to measure fair value may fall into
different levels of the fair value hierarchy. In such cases, for disclosure
purposes, the level in the fair value hierarchy within which the fair value
measurement is disclosed is determined based on the lowest level input that is
significant to the fair value measurement.




Items
recorded or measured at fair value on a recurring basis in the accompanying
consolidated financial statements consisted of the following items as of
December 31, 2008:


Total
                
                
                Quoted
                  Prices
      in
                  Active
                  Markets
      for
                  Identical
                  Instruments
                  Level
      1
                
                
                Significant
                  Other
                  Observable
                  Inputs
                  Level
      2
                
                
                Significant
                  Unobservable
                  Inputs
                  Level
      3 (A)Assets:NoneLiabilities:Derivative
      Liability
                
                $
                (2,266,930
                )
                
                $
                —
                
                
                $
                
                
                
                $
                (2,266,930
                )Warrant
      Liability
                
                $
                (15
                )
                
                $
                —
                
                
                $
                —
                
                
                $
                (15
                )Total
                
                $
                (2,266,945
                )
                
                $
                —
                
                
                $
                —
                
                
                $
                (2,266,945
                )




(A) Fair
value is estimated based on internally-developed models or methodologies
utilizing significant inputs that are unobservable from objective
sources.




With the
exception of assets and liabilities included within the scope of FSP FAS No.
157-2, we adopted the provisions of SFAS No. 157 prospectively effective as of
the beginning of Fiscal 2008. For financial assets and liabilities included
within the scope of FSP FAS No. 157-2, The Company is required to adopt the
provisions of SFAS No. 157 prospectively as of the beginning of Fiscal 2009. The
adoption of SFAS No. 157 did not have a material impact on our financial
position or results of operations, and we do not believe that the adoption of
FSP FAS No. 157-2 will have a material impact on our financial position or
results of operations.




The table
below presents a reconciliation of the beginning and ending balances of our
derivative liability during the year ended December 31, 2008:


Derivative
      Liability:Balance,
      January 1, 2008
                      
                      $
                      2,118,173Net
      additions to derivative liability
                      
                      $
                      148,757Balance,
      December 31, 2008
                      
                      $
                      2,266,930




The table
below presents a reconciliation of the beginning and ending balances of our
warrant liability during the year ended December 31, 2008:


Warrant
      Liability:Balance,
      January 1, 2008
                              
                              $
                              55,336Reductions
      to warrant liability
                              
                              $
                              (55,321
                              )Balance,
      December 31, 2008
                              
                              $
                              15




During
the year ended December 31, 2008, the Company recognized a net unrealized gain
of $134,954 in connection with the change in the derivative and warrant
liability. The unrealized gain was credited to operations under the unrealized
gain (loss) on change in fair value of derivative and warrant liability included
in other income (expense).




NOTE
N – DISCONTINUED OPERATIONS




During
the fourth quarter 2008, KD Medical, Inc., Molecula, Inc., Molecularware, Inc.
and LifeStem, Inc., wholly owned subsidiaries of the Company, met all the
criteria of SFAS No. 144, “Accounting for the Impairment and Disposal of
Long-Lived Assets” to be classified as held for sale.




In
December 2008, the Company concluded the sale of the stock of KD Medical, Inc.,
Molecula, Inc., Molecularware, Inc. and LifeStem, Inc. to officers and majority
shareholders in exchange for 49,000,000 shares of the Company’s common stock,
5,000,000 shares of the Company’s preferred stock, net with a issuance of two
promissory notes payable in an aggregate amount of $150,000, due in monthly
installments over six months with interest of 6% per annum. The related gain on
the sale of $1,009,241 was recorded as an adjustment to equity due to the
related party transaction.


46




The net
assets (liabilities) sold were as follows:


December
      31,
                  2008
                
                
                December
      31,
                  2007Assets
      held for sale:Cash
                
                $
                3,854
                
                
                $
                20,605Accounts
      receivable, net
                
                
                125,345
                
                
                
                76,380Inventory
                
                
                238,611
                
                
                
                214,855Prepaid
      expenses
                
                
                18,274
                
                
                
                18,274Property,
      plant and equipment, net
                
                
                61,807
                
                
                
                88,858Total
      assets held for sale
                
                $
                447,891
                
                
                $
                418,972





December
      31,
                  2008
                
                
                December
      31,
                  2007Held
      for sale liabilities:Accounts
      payable and accrued expenses
                
                $
                452.379
                
                
                $
                216,639Accrued
      consulting fees
                
                
                753,510
                
                
                
                456,540Capital
      leases
                
                
                42,165
                
                
                
                65,531Notes
      payable
                
                
                111,579
                
                
                
                201,122Total
      held for sale liabilities
                
                $
                1,359,633
                
                
                $
                939,832




The
subsidiaries are classified as a discontinued operation in accordance with SFAS
No. 144. The Consolidated Statements of Operations for all prior periods have
been reclassified to reflect the discontinuance of operations. The operating
results of the subsidiaries for all periods are as follows:


December
      31,
                  2008
                
                
                December
      31,
                  2007Net
      sales
                
                $
                1,210,590
                
                
                $
                1,148,529Income
      (loss) before income taxes
                
                
                33,508
                
                
                
                723,550(Provision)
      for income taxes
                
                
                —
                
                
                
                —Discontinued
      operations, net of tax
                
                $
                33,508
                
                
                $
                723,550




NOTE
O - GOING CONCERN MATTERS




The
accompanying financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. As shown in the accompanying financial
statements for the years ended December 31, 2008 and 2007, the Company has
incurred operating losses of $1,151,842 and $989,612, respectively. In addition,
the Company has a deficiency in stockholder’s equity of $3,462,694 and
$3,980,966 at December 31, 2008 and 2007, respectively. These factors among
others may indicate that the Company will be unable to continue as a going
concern for a reasonable period of time.




The
Company’s existence is dependent upon management’s ability to develop profitable
operations. Management is devoting substantially all of its efforts to
establishing its business and there can be no assurance that the Company’s
efforts will be successful. However, the planned principal operations have not
fully commenced and no assurance can be given that management’s actions will
result in profitable operations or the resolution of its liquidity problems. The
accompanying statements do not include any adjustments that might result should
the Company be unable to continue as a going concern.




In order
to improve the Company’s liquidity, the Company is actively pursuing additional
equity financing through discussions with investment bankers and private
investors. There can be no assurance that the Company will be successful in its
efforts to secure additional equity financing.


47




EXHIBIT
INDEX


Exhibit
      No.
            
            Description2.1
            
            Articles
      of Incorporation*2.1.1
            
            Articles
      of Amendment to Articles of Incorporation, dated September 16,
      1998*2.1.2
            
            Articles
      of Amendment dated March 20, 2003*2.1.3
            
            Articles
      of Merger dated March 20, 2003 for redomicile *2.1.3.1
            
            Merger
      Agreement underlying Articles of Merger for redomicile
*2.1.4
            
            Articles
      of Merger dated March 20, 2003 for merger of subsidiary, CalbaTech, Inc.,
      into Parent, Traffic Technology, Inc. with name change to CalbaTech, Inc.
      post merger *2.1.4.1
            
            Merger
      Agreement underlying Articles of Merger for merger of Subsidiary and
      Parent and concurrent name change *2.2
            
            Bylaws
      of Traffic Technology, Inc., a Nevada Corporation *6.1
            
            Consulting
      Agreement with Pinnacle West Capital Corporation, dated May 30,
      2000*6.2
            
            Distributor
      Agreement with Layton Solar, dated April 3, 2000*6.2.1
            
            Amendment
      to Distributor Agreement with Layton Solar, dated August 24,
      2000*6.3
            
            Distributor
      Agreement with IMS Industries, dated March 17, 2000*6.4
            
            Distributor
      Agreement with Taiwan Signal Technologies Co., dated June 30,
      2000*6.5
            
            Distributor
      Agreements with Artflex, Sinalizacao and Viaria Ltd., dated August 7,
      2000*6.6
            
            Distributor
      Agreement with Supremetech Engineering Co. dated August 15,
      2000*6.7
            
            Consulting
      Service Agreement for LED Traffic Signal Technology Transfer and Licensing
      with JCI Group, Inc. (China), dated January 8, 2001*6.8
            
            LED
      Single Lens Traffic Signal Technology Transfer and Consulting Service
      Agreement with JCI Group, Inc. Japan), dated April 25,
    2001*6.9
            
            Form
      of Distributor Agreement (United States)*10.1
            
            Employment
      Agreement for James DeOlden *10.2
            
            Employment
      Agreement for Edward Deese *10.3
            
            Employment
      Agreement for John Gordon *10.4
            
            Employment
      Agreement for David Killen *10.5
            
            Asset
      Purchase Agreement (Zoval Enterprises) *10.6
            
            Agreement
      and Plan of Reorganization for the acquisition of Molecularware
      *10.7
            
            Agreement
      and Plan of Reorganization for the acquisition of Molecula
    *10.8
            
            Lease
      Agreement for KD Medical with Snowden First, LLC *23.1
            
            Consent
      of De Joya Griffith & Company, LLC (filed herein)24.1
            
            Power
      of Attorney (filed herein)31.1
            
            Rule
      13a-14(a)/15d-14(a) Certification of James DeOlden (filed
      herewith).31.2
            
            Rule
      13a-14(a)/15d-14(a) Certification of Edward Deese (filed
      herewith).32.
            
            Section
      1350 Certification of James DeOlden and Edward Deese (filed
      herewith).




*
Documents previously filed with the SEC




48