**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





———————


**FORM
      10-KSB**


———————





**x**
            **ANNUAL
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934**For
                the fiscal year ended: December 31, 2007o
            **TRANSITION
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934**For
                the transition period from: _____________ to
                _____________





———————





**SURFECT
      HOLDINGS, INC.**


(Name
      of
      small business issuer in its charter)





———————





**Delaware**
            **333-132597**
            **88-0513176**(State
                or Other Jurisdiction
            (Commission
            (I.R.S.
                Employerof
                Incorporation)
            File
                Number)
            Identification
                No.)




**1800
      W. Broadway Road, Tempe, Arizona 85282**


(Address
      of Principal Executive Office) (Zip Code)




**(480)
      968-2897**


(Registrant’s
      telephone number, including area code)




**N/A**


(Former
      name or former address, if changed since last report)


———————


**Securities
                registered pursuant to Section 12(b) of the Act:****Title
                of each class**
            
            **Name
                of each exchange on which registered**None**Securities
                registered pursuant to Section 12(g) of the Act:**None(Title
                of Class)


———————


Check
                whether the issuer (1) has filed all reports required to be filed
                by
                Section 13 or 15(d) of the Securities Exchange Act of 1934 during
                the past
                12 months (or for such shorter period that the registrant was required
                to
                file such reports), and(2)
                has been subject to such filing requirements for the past 90
                days.
            x
            Yes
            o
            NoCheck
                if there is no disclosure of delinquent filers in response to Item
                405 of
                Regulation S-B contained in this form, and no disclosure will be
                contained, to the best of registrant’s knowledge, in definitive proxy or
                information statements incorporated
                by reference in Part III of this Form 10-KSB or any amendment to
                this Form
                10-KSB.xIndicate
                by check mark whether the registrant is a shell company (as defined
                in
                Rule 12b-2 of the Act).
            o
            Yes
            x
            No









State
                issuer’s revenues for its most recent fiscal year.$0.00State
                the aggregate market value of the voting and non-voting common equity
                held
                by non-affiliates computed by reference to the price at which the
                common
                equity was sold, or the average bid and asked price of such common
                equity,
                as of a specified date within the past 60 days.
              
              The
                aggregate market value of the common stock held by non-affiliates
                of the
                registrant as of March 28, 2008 (based upon the last sales price
                as
                reported on the OTC Bulletin Board) was $6,958,507.Indicate
                the number of shares outstanding of each of the issuer’s classes of common
                stock, as of the latest practicable date.As
                of March 26, 2008, 121,545,809 shares of common stock of the registrant
                were outstanding.**ISSUERS
                INVOLVED IN BANKRUPTCY****PROCEEDINGS
                DURING THE PRECEDING FIVE YEARS:**Check
                whether the issuer has filed all documents and reports required to
                be
                filed by Section 12, 13 or 15(d) of theSecurities
                Exchange Act of 1934 after the distribution of securities under a
                plan
                confirmed by a court.
            o
            Yes
            x
            No**DOCUMENTS
                INCORPORATED BY REFERENCE**Transitional
                Small Business Disclosure Format (Check one):
            o
            Yes
            x
            No


















**INDEX**




**PART
                  I**Item
                  1.
              Description
                  of Business.
              1Item
                  2.
              Description
                  of Property.
              12Item
                  3.
              Legal
                  Proceedings.
              12Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders.
              12**PART
                  II**Item
                  5.
              Market
                  for Common Equity and Related Stockholder Matters and Small Business
                  IssuerPurchases
                  of Equity Securities.
              13Item
                  6.
              Managements’
                  Discussion and Analysis or Plan of Operation.
              14Item
                  7.
              Financial
                  Statements.
              F-1Item
                  8.
              Changes
                  in and Disagreements With Accountants on Accounting and Financial
                  Disclosure.
              29Item
                  8A.
              Controls
                  and Procedures.
              29Item
                  8B.
              Other
                  Information.
              29**PART
                  III**Item
                  9.
              Directors,
                  Executive Officers, Promoters, Control Persons and Corporate Governance;Compliance
                  With Section 16(a) of the Exchange Act.
              30Item
                  10.
              Executive
                  Compensation.
              32Item
                  11.
              Security
                  Ownership of Certain Beneficial Owners and Management andRelated
                  Stockholder Matters.
              37Item
                  12.
              Certain
                  Relationships and Related Transactions, and Director
                  Independence.
              39Item
                  13.
              Exhibits.
              40Item
                  14.
              Principal
                  Accounting Fees and Services.
              41SIGNATURES
              
              42




i





**PART
      I**




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




We
      are an
      early stage developer of automated electroplating tools for the semiconductor
      assembly and solar industries. Our tools are designed to deposit conductive
      metals on wafers through a proprietary electroplating process.





Our
      business is conducted through our wholly-owned subsidiary, Surfect Technologies,
      Inc., which was formed in December 26, 2000 to develop and commercialize
      patented automated electroplating deposition tools which apply proprietary
      combinatorial deposits on wafers through a unique process.




We
      believe our automated electroplating process is also suitable for the deposition
      of metal interconnect for silicon and wafer based solar cells. We announced
      development of Solargy, our solar tool, in July 2007 and currently intend to
      target the growing equipment market for metallization of solar cell wafers
      with
      this tool in 2008. Utilizing similar process and tool technology developed
      for
      semiconductor wafer deposition, we plan to develop high speed and low cost
      processes enabling cost effective and automated solar cell manufacturing. We
      performed initial customer testing and evaluations during 2007 which we plan
      to
      expand during 2008, as part of our solar initiative.




Electroplating
      involves the coating of an electrically conductive object with a layer of metal
      using electrical current. Usually, the process is used to deposit an adherent
      surface layer of a metal having a desired property (generally conductivity
      in
      the semiconductor industry) onto a substrate lacking that property.




Wire
      bonding is the most common way to make the electrical interconnections between
      a
      microchip and the component it serves. Its operation resembles that of a sewing
      machine combined with a soldering iron. A capillary (“needle”) feeds a wire
      which is melted at the tip. When the metal solidifies it forms a ball at the
      end
      of the needle. The needle attaches this ball to the microchip. A length of
      wire
      is fed through the needle to create a connection (an “interconnect”) between the
      microchip and the location it needs to be wired to the substrate. A second
      ball
      is then created which holds the wire in place on the substrate. This process
      repeats several times per second. Wire bonding, although cost effective, is
      limited due to the bond having to occur along the edge of the microchip to
      avoid
      wire overlap and potential electrical shorting.




Electroplating
      technology is one of the primary methods used to apply solder “bumps” to
      semiconductor wafers which are designed to extend interconnection capabilities
      beyond existing wire-bonding technology. In addition to electroplating and
      wire
      bonding, solder bumps may be formed or placed on wafers through evaporation,
      printing, and pre-formed solder sphere placement. In the electroplating process,
      a layer of photoresist, a chemical that hardens when exposed to light (generally
      ultraviolet) is applied to the wafer. A photomask is then applied to selectively
      choose which part of the wafer is exposed to the light. Once “exposed,” the
      unhardened photoresist can be removed from the surface of the wafer using
      chemicals. The hardened photoresist leaves patterns (trenches or dips) that
      can
      then be filled with conductive metals. Once the electroplating process is
      complete, the remaining photoresist is chemically stripped so that only the
      metal deposition, or “bumps”, remains.




Electroplating
      and evaporation are generally used to form copper and other hard metal bumps
      with low defect levels. As opposed to wire-bonding, electroplating and similar
      methods allow the entire surface of a chip (the “die”) to be populated with
      bumps that are subsequently interconnected to a substrate for the highest
      possible input/output (I/O) counts (conductivity) in order to meet the demand
      for electrical functionality in integrated circuit (IC) technology. Although
      traditional gold and aluminum wire bond continues to dominate IC interconnects
      in terms of absolute numbers, “flip chip” technology (which consists of the
      face-down soldering of IC devices to chip carriers) is gaining wider acceptance
      due primarily to the improvements afforded by such technology in electrical
      performance, functionality and reliability, particularly for consumer
      electronics. For example, in a standard personal computer a processor chip
      constantly feeds data back and forth to a monolithic memory chip located
      somewhere on the motherboard. By connecting the memory chip directly to the
      processor in a “flip chip” arrangement, the distance the data has to travel is
      dramatically reduced increasing performance and reducing degradation of the
      data.




1




Electroplating
      technology is also used to pattern interconnect lines on solar cells creating
      frontside or backside rows of metal interconnect which connect the various
      solar
      cell elements and enable interconnection to the solar module itself. Our solar
      cell tool development leverages the same team and outsourcing partners used
      for
      the semiconductor wafer bumping and metallization.




We
      have
      focused our product development efforts towards a compact single-cell
      multi-metal plating tool which we believe offers the following advantages over
      large multi-cell systems currently on the market.




·
            our
                compact plating computer enables multi-metal deposition in a continuous
                and repeatable manner;





·
            replaces
                the cell-to-cell and tank-to-tank wafer transfer reducing opportunity
                for
                contamination and damage;





·
            enables
                improved metrology (analysis of the metal deposition process) and
                plating
                operation through real-time monitoring and process control facilitated
                by
                the single process chamber;·
            reduces
                the need for robotic handling; and





·
            our
                “plating computer” approach allows us to embed our knowledge of chemistry
                and plating process within the software itself, thereby reducing
                the need
                for “plating experts” on the customer’s production
                line.




By
      integrating process knowledge into the underlying tool software, product
      recipes, and incorporating ‘plug and plate’ sealed chemistry tanks, we reduce
      the potential difficulty of introducing and supporting flip chip bumping
      technology in production.




Utilizing
      a single wafer, closed process cell design, eliminates the need to move the
      wafer through various plating chemistries which reduces the need for robotics
      and thereby lowers machine cost and space required on the production floor.
      This
      single cell approach reduces the likelihood of damage by minimizing wafer
      handling and enables a wide range of various composition of leaded and lead-free
      solders to be applied and/or developed.




We
      believe that our ability to embed metrology and chemistry management as well
      as
      provide upgradeable process recipes will help establish a means of continual
      customer development activity and revenue through both tool sales and process
      upgrades.





2




**Our
      History**




We
      were
      originally incorporated on November 8, 2001 as a Nevada corporation under the
      name Windy Creek Developments, Inc., and subsequently reincorporated in Delaware
      on September 14, 2006. Surfect Technologies was incorporated on December 26,
      2000, as a New Mexico corporation, and subsequently reincorporated in Delaware
      on April 4, 2006. On September 27, 2006, Surfect Technologies merged with our
      wholly-owned subsidiary, resulting in Surfect Technologies being 100% owned
      by
      us (the “Merger”). We did not have any operations before September 27,
      2006.




**Industry
      Overview and Background**




We
      believe that current demands in the electronics component fabrication and
      semiconductor assembly and solar industries for alternative materials and
      application processes are driven by major initiatives, including:




·
            European
                Union and Japanese mandates requiring lead-free
                manufacturing;





·
            Industry
                conversion from wire bonding to “flip chip” bumping technology for all
                packaging interconnect. “Flip
                chip” refers to an electronic component or semiconductor device that can
                be mounted directly onto a substrate, board, or carrier in a “face-down”
                manner. Electrical connection is achieved through conductive bumps
                built
                on the surface of the chips, which is why the mounting process is
                “face-down” in nature. During mounting, the chip is flipped on the
                substrate, board, or carrier, (hence the name “flip-chip”), with the bumps
                being precisely positioned on their target locations. Because flip
                chips
                do not require wirebonds, their size is much smaller than their
                conventional counterparts.




·
            Transition
                to wafer-scale manufacturing (packaging an IC directly at wafer level,
                instead of the traditional process of assembling the package of each
                individual unit after wafer dicing), chip-scale packaging (CSP) and
                multi-chip or 3-D packaging strategies (a specialized electronic
                package
                where multiple ICs, semiconductor dies or other modules are stacked
                to
                facilitate their use as a single integrated IC). CSP
                is a type of integrated circuit chip carrier that has no pins or
                wires but uses contact pads instead. To be considered a CSP, a package
                must have an area no greater than 1.2 times that of the die packaged.
                The
                die may be mounted on an interposer upon which pads or balls are
                formed,
                as in ball grid array (BGA) packaging and flip chip BGA packaging,
                or the
                pads may be etched or printed directly onto the silicon wafer, resulting
                in a package very close to the size of the silicon die. Such a package
                is
                called a wafer level chip scale package or a wafer level
                package.




·
            Transition
                to copper based metallization on solar cells to replace or supplement
                traditional silver paste metallization providing higher power capability
                as well as more cost effective metallization. Solar cell manufacturers
                transitioning from metal lines and contacts on the front of the solar
                cell
                to placement of these interconnects on the backside of the wafer
                enabling
                more sunlight to interact with the cell and increase the power
                capability.




We
      believe that the adoption of electroplating for placing bumps on wafers and
      wafer level CSP packaging will increase significantly over the next five to
      ten
      years as a result of semiconductor companies facing increasing demands for
      miniaturization and improved thermal and electrical performance in semiconductor
      devices and solar cell companies facing increasing cost pressures and demand
      for
      increased efficiency in their solar cells and module devices.




3






**Growth
      Strategy**




**We
      have certain working relationships.** We have
      certain working relationships with national research laboratories as well as
      universities under contracted service arrangements. We are working to include
      novel high conductivity nano-particles in our proprietary materials product
      line
      and are exploring possible licensing arrangements with leading research
      laboratories in this area. To date, no formal licensing agreements have been
      consummated, however, Louisiana Tech is conducting testing for us on a time
      and
      materials basis, and Sandia National Laboratory has provided us limited
      characterization and optical testing services in exchange for plating services.
      Income received by us for such plating services and payments made to such
      institutions for testing services have been minimal. There can be no assurance
      that any of our working relationships will ever develop into formal licensing,
      development or other agreements.




**Volume-based,
      outsourced manufacturing and scalable business model.** Because
      our technology is developed around two key hardware platforms that are highly
      scalable and built using large volume industry outsourcing partners, we believe
      that we can accommodate large-scale volume ramp ups with only modest additional
      capital expenditures and marketing costs. We currently have two hardware
      platforms which will serve three market segments - IC wafer bumping, flip chip
      substrate manufacturing, and solar cell plating. ****




**Sales
      and Marketing**




Our
      target markets are international and domestic semiconductor manufacturers,
      product development groups, fabless companies, and merchant interconnect and
      packaging suppliers. We intend to use domestic and international-based trade
      groups such as Semi, SEIA, industry trade publications (semiconductor,
      equipment, packaging), select technology publications, international
      semiconductor (ECS, IEEE, IMAPS, ASME, Meptec) and solar energy associations
      and
      local trade shows to target these markets.




We
      believe that top-tier producers and manufacturers of electronics and
      communications devices will be the first to adopt next generation wafer-scale
      packaging and assembly processes, and will ultimately set the standards for
      such
      processes. Our targeted strategy may include:




·
            Attracting
                top-tier producers and manufacturers as initial joint development
                and Beta
                tool partners as first adopters of our technology
                suite;





·
            Partnering
                with well established, multi-national chemical manufacturers and
                suppliers
                to provide primary distribution and immediate market presence and
                global-service credibility;





·
            Partnering
                with a well-established Asian sales representative with high level
                management contacts and reputation for strong support and compatible
                supporting technology;




4





·
            Partnering
                with national laboratories and universities to tap emerging technology
                and
                expert process evaluation assistance;
                and





·
            Partnering
                with well-established, multi-national photo-resist suppliers to jointly
                test industry leading flip chip material capability in our
                tools.




Our
      target market for electrodeposition tools and materials is made up of the
      following four segments:




·
            Flip
                Chip wafer bumping





·
            Wafer
                Scale CSP Packaging





·
            High
                Density Laminate Flip Chip
                Substrates





·
            Solar
                Cell plating and thru-wafer via
                interconnections




In
      November 2006, we concluded our first sale of an electroless “Rio” tool to C.
      Uyemura & Co., Ltd. in Japan at a price of $220,000 pursuant to a purchase
      order. In connection with the sale, we provided a warranty for parts and labor
      and telephone support for one year.




In
      November 2007, we received conditional purchase orders for two tools for
      placement with US-based customers. The first tool shipped during first quarter
      2008; the second is scheduled to ship within the next two months. Such sales
      are
      subject to such customers’ testing and acceptance of the tools. In November
      2007, we entered into a letter of intent with a US-based solar company for
      up to
      10 Solargy tools, subject to such customer obtaining funding to purchase the
      tools, terms of a definitive purchase order, and testing and acceptance by
      such
      customer. There can be no assurances that such placements or letter of intent
      will result in sales of our tools.




**Products
      and Services**




Our
      technology seeks to provide the resolution and lower cost typically associated
      with conventional electroplating while providing a high degree of process
      control and eliminating the barrier to lead-free binary and ternary alloys
      associated with plating. By combining our specialized plating tools,
      combinatorial material compounds and process technologies, we seek to provide
      metal combinations and deposition rates close to solder stencil printing without
      pitch and density limitations.




While
      the
      trend toward miniaturization and advanced packaging continues, we believe our
      tools, materials and wafer-scale processes will enable device engineers to
      breakthrough performance limits set by current packaging techniques. Our
      technologies are compatible with most existing fabrication processes and
      procedures, easing adoption of such technologies.




We
      believe our plating tools will provide an improvement in uptime and utilization
      facilitated by a simpler design and rapid chemistry change for multi-metal
      systems with less opportunity for product handling damage or contamination
      and a
      reduction in chemistry cost as a result of layered alloy creation technology
      rather than the more traditional pre-mixed alloy chemistries.




5








**The
      Tools, Process, and Materials**









We
      have
      developed two hardware-plating technologies and subsequent tool platforms to
      support specific device and wafer-scale fabrication and assembly in a ‘Back End
      Of Line’ (BEOL) environment. Each tool provides users with a controlled
      production platform.




Our
      electrolytic plating tools utilize our proprietary WaveCell technology as
      discussed below:







**Name**
            **Description**
            **Notes**Ascent
            Independent
                Device Manufacturers (IDM) Bump Engine for focused applications and
                R&D tool that allows IDMs to test new chemistries.
            Prospects
                have called the tool the “Desktop Plater”Leapfrog
            300/200mm
                fully automated production tool
            Comparable
                in functionality to traditional 6 cell dipping tools while eliminating
                robotics and aimed at decreasing likelihood of
                contaminationSolargy
            300/200/150/100mm
                Bump Engine tailored to produce a cost effective solar cell interconnect
                on backside
            New
                product development aimed at rapidly growing solar concentrators
                and
                wafers for alternative power industryFuture
                ProductsPromise
            300/200/150mm
                Bump Engine for silicon fuel cell applications
            New
                product development for silicon fuel cell plating and interconnect
                targeted at Toshiba/others




The **WAVeCELL Technology** is a
      patented wafer-level plating technology with a number of unique technical
      features fundamentally distinguishing it from traditional wafer-level plating
      technologies. Unlike other commercial wafer-level plating tools, the **WAVeCELL Technology** utilizes
      a single wafer closed cell with a primarily horizontal plating operation. This
      enables progressive multiple metal deposition and allows gases produced at
      the
      wafer surface during plating to be continually swept away rather than be
      retained on the wafer surface as they are with other cup style or flood plater
      cells. Gasses forming at the wafer surface can interfere with the deposition
      of
      metal during the plating process. In the **WAVeCELL Technology** , the
      plating electrolyte flows across the wafer surface in a laminar flow improving
      agitation which increases diffusion layer ion exchange and plating rates. The
      combination of continual gas deposit removal, tight electrolyte volume control
      and close wafer-to-anode tolerance control permits a significant degree of
      control over the plating deposit.




6




The **WAVeCELL Technology** enables
      the deposition of finer grained plating layers than can be achieved by
      traditional wafer printing tools. Finer metal grains in the plating deposit
      enable higher plating pattern resolution on wafers and help ensure that the
      proper homogeneous plating alloy stoichiometry is present on even the smallest
      wafer features. The **WAVeCELL Technology** is
      capable of depositing layered compositions and alloys with tight composition
      control and consistency as well as increased uniformity over the newer large
      300mm wafers due to improved zones of agitation that are adjustable, in an
      effort to ensure reliable and complete reflow temperature for all wafer solder
      deposit features.




Our
      Electroless Plating Tool utilizes our proprietary PaveCell
      technology:




**Name**
            **Description**
            **Notes**Rio
            Tool
                specialized for electroless nickel immersion gold (ENiG)
                process
            Developed
                for major chemical companies who are seeking new applications for
                ENiG
                process




The ***PaveCell Technology*** is a
      dedicated single-substrate processing cell designed for high precision high
      tolerance autocatalytic (electroless) metal plating deposition. Utilization
      of
      electroless processing of wafers in the ***PaveCell Technology*** allows
      the deposition of features without requiring that they be electrically bussed
      together (joined together into an electrical circuit). Utilizing cell
      pressurization and anodic protection to control electroless plating rate in
      the ***PaveCell Technology*** allows
      deposition rate, deposit uniformity and deposit finish to be optimized,
      concurrently.




Because
      electroless plating results from chemical reaction rather than electrical
      bussing, conventional electroless process chemistries are indiscriminate in
      depositing plating, not only onto the desired substrate areas, but also onto
      the
      walls of the plating hoses, plating tank and anywhere else the electroless
      plating solution contacts. Plating chemistry manufacturers presently attempt
      to
      manage this difficulty by incorporating organic inhibitors into the plating
      bath
      which retard the activity of the chemistry sufficiently so that the deposition
      can be largely, but not completely, limited to those areas intended for plating.
      This chemical inhibition may cause the plating bath to be less than optimally
      efficient, and the organic additives to co-deposit alongside the plating metal
      which may impair the quality of the plating deposit. The ***PaveCell Technology*** is
      constructed in such a manner as to allow it to be maintained at any desired
      electrical potential relative to the cell body, thus allowing for highly
      accurate and targeted plating. By pressurizing the plating solution, gas bubble
      formation on the wafer surface is suppressed during the plating cycle, which
      has
      a significant slowing effect on the activity of the plating chemistry, and
      allows the electroless plating rate kinetics to be regulated directly without
      requiring the incorporation of organic rate inhibitors.





7




**Process
      Technologies**




In
      addition to the enhancement in process efficiencies which may be realized by
      the
      use of the ***WAVeCELL*** and ***PaveCell Technology*** for
      conventional electrolytic and electroless plating processes, the full value
      of
      the ***WAVeCELL*** technology may be realized when used as a component of the ***StrataPlate*** or ***AggrePlate*** process.




·
            The***StrataPlate***process involves layering of various multi-solder alloys by sequential
                electrochemical deposition of the individual alloy constituent elements,
                including Pb-free combinatorial metals in a single oxide-free cell
                and
                reduces excess wafer handling and the need for multiple deposition
                tools
                and steps. The metals comprising the finished plating lamination
                stack are
                deposited with a high degree of individual mass control. The thickness
                and
                sequence of the constituent metal plating layers are chosen so as
                to
                create the desired solder alloy upon thermal cycling of the plating
                layer
                lamination stack.










**Figure
                1: Au / Sn before reflow**
            **Figure
                2: Au / Sn after reflow**




·
            The**AggrePlate**process is a developmental multi-element co-deposition process that
                provides the same composition of the StratoPlate Process in a
                single-deposit step using the same WaveCell Electroplating
                technology.




·
            The***AggrePlate***process involves co-depositing nano, micro metal or other particles
                along
                with standard metal plating. This process enables the creation of
                higher
                conductivity (thermal and electrical) and controlled stand-off
                compositions. Copper bumps and interconnect is rapidly gaining favor
                for
                high performance applications due to its improved performance over
                tin/lead bumps. The AggrePlate process enables deposition of low
                stress
                and high performance copper interconnect using coated particles that
                reduce electro-migration issues and increase
                conductivity.




**Proprietary
      Materials:**




·
            Surflo:
                micro or nano-encapsulated powders that are coated providing enhanced
                characteristics and are targets for use with our deposition tools
                for
                competitive process advantages. We believe this nascent technology
                provides a higher value path to cost reduction and process control
                for
                both electroplating and solder stencil printing of metal features
                at all
                levels of electronic assembly. Surflo-micro-encapsulation allows
                all of
                the combined elements required for solders to be co-deposited on
                the
                surface of a carrier particle for one-step delivery to the substrate
                surface when used in the AggrePlate
                process.




8




**Research
      and Product Development**




Our
      product development team is located in Tempe, Arizona and consists of industry
      veterans and technical experts who work closely with our prospect’s
      representatives and industry research groups to create internal development
      roadmaps. Our team focuses on technology required for initial tool and process
      and technology developments required to be competitive and to ensure that our
      products will meet emerging requirements. Our proximity to national laboratories
      such as Sandia National, Los Alamos National Laboratories and ASU Photovoltaic
      Testing Laboratory enables interaction with some of the leading chemical,
      nano-material, solar and fuel cell technology experts and testing
      facilities.




Our
      initial research and development efforts are based on modifying or improving
      the
      properties of currently available solder powder metals and positioning our
      materials as drop-in replacements for existing materials or assembly processes.
      We believe this will allow for a rapid development curve based on a solid
      engineering approach. Our technical staff will directly engage with a
      prospective customer’s engineers to determine the most viable and cost-effective
      plan to supplant an existing qualified process. We currently plan to use minimal
      resources for development of micro-composition materials, which is largely
      driven by customer applications. Our initial research efforts will be to develop
      Surflo low temperature solder materials for use in level-one assembly material
      and wafer bumping applications. We also may investigate copper based metal
      features such as microvia and blind via for expedient process technologies.
      We
      believe that our relationship with outsourcing companies provide us the ability
      to rapidly prototype machine and device concepts.




**Competition**




Based
      upon our market analysis, we believe that our competitors comprise the following
      categories:




·
            Robotic
                Ball Placement





·
            Paste
                and Stencil Plating





·
            Traditional
                Electroplating Tool Suppliers





·
            Serially
                placed wire bond stud bumping tools





·
            Substitutes
                and new technologies such as jetting
                technology




Competitive
      semiconductor electroplating tool suppliers are shown in the table
      below.




**Company**
            **Tool
                Offerings****SemiTool,
                Inc.**
            **Wet
                processing tools, Cup Bump plating tools, ECD copper
                tool****Electroplating
                Engineers of Japan, Ltd.**
            **Cup
                electroplaters for alloy bumps and copper
                damascene****C.
                Uyemura & Co., Ltd.**
            **Conventional
                rack process and wafer-boat for Electroless****EBARA
                Corporation**
            **Cup
                electroplaters for alloy bumps and copper
                damascene****Technics,
                Inc.**
            **Cup
                and bench with rack electroplaters****Hitachi
                Engineering & Services, Co., Inc.**
            **Vertical
                paddle electroplater****NEXX
                Systems, Inc.**
            **Vertical
                batch electroplating cell**






9




Older
      bumping technologies that utilize both robotic ball placement and stenciling
      technologies can compete with typical electroplating technologies more cost
      effectively given the higher cost of competitive electroplating in lower end
      applications.




For
      most
      higher value processors or application specific integrated circuit die and
      analog die, electrochemical deposition (ECD) technologies are an effective
      method to meet the lower defect levels while maintaining cost
      effectiveness.




ECD
      is a
      technique used to deposit thin films of various materials onto various surfaces
      (e.g., semiconductor wafers) by an electromechanical means. Variants of ECD
      include:




·
            ECD
                Damascene





·
            Multi-cell
                (traditional) electroplating;





·
            Single-cell
                electroplating - including Electroless (or chemical reactive)
                plating.




ECD
      technologies (including electroplating) may better address newer devices with
      bump pitches less than 200um. Older processes may not be capable of the quality
      and low defect levels required for high performance devices and may not be
      capable of the repeatability required by newer technologies.




For
      our
      solar products, we compete against large open tank and rack systems, such as
      those sold by Schmid, Technic and Pal, which are larger in size and more
      expensive than our Solargy plating tool.




**Intellectual
      Property**




We
      have
      sought U.S. and international patent protection of key technologies used in
      our
      business as follows:





Patent
                Description
            
            Issued
            
            Status“Sub-micron
                & Nano Size Particle Encapsulation by Electrochemical Process and
                Apparatus”
            
            2005
            
            U.S.
                Patent 6,942,765“Electrodeposition
                Apparatus and Method using Magnetic Assistance and Rotary Cathode
                for
                Ferrous and Magnetic Particles”
            
            2005
            
            U.S.
                Patent 6,890,412“Metal
                Hydride Composite Materials”
            
            2004
            
            U.S.
                Patent 6,824,667
              Patent
                Pending
              EU




10




“Coated
                and Magnetic Particles and Applications Thereof”
            
            Filed
                2003
            
            Patent
                Pending
              Japan“Apparatus
                and Method for Highly Controlled Electrodeposition”
            
            Filed
                2004
            
            Patent
                Pending
              U.S.“Plating
                Apparatus and Method”
            
            Filed
                2005
            
            Patent
                Pending
              Japan,
                Canada, Malaysia
              and
                Taiwan“Method
                and Apparatus for Aligning MEMS and Photonics Devices”
            
            Filed
                2005
            
            Patent
                Pending
              U.S.“Composite
                Magnetic Particles and Foils”
            
            Filed
                2005
            
            Patent
                Pending
              U.S.“Dynamic
                Profile Anode”
            
            Filed
                2005
            
            Patent
                Pending
              Japan,
                Canada“Electrode
                Chemical Control System and Method”
            
            Filed
                2006
            
            Patent
                Pending
              U.S.“Submicron
                and Nano Size Particle Encapsulation by Electrochemical Process and
                Apparatus”
            
            Filed
                2005
            
            Patent
                Pending
              Japan




To
      protect our trade secrets, we plan to provide certain of our controlled process
      intellectual property as part of a tool transaction while continuing to develop
      additional process applications to exploit the tool intellectual
      property.




We
      have
      the registered trademark for Surfect®.




Our
      employees are parties to nondisclosure of proprietary information, innovation,
      confidentiality and non-compete agreements.




We
      may in
      the future pursue the licensing of certain technologies from laboratories,
      such
      as Sandia and Los Alamos National Laboratories, or other
      institutions.




**Customer
      Relationship Management**




We
      currently anticipate that each sales region will require its own local technical
      support. We anticipate utilizing local manufacturers and support representatives
      to help sell and support our equipment and processes. Customer support in the
      Tempe, Arizona corporate office will support customers in the United States
      and
      provide a platform for the management and facilitation of international customer
      support teams. Support will be available primarily through our internal sales
      team during the early product development and roll-out phase of our development
      which will be supplemented with internal technical product support as well
      as
      local support in Korea, Taiwan, Singapore, and China through a sales
      representative network. Our online support includes web access, including
      Frequently Asked Questions (FAQ’s) on a custom portal, on-line help in each
      product, email support requests posted on the customer portal, and by telephone.
      We use salesforce.com® software
      via web
      interface to provide high quality yet low cost customer development management.
      Engineers in the United States create on-line training materials and tutorials,
      and work with international contacts to translate those materials.




11




Our
      focus
      is to respond to customers’ needs for technology which we believe will enable us
      to implement cost effective rapid flip chip capacity growth and to introduce
      lead-free flip chip bumps as quickly as possible. Our strategy and technology
      approach are focused on providing market penetration with large customers
      experienced in flip chip technology and willing to share reliability data.
      Our
      initial prospects will act as beta customers providing critical feedback on
      process and tool operation as well as incorporating their specific requirements
      and metrology inputs. Our process team will provide process demonstration wafers
      which are characterized by the customer’s process, and reliability engineers
      followed by additional wafers run on a beta tool installed in the customer’s
      facility. We believe that customer characterizations will result in valuable
      feedback and references. Currently our marketing activities are focused on
      securing orders from leading US independent device manufacturers (IDM) and
      merchant outsourcing providers supporting key foundries. Bumped wafers
      demonstrating process capability have been provided to these initial prospects
      and beta orders are currently anticipated in the first quarter of
      2008.




**Employees**




As
      of
      March 24, 2008, we had five full-time employees. Our employees are not
      represented by a union or collective bargaining entity and our management
      considers relations with employees to be good.





**Regulation**




We
      are
      subject to regulation by numerous federal, state and local regulatory agencies,
      including the United States Department of Transportation, which regulates
      shipments of chemicals and the importation of hazardous materials, and the
      United States Department of Commerce which regulates the import and export
      of
      technological products, and similar state and local agencies. Compliance with
      these laws has not had and is not anticipated to have a material effect on
      our
      business.





**Item
                2.**
            **Description
                of Propert****y.**




Effective
      April 1, 2007, we entered into a two-year lease for approximately 5,250 square
      feet of production and sales space in Tempe, Arizona for approximately $5,400
      per month, including fees and taxes. This facility houses our executive offices,
      certain administrative operations, engineering, and certain product development
      operations. We believe that our present facilities are adequate to meet our
      immediate current needs and that comparable facilities are readily available
      in
      the markets in which we desire to operate.




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




There
      are
      no pending, and we are not aware of any threatened, legal proceedings against
      us.




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




In
      December 2007, holders of a majority of outstanding common stock (53.9%) acting
      by written consent authorized an amendment to our Certificate of Incorporation
      to increase the number of authorized shares of our common stock, par value
      $0.0001 per share from 40,000,000 to 500,000,000 shares.




12





**PART
      II**




**Item
                5.**
            **Market
                for Common Equity and Related Stockholder Matters and Small Business
                Issuer Purchases of Equity
                Securities.**




Our
      common stock has been quoted on the OTC Bulletin Board since October 6, 2006
      under the symbol “SUFH.OB”. Prior to that date, there was no active market for
      our common stock. As of March 7, 2008, there were approximately 81 holders
      of record of our common stock.




The
      following table sets forth the high and low bid prices for our common stock
      for
      the periods indicated as reported by the OTC Bulletin Board. These quotations
      reflect inter-dealer prices, without retail mark-up, mark-down, or commission
      and may not represent actual transactions.




**High**
            
            **Low**Fiscal
                2006Fourth
                Quarter (beginning October 6, 2006)
            
            $
            2.50
            
            $
            1.81Fiscal
                2007First
                Quarter
            
            $
            2.25
            
            $
            0.90Second
                Quarter
            
            $
            1.20
            
            $
            0.79Third
                Quarter
            
            $
            1.04
            
            $
            0.55Fourth
                Quarter
            
            $
            0.83
            
            $
            0.10Fiscal
                2008First
                Quarter (through March 7, 2008)
            
            $
            0.38
            
            $
            0.11




**Dividends**




We
      have
      not declared or paid any cash dividends on our common stock and do not
      anticipate declaring or paying any cash dividends in the foreseeable future.
      We
      currently expect to retain future earnings, if any, for the development of
      our
      business. Dividends may be paid on our common stock only if and when declared
      by
      our board of directors.




13




**Equity
      Compensation Plan Information**




**Plan
                Category**
            
            **Number
                of securities to be issued upon exercise of outstanding options,
                warrants
                and rights**
              **(a)**
            
            **Weighted**
              **average**
              **exercise**
              **price
                of outstanding options, warrants and rights**
              **(b)**
            
            **Number
                of securities remaining available for future issuance under equity
                compensation plans (excluding securities reflected in column
                (a))**
              **(c)**Equity
                compensation plans approved by security holders(1)
            
            
            1,315,452
            
            $
            0.75
            
            
            184,548Equity
                compensation plans not approved by security holders(2)
            
            
            1,180,308
            
            $
            0.30
            
            
            -Total
            
            
            2,495,760
            
            
            
            
            
            184,548


_________________


(1)
            Issued
                under the 2006 Stock Plan.


(2)
            Represents
                options held by certain of our management resulting from the conversion
                of
                previously held options to purchase shares of common stock of Surfect
                Technologies in connection with the Merger. (See “Other Options” and Note
                12 to our December 31, 2007 financial
                statements.)




**Recent
      Sales of Unregistered Securities**




Not
      Applicable




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




*The
      following discussion of our plan of operation should be read in conjunction
      with
      our financial statements and notes thereto appearing elsewhere in this
      document.*




Certain
      statements in “Management’s Discussion and Analysis or Plan of Operation” are
      forward-looking statements that involve risks and uncertainties. Words such
      as
      may, will, should, would, anticipates, expects, intends, plans, believes, seeks,
      estimates and similar expressions identify such forward-looking statements.
      Readers are cautioned not to place undue reliance on these forward-looking
      statements, which reflect management’s analysis only as of the date hereof. We
      assume no obligation to update these forward-looking statements to reflect
      actual results or changes in factors or assumptions affecting forward-looking
      statements.





**Overview**




We
      are an
      early stage developer of automated electroplating tools for the semiconductor
      assembly and solar industries. Our tools are designed to deposit conductive
      metals on wafers through a proprietary electroplating process.





Since
      the
      Merger on September 27, 2006, our business has been conducted through Surfect
      Technologies. That corporation’s efforts have been primarily focused on research
      and development with its first sale occurring in 2006. We did not have any
      sales
      in 2007 but expect to complete a number of sales in 2008. Our efforts are
      focused on the semiconductor and solar industries. With the importance of
      alternative energy in Europe and Asia, we are devoting considerable attention
      to those market, particularly Germany and Korea, which have a
      growing solar manufacturing business.




**Critical
      Accounting Policies and Estimates**




In
      accordance with SEC guidance, those material accounting policies that we believe
      are the most critical to an understanding of our financial results and condition
      are discussed below. Certain of these policies require the application of
      significant judgment by our management to determine the appropriate assumptions
      to be used in the determination of certain estimates.




14




**Share-Based
      Compensation -** We
      have
      granted stock options to our employees at exercise prices equal to or greater
      than the fair value of the shares at the date of grant and, prior to January
      1,
      2006, accounted for these stock option grants in accordance with APB Bulletin
      No. 25, “Accounting for Stock-Based Compensation” or APB 25. Under APB 25, when
      stock options are issued with an exercise price equal to or greater than the
      market price of the underlying stock on the date of grant, no compensation
      expense is recognized in the statement of operations. APB is no longer effective
      as of January 1, 2006.





Under
      Statement of Financial Accounting Standards No. 123, “Share-Based Payment”
(revised 2004) or Statement 123(R), which was effective as of January 1, 2006,
      we now recognize an expense for the fair value of our outstanding stock options
      as they vest, whether held by employees or others. Under Statement 123(R),
      we
      must determine the transition method to be used at the date of adoption, the
      appropriate fair value model to be used for valuing stock-based payments and
      the
      amortization method for compensation cost. The transition methods include
      prospective, retroactive and modified prospective adoption options. We are
      utilizing the modified prospective method and the impact has been calculated
      and
      incorporated in our consolidated financial statements.





We
      estimate the fair value of each stock option at the grant date by using the
      Black-Scholes option pricing model based upon certain assumptions which are
      contained in Note 2 to our Audited Consolidated Financial Statements contained
      in this Report. The Black-Scholes model requires the input of highly subjective
      assumptions including the expected stock price volatility. Because our stock
      options and warrants have characteristics different from those of traded
      options, and because changes in the subjective input of assumptions can
      materially affect the fair value estimate, in our management’s opinion, the
      existing models do not necessarily provide a reliable single measure of the
      fair
      value of such stock options.





**Inventory
      Impairment -** Inventories are carried at the lower of first-in, first-out (FIFO) cost or
      net
      realizable value. We review the Company’s inventories to identify items with
      cost in excess of estimated net realizable value and record an impairment
      allowance when we identify such excess costs. It is reasonably possible that
      our
      estimates of net realizable values could be revised again in the near term
      due
      to technological and other changes.




**Results
      of Operations**





***Year
      Ended December 31, 2007 Compared to the Year Ended December 31,
      2006***




*Revenues*





We
      generated no revenue in 2007 compared to $220,939 in 2006 when we initiated
      our
      sales effort.





*Cost
      of Revenues*





Our
      cost
      of revenue in 2007 was $234,439 representing a Finished Goods Inventory
      impairment of $278,628 and the reversal of a Warranty Reserve of $44,189 which
      was recovered when the warranty period on the Rio electroless tool which was
      sold in 2006 elapsed without claim.





Our
      cost
      of revenue in 2006 was $110,734 which related to the costs associated with
      our
      Rio Electroless tool sale.





*Expenses*




15





Our
      expenses in 2007 increased to $4,658,095 from $3,068,006 for 2006. The primary
      increases were general administrative expenses which increased to $1,740,422
      from $852,480 in 2006. Additionally, our interest charges were $855,736 in
      2007
      in contrast to only $10,772 in 2006. This increase was predominantly a non-cash
      expense resulting from 660,000 and 144,000 shares of our common stock given
      at
      $0.94 and $0.95 respectively in payment to our Bridge Loan investors as a term
      of the $1,800,000 Bridge Loan that was completed in June and July
      2007.





*Net
      Loss*





Our
      net
      loss in 2007 was $4,845,398 compared to $2,950,114 in 2006 principally due
      to
      the increased expenses described above.







**Liquidity
      and Capital Resources**





Net
      cash
      used in operating activities in 2007 was $3,986,984 compared to $3,036,895
      for
      2006. The year to year increase in net cash used in operating activities is
      primarily caused by the increased expenses discussed above.





Net
      cash
      used in investing activities was $126,534 in 2007 in contrast to $53,774 in
      2006.





Net
      cash
      provided by financing activities was reduced to $2,142,564 in 2007 in contrast
      to $5,073,845 provided in 2006. The change resulted from the fact that we raised
      less money in 2007.





We
      have
      funded our operations through sales of equity and debt securities. On January
      11, 2008 and January 16, 2008, we accepted subscriptions from accredited
      investors in a private offering for an aggregate of (i) 35,750,000 and
      9,875,000 shares of common stock, respectively, and (ii) five-year warrants
      to
      purchase an aggregate of 35,750,000 and 9,875,000 shares of common stock,
      respectively, at an exercise price of $0.08 per share, for which we received
      gross proceeds of $1,430,000 and $395,000, respectively. These funds included
      $765,000 received through December 31, 2007.




This
      equity funding also included issuing 1,530,859 of common stock in exchange
      for
      the remaining $50,000 of Bridge Notes outstanding which converted to 1,530,859
      shares of common stock at $0.04 per share and 1,291,625 warrants to purchase
      shares of common stock at $0.08 per share, as well as $140,000 of Short Term
      Notes which were converted into 7,000,000 shares of common stock at $0.02 per
      share and 7,000,000 warrants to purchase shares at $0.08.




As
      of the
      date of this Report, we have approximately $471,500 in available cash (excluding
      $525,000 which is escrowed for worldwide Investor Relations activities) and
      $317,094 of working capital. We anticipate that we have sufficient cash
      resources to last through May 2008. Our management is presently focused on
      raising additional capital from investors or an industry partner. We cannot
      assure you that we will be successful in this regard.




If
      we are
      able to obtain additional equity or debt financing, it may be dilutive and
      may
      not be obtained on favorable terms. Our future capital requirements may differ
      materially from those currently anticipated and will depend on many factors,
      including, but not limited to, market acceptance of our products, volume pricing
      concessions, capital improvements, demand for our products, technological
      advances and our relationships with suppliers and prospective customers.




16




**Forward-Looking
      Statements**




The
      statements in this Report relating to tool design, development outsourcing
      and
      placements, revenue generation, financing activities and market penetration
      are
      forward-looking statements within the meaning of the Private Securities
      Litigation Reform Act of 1995. Additionally, words such as “expects,”
“anticipates,” “intends,” “believes,” “will” and similar words are used to
      identify forward-looking statements.




The
      results anticipated by any or all of these forward-looking statements might
      not
      occur. Important factors, uncertainties and risks that may cause actual results
      to differ materially from these forward-looking statements are contained in
      the
      Risk Factors which follow. We undertake no obligation to publicly update or
      revise any forward-looking statements, whether as the result of new information,
      future events or otherwise. For more information regarding some of the ongoing
      risks and uncertainties of our business, see the Risk Factors and our other
      filings with the Securities and Exchange Commission.








**RISK
      FACTORS**




There
      are
      numerous and varied risks, known and unknown, that may prevent us from achieving
      our goals. You should carefully consider the risks described below and the
      other
      information included in this Report, including our financial statements and
      related notes. Our business, financial condition and results of operations
      could
      be harmed by any of the following risks. If any of the events or circumstances
      described below were to occur, our business, financial condition and results
      of
      operations could be materially adversely affected. As a result, the trading
      price of our common stock could decline, and investors could lose part or all
      of
      their investment.




**Risks
      Related to Our Company and Business**




**Our
      ability to continue as a going concern is in substantial doubt absent obtaining
      adequate new debt or equity financing and achieving sufficient sales
      levels.**




Our
      auditors have included an “uncertainty paragraph” in their audit report on our
      financial statements for the period ended December 31, 2007 regarding our
      ability to continue as a going concern. Our ability to continue as a going
      concern is subject to our ability to realize a profit and/or obtain funding
      from
      outside sources. Our plan to address our ability to continue as a going concern,
      includes obtaining additional funding from the sale of securities and
      establishing revenue by commercializing one or more products. Although we
      believe that we will be able to obtain the necessary funding to allow us to
      remain a going concern through these methods, there can be no assurances that
      such methods will prove successful.





**Because
      our products are highly specialized and it is difficult to estimate the size
      of
      the available market for our products, our products may not achieve market
      acceptance.**




Our
      products are highly specialized and primarily have applications in
      high-performance semiconductor wafer bumping and solar wafer packaging
      applications. It is difficult to estimate with certainty the total market size
      for our products and there can be no assurances that our products will achieve
      market acceptance or generate significant revenues.




**Because
      we are in an early stage of development and have a limited operating history,
      we
      cannot assure you that we will generate significant revenue or become
      profitable.**




17




We
      are in
      the early stage of development, have had limited revenue related to our core
      operations and have only a limited operating history on which to base an
      evaluation of our business and prospects. Since inception, we have generated
      limited revenue from the provision of miscellaneous consulting and plating
      services which we have recorded in our financial statements as other income.
      On
      November 28, 2006, we recorded our first revenue from tool sales of
      approximately $221,000. For the fiscal year ended December 31, 2007 we
      experienced losses of $4.8 million on a consolidated basis and reported no
      revenue. As of December 31, 2007 and 2006, our accumulated deficit was
      approximately $12.5 million and $7.7 million, respectively. In addition, we
      expect to continue incurring operating losses for the foreseeable future. Our
      ability to generate significant revenue and achieve profitability depends on
      our
      ability to complete the development of and manufacture, market and sell our
      technology. We may not succeed given the technological, marketing, strategic
      and
      competitive challenges we will face. The likelihood of our success must be
      considered in light of the expenses, difficulties, complications, problems,
      delays and inherent risks frequently encountered in connection with the growth
      of a new business, the continuing development of new technology, and the
      competitive environment in which we operate. Such risks include acceptance
      by
      users in an evolving and unpredictable business environment, the lack of a
      well
      developed brand identity and the difficulty of bringing our product to market
      on
      a timely basis.




**Our
      revenue is highly dependent on the semiconductor and solar industries which
      are
      subject to fluctuations.**




We
      anticipate that most of our revenue will be derived from semiconductor and
      solar
      companies and outsourcing merchant providers and other suppliers in the
      semiconductor and solar industries. We may also decide to expand beyond the
      semiconductor and solar markets to high density PCB substrate and solar cell
      markets if and when such markets grow but we are currently exclusively dependent
      in the short term on semiconductor and solar industry fluctuations. Our revenue
      if any may increase and decrease with the level of equipment purchases and
      wafer
      bump conversion activity and is therefore subject to declines in or disruptions
      to purchasing or qualification buy-offs in both the semiconductor and solar
      industries. Our revenue may be adversely affected as product demand and customer
      volume requirements vary as a result of:





·
            Economic
                downturns and recessions;





·
            Global
                security issues, political instability, acts of terrorism, hostilities
                and
                war;





·
            Seasonal
                customer assembly fluctuations that may be aimed at building inventory
                to
                support the increased demand during the Christmas season or for major
                new
                product launches;





·
            Increased
                customer competitiveness reducing the number of customers and capacity
                requirements;·
            Inclement
                weather and earthquakes, which could devastate parts of  Southeast
                Asia and could prevent access to customer locations and
                factories;





·
            Shifts
                in product design that could disrupt current technology conversion
                paths;





·
            Economic
                and political issues in the Asia, European, Latin America and emerging
                markets; and





·
            The
                financial condition of merchant providers and smaller semiconductor
                and
                solar customers.




The
      possibility of further supply disruptions, availability of key material sources,
      integrated circuit (IC) demand, product design changes, and financial
      instability in emerging markets may adversely affect the markets for our
      products. Companies may reduce their planned capacity requirements, making
      fewer
      unit sales available to us. The financial instability of smaller semiconductor
      companies or a prolonged substantial decrease in semiconductor booking volumes
      could have an adverse impact on our business and operations. High demand versus
      limited supply of silicon could slow our growth in solar business.




18




**Initially
      we expect to depend on a relatively small number of
      customers.**




We
      expect
      our sales to be concentrated among relatively few customers. The loss of any
      significant customer or any reduction in orders by a significant customer may
      have a material adverse effect on our revenue.




**We
      encounter risks and difficulties frequently experienced in rapidly evolving
      industries such as the semiconductor and solar industries.**




We
      may
      face risks related to our ability to **:**




·
            Attract
                and retain customers on a cost-effective
                basis;





·
            Expand
                and enhance our product offerings;





·
            Operate,
                support, expand and develop our operations, our websites, our software
                and
                our  communications and other
                systems;





·
            Diversify
                our sources of revenue, including by entering into agreements that
                may
                reflect  changes to our business
                model;





·
            Maintain
                and develop our existing brands and distribution channels, as well
                as to
                make cost-effective expenditures in connection with these
                initiatives;





·
            Manage
                our relationships with important manufacturers and other industry
                 participants; and





·
            Respond
                to competitive market conditions.




If
      we are
      unsuccessful in addressing these risks or in executing our business strategy,
      we
      may not be profitable.





**We
      face competition from established and emerging semiconductor capital equipment
      manufacturers, which could divert prospective customers to our
      competitors.**




We
      currently compete in the wafer bumping tools and packaging markets. Some
      equipment companies not traditionally serving our market could enter our market,
      causing reduced revenues and sales opportunities. We expect existing competitors
      and new entrants to the wafer bumping business to increase and to constantly
      revise and improve their business models. Many of these entities have
      significantly greater research and development capabilities and budgets than
      we
      do, as well as substantially more marketing, manufacturing, financial and
      managerial resources. These entities represent significant competition for
      us.
      Acquisitions of, or investments in, competing companies by large corporations
      could increase potential competitors’ resources. Since our resources are
      limited, we may not be able to compete with these larger
      competitors.




19




**We
      are dependent on the continued operation of qualified manufacturing outsourcing
      capacities.**




We
      currently intend to outsource all of our manufacturing activities to facilities
      located in the United States and Asia. While we have not as yet identified
      all
      such manufacturing facilities, we believe there are sufficient manufacturing
      facilities available to us for the foreseeable future. We may not be able to
      continue to find qualified manufacturers on acceptable terms and, even if we
      do
      there can be no assurance that product quality will continue to be acceptable.
      These facilities may be subject to disruption for a variety of reasons,
      including work stoppages, fire, energy shortages, flooding or other natural
      disasters. We cannot ensure that alternative production capacity would be
      available if a major disruption were to occur or that, if it were available,
      it
      could be obtained on favorable terms. Such a disruption could negatively impact
      our ability to operate our business.





**Consolidation
      in the high technology capital equipment industry and increased competition
      may
      result in increased expenses, lost bookings and reduced
      revenue.**




We
      compete to attract and retain the largest most advanced flip chip and solar
      panel and solar module companies as prospective customers. Consolidation of
      customers may result in decreased equipment demand and increased competition.
      In
      order to compete effectively, we may need to increase incentives, pre-pay
      incentives, increase spending on marketing or product development, or make
      significant investments to purchase strategic assets. In addition, consolidation
      among process equipment manufacturers, such as mergers and alliances, may
      increase competition from their distribution channels or give them additional
      leverage to negotiate lower booking charges.




**Our
      success depends on maintaining the integrity and upgrading the quality of our
      systems and infrastructure.**




If
      our
      operations grow in both size and scope, we will continuously need to improve
      and
      upgrade our systems and infrastructure to offer an increasing number of
      customers enhanced products, services, features and functionality, while
      maintaining the reliability and integrity of our systems and infrastructure.
      The
      expansion of our systems and infrastructure will require us to commit
      substantial financial, operational and technical resources before the volume
      of
      business increases, with no assurance that the volume of business will increase.
      Fabless companies, merchant providers, large IC and solar panel and module
      manufacturers will not tolerate a service hampered by slow equipment delivery
      and lead times, unreliable service levels and production outages due to
      installation delays, or insufficient technical support and process capability,
      any of which could negatively affect our business.




**If
      we do not continue to innovate and provide products and services that are useful
      to users, we may not remain competitive, and our revenue and operating results
      could suffer.**




Our
      future success depends on providing products and services that are accepted
      by
      semiconductor and solar panel and module manufacturers. Our competitors are
      constantly developing innovations. If wafer bumping industry participants
      introduce changes or developments that we cannot meet in a timely or
      cost-effective manner, our business may be adversely affected. As a result,
      we
      must continue to invest significant resources in research and development in
      order to enhance our technology and existing products and services.
      Additionally, we will have to consistently introduce new high-quality products
      and services that industry participants can easily and effectively use. If
      we
      are unable to provide prospective customers with high quality and
      technologically efficient products, then such customers may become dissatisfied
      and move to competitors’ products. Moreover, if we are unable to predict user
      preferences or industry changes, or if we are unable to modify our products
      and
      services on a timely basis, we may lose users.




20




**Our
      ability to compete effectively will depend, in part, on our ability to maintain
      the proprietary nature of our technology.**




Although
      we seek to protect our technology through, among other avenues, U.S. and foreign
      patent protection, there can be no assurance that the patents which may be
      obtained and the patent applications filed by us are sufficient to protect
      our
      technology or that any patent will not be held invalid, circumvented, or
      infringed by others. In addition, we rely to a significant extent on proprietary
      know-how. We cannot ensure that others will not independently develop superior
      know-how to that which we now consider proprietary.




We
      have
      received three patents and filed six additional patent applications with the
      U.S. Patent and Trademark Office and have filed patent applications in Europe,
      Japan, Taiwan, Malaysia and Canada. In addition, we have registered our
      trademark SURFECT® and will apply to register new trademarks as they arise.
      Litigation may be necessary to enforce patents issued to us, to protect trade
      secrets or know-how owned by us, or to determine the enforceability, scope,
      and
      validity of the proprietary rights of others. Enforcing or defending our rights
      is expensive, could cause diversion of our resources, and may not prove
      successful. Any failure to enforce or protect our rights could cause us to
      lose
      the ability to exclude others from using our technology to develop or sell
      competing products.







**We
      may face litigation from third parties that claim our products infringe on
      their
      intellectual property rights.**




We
      may be
      exposed to future litigation by third parties based on claims that our
      technologies, products, or activities infringe the intellectual property rights
      of others or that we have the trade secrets of others. Presently, we have not
      engaged in discussions, received any communications, nor do we currently have
      any reason to believe that any third party is challenging or has the proper
      legal authority to challenge our intellectual property rights. However, any
      litigation or claims against us, whether or not valid, could result in
      substantial costs, could place a significant strain on our financial and
      managerial resources, and could harm our reputation. If we enter into license
      agreements for our intellectual property, most of those license agreements
      would
      likely require that we pay the costs associated with defending this type of
      litigation. In addition, intellectual property litigation or claims could force
      us to cease selling, incorporating or using any of our technologies and/or
      products that incorporate the challenged intellectual property, which would
      adversely affect our future revenue; obtain a license from the holder of the
      infringed intellectual property right, which license may be costly or may not
      be
      available on reasonable terms, if at all; or redesign our products, which would
      be costly and time consuming.




**Doing
      business internationally poses special risks.**




We
      intend
      to conduct a large portion of our business internationally which requires
      management attention and special resources. We currently are focused on initial
      customer penetration in the Asia and European markets which represents the
      largest markets for our tools and processes outside of the United States. We
      will face a number of risks associated with international operations,
      including:




·
            currency
                fluctuations;





·
            challenges
                caused by distance, language and cultural
                differences;





·
            longer
                payment cycles in some countries;





·
            credit
                risk and higher levels of payment
                fraud;




21





·
            legal
                and regulatory restrictions;





·
            foreign
                exchange controls that might prevent us from repatriating cash earned
                in
                countries  outside the United
                States;





·
            political
                and economic instability and export
                restrictions;





·
            potentially
                adverse tax consequences; and





·
            higher
                costs associated with doing business
                internationally.




In
      addition, agreements may be difficult to enforce and receivables difficult
      to
      collect through a foreign country’s legal system. These and other risks could
      harm our international business efforts, which would adversely affect our
      business prospects and operating results. If we are unable to manage
      successfully the risks inherent in international activities, our international
      business operations could suffer.




**We
      depend upon key personnel who may terminate their employment with us at any
      time, and we will need to hire additional qualified personnel who may be
      unavailable due to the necessity of unique skills and
      resources.**




Our
      success will depend to a significant degree upon the continued services of
      key
      management, including Steven Anderson, our Chief Executive Officer. We have
      purchased “key man” life insurance for Mr. Anderson in the amount of $3,000,000.
      However, this insurance may not adequately compensate for the loss of Mr.
      Anderson’s services. Management and other employees may voluntarily terminate
      their employment at any time, since we do not have employment agreements with
      any of our employees. Our success will also depend on the ability to attract
      and
      retain highly skilled personnel. Competition for qualified personnel is intense,
      and the process of hiring and integrating such qualified personnel is often
      lengthy. We may be unable to recruit such personnel on a timely basis, if at
      all. The loss of the services of key personnel, or the inability to attract
      and
      retain additional highly qualified personnel, could adversely affect our
      business and damage our business prospects.




**We
      require significant additional funding which we may have difficulty raising
      because of our limited operating history and business risks associated with
      our
      company.**




We
      currently do not generate significant revenue, and we have sufficient cash
      resources to last through May 2008. We cannot assure you that we will be able
      to
      raise the necessary working capital. We do not know when, or if, this will
      change. We have expended substantial funds in research and development as well
      as administrative efforts and will continue to expend substantial funds in
      manufacturing, research and development and for general operations. We will
      require substantial additional funds to gear up operations if and when our
      products are accepted into the market, and to provide for the marketing and
      distribution of our products. Additional funds may not be available on
      acceptable terms, if at all. If adequate funds are unavailable or are not
      available on terms deemed acceptable by management, we may have to delay, reduce
      the scope of or eliminate one or more of our research or development programs
      or
      product or marketing efforts. Our long term capital requirements are expected
      to
      depend on many factors, including:




·
            the
                number of potential products and technologies in
                development;






22





·
            continued
                progress and cost of our research and development
                programs;





·
            costs
                involved in preparing, filing, prosecuting, maintaining and enforcing
                patent claims;





·
            costs
                of developing sales, marketing and distribution channels and our
                ability
                to sell our products;





·
            competing
                technological and market
                developments;





·
            market
                acceptance of our products; and





·
            costs
                for recruiting and retaining management, employees, and
                consultants.




We
      may
      consume available resources more rapidly than currently anticipated, resulting
      in the need for additional funding. We may seek to raise additional funds
      through the exercise of warrants, equity or debt financings, collaborative
      arrangements with corporate partners, or other sources. Any equity financing
      may
      be dilutive to existing stockholders and debt financing, if available, may
      involve restrictive covenants that would limit how we conduct our business
      or
      finance our operations, or otherwise have a material effect on our current
      or
      future business prospects. In addition, in the event that additional funds
      are
      obtained through arrangements with collaborative partners or other sources,
      we
      may have to relinquish economic and/or proprietary rights to some of our
      technologies or products under development that we would otherwise seek to
      develop or commercialize by ourselves. If adequate funds are not available,
      we
      may be required to significantly reduce, refocus, or delay our development
      efforts with our technology and products.




**Since
      we may be dependent on collaborative arrangements for the development of our
      technologies and business, we may be exposed to the risk of reliance on the
      viability of third parties.**




In
      conducting our research and development activities, we may in the future rely
      upon collaborative arrangements with universities, laboratories and corporate
      partners. The loss of or failure to perform under any of these arrangements,
      by
      any of these entities, may substantially disrupt or delay our research and
      development activities.




**Due
      to our limited marketing, sales, and distribution experience, we may be
      unsuccessful in our efforts to sell our products, enter into relationships
      with
      third parties, or develop a sales organization.**




We
      may
      enter into agreements with third parties to sell our products or we may develop
      our own sales and marketing force. We may be unable to establish or maintain
      third party relationships on a commercially reasonable basis, if at all. In
      addition, these third parties may have similar or more established relationships
      with our competitors.




If
      we do
      not enter into relationships with third parties for the sales and marketing
      of
      our products, we will need to develop our own sales and marketing capabilities.
      We have limited experience in developing, training, or managing a sales force.
      If we choose to establish a direct sales force, we may incur substantial
      additional expenses in developing, training, and managing such an organization.
      We may be unable to build a sales force on a cost effective basis or at all.
      Any
      such direct marketing and sales efforts may prove to be unsuccessful. In
      addition, our marketing and sales efforts may be unable to compete with many
      other companies that currently have extensive marketing and sales operations.
      We
      may be unable to establish a sufficient sales and marketing organization on
      a
      timely basis, if at all, and may be unable to engage qualified distributors.
      Even if engaged, these distributors may:




23






·
            fail
                to satisfy financial or contractual obligations to
                us;





·
            fail
                to adequately market our products;





·
            cease
                operations with little or no notice;
                or





·
            offer,
                design, manufacture, or promote competing
                products.




If
      we
      fail to develop sales, marketing, and distribution channels, we would experience
      delays in product sales and incur increased costs, which would harm our
      financial results.




**We
      are exposed to product liability risks, which could place a substantial
      financial burden upon us should we be sued, because we currently have limited
      product liability insurance above and beyond our general insurance
      coverage.**




Our
      business exposes us to potential product liability and other liability risks
      that are inherent in the testing, manufacturing and marketing of our products.
      We cannot assure that such potential claims will not be asserted against us.
      A
      successful liability claim or series of claims brought against us could consume
      our resources and harm our reputation and business.




We
      currently have limited product liability insurance, and do not have other
      liability insurance relating to any products that could cover all of the
      liability or damage that could occur as a result of our activities. We cannot
      assure that we will be able to maintain adequate product liability insurance
      on
      acceptable terms, if at all, or that such insurance will provide adequate
      coverage against our potential liabilities. Furthermore, our current and
      potential partners with whom we may collaborate or our future licensees may
      not
      be willing to indemnify us against liabilities and may not themselves be
      sufficiently insured or have a net worth sufficient to satisfy any product
      liability claims. Claims or losses in excess of our product liability insurance
      coverage could have a material adverse effect on our business.




**Our
      suppliers may encounter financial hardships unrelated to our demand for
      components, which could inhibit their ability to fulfill our orders and meet
      their requirements.**




Any
      interruption or delay in the supply of components or materials, or our inability
      to obtain components or materials from alternate sources at acceptable prices
      in
      a timely manner, could impair our ability to meet the demand of our customers
      and cause them to cancel orders or switch to competitive
      procedures.




To
      mitigate the risk of supply interruptions from a sole-source supplier, we may
      determine to maintain excess inventory of the products or components they
      supply. Managing our inventory levels is important to our cash position and
      results of operations. An excessive amount of inventory reduces our cash
      available for operations and may result in excess or obsolete materials.
      Inadequate inventory levels may make it difficult for us to meet customer
      product demand, resulting in decreased revenues. An inability to forecast future
      revenues or estimated life cycles of products may result in inventory-related
      charges that would negatively affect our gross margins and results of
      operations.




**Our
      business may incur substantial expense to comply with environmental laws and
      regulations.**




24




We
      may
      incur substantial costs to comply with environmental laws and regulations.
      In
      addition, we may discover currently unknown environmental problems or
      conditions. We are subject to extensive federal, state, provincial and local
      environmental laws and regulations which govern the discharge, emission,
      storage, handling and disposal of a variety of substances that may be used
      in,
      or result from, our operations. Environmental laws or regulations (or their
      interpretation) may become more stringent in the future.




**Instability
      in emerging markets may adversely affect the semiconductor and/or solar
      equipment markets.**




Supply
      disruptions, availability of key material sources, IC demand, product design
      changes and financial instability in emerging markets may adversely affect
      the
      semiconductor equipment market. Companies may reduce their planned capacity
      requirements, making fewer unit sales available to us. The financial instability
      of smaller semiconductor companies or a prolonged substantial decrease in
      semiconductor booking volumes could have an adverse impact on our financial
      performance, operations, liquidity and capital resources.




Reductions
      in governmental subsidies for alternative energy generation and shortages of
      silicon in the solar supply chain could significantly reduce demand for
      photovoltaic cell production, resulting in delays or elimination of capital
      equipment purchases to support this market.




**Risks
      Relating to Our Common Stock**




**Our
      stock price may be volatile, which could result in substantial losses for
      investors.**




The
      market price of our common stock is likely to be highly volatile and could
      fluctuate widely in price in response to various factors, many of which are
      beyond our control, including the following:




·
            technological
                innovations or new products and services by us or our
                competitors;





·
            intellectual
                property disputes;





·
            additions
                or departures of key personnel;





·
            our
                ability to execute our business
                plan;





·
            operating
                results that fall below
                expectations;





·
            loss
                of any strategic relationship;





·
            regulatory
                or industry developments;





·
            economic
                and other external factors; and





·
            period-to-period
                fluctuations in our financial
                results.




In
      addition, the securities markets have from time to time experienced significant
      price and volume fluctuations that are unrelated to the operating performance
      of
      particular companies. These market fluctuations may also materially and
      adversely affect the market price of our common stock.




25




**Our
      principal stockholders, executive officers and directors together beneficially
      own a substantial number of shares of common stock, which gives them substantial
      control over certain major decisions on which our stockholders may vote and
      which may discourage an acquisition of our company.**




Our
      executive officers, directors and principal stockholders beneficially own,
      in
      the aggregate, 65.79% of our outstanding common stock. Accordingly, such persons
      will have the ability to determine the direction and decisions of our company.
      Additionally, the executive officers and directors may have even greater control
      in the event that they exercise any of the options which have been or may be
      granted to them under our employee incentive plan or if they otherwise acquire
      additional shares of our common stock.




The
      interests of our current executive officers, directors and principal
      stockholders may differ from the interests of other stockholders. As a result,
      these current executive officers, directors and principal stockholders will
      have
      significant influence over all corporate actions requiring stockholder approval,
      irrespective of how our other stockholders may vote, including in connection
      with the following actions:




·
            the
                election of directors;





·
            the
                amendment of charter documents;





·
            the
                issuance of blank check preferred or convertible stock, notes or
                instruments of indebtedness, which may have conversion, liquidation
                and
                similar features and other financing arrangements;
                or





·
            the
                approval of certain mergers and other significant corporate transactions,
                including a sale of substantially all of our
                assets.




**Because
      the market for our common stock is limited, persons who purchase our common
      stock may not be able to resell their shares at or above the purchase price
      paid
      by them.**




Our
      common stock trades on the Over-the-Counter Bulletin Board which is not a liquid
      market. There is currently only a limited public market for our common stock.
      We
      cannot assure you that an active public market for our common stock will develop
      or be sustained in the future. If an active market for our common stock does
      not
      develop or is not sustained, the price may continue to decline.




**Our
      common stock may be considered “a penny stock,” which would make it more
      difficult for our investors to sell their shares.**




The
      SEC
      has adopted regulations that generally define “penny stock” to be an equity
      security that has a market price of less than $5.00 per share, subject to
      specific exemptions. The market price of the Company’s common stock is currently
      less than $5.00 per share and therefore may be a “penny stock” according to SEC
      rules. This designation requires any broker or dealer selling these securities
      to disclose certain information concerning the transaction, obtain a written
      agreement from the purchaser and determine that the purchaser is reasonably
      suitable to purchase the securities. These rules may restrict the ability of
      brokers or dealers to sell common stock and may affect the ability of investors
      to sell their shares. In addition, since the common stock is traded on the
      OTC
      Bulletin Board, investors may find it difficult to obtain accurate quotations
      of
      the stock and may experience a lack of buyers to purchase such stock or a lack
      of market makers to support the stock price.




26




**We
      have raised substantial amounts of capital in private placements and if we
      inadvertently failed to comply with the applicable securities laws, ensuing
      rescission rights or lawsuits would severely damage our financial
      position.**




The
      securities offered in our private placements were not registered under the
      Securities Act or any state “blue sky” law in reliance upon exemptions from such
      registration requirements. Such exemptions are highly technical in nature and
      if
      we inadvertently failed to comply with the requirements or any of such exemptive
      provisions, investors would have the right to rescind their purchase of our
      securities or sue for damages. If one or more investors were to successfully
      seek such rescission or prevail in any such suit, we would face severe financial
      demands that could materially and adversely affect our financial position.
      Financings that may be available to us under current market conditions
      frequently involve sales at prices below the prices at which our common stock
      currently is reported on the OTC Bulletin Board or exchange on which our common
      stock may in the future be listed, as well as the issuance of warrants or
      convertible securities at a discount to market price.




**Offers
      or availability for sale of a substantial number of shares of our common stock
      may cause the price of our common stock to decline.**




If
      our
      stockholders sell substantial amounts of our common stock in the public market,
      upon the expiration of any statutory holding period, under Rule 144, or upon
      expiration of lock-up periods applicable to outstanding shares, or issued upon
      the exercise of outstanding options or warrants, such events could create a
      circumstance commonly referred to as an “overhang” and in anticipation of which
      the market price of our common stock could fall. The existence of an overhang,
      whether or not sales have occurred or are occurring, also could make our ability
      to raise additional financing through the sale of equity or equity-related
      securities in the future at a time and price that we deem reasonable or
      appropriate more difficult.




**The
      issuance of common stock upon the exercise of our outstanding warrants may
      result in substantial dilution of the stockholders.**




There
      are
      currently 113,998,083 shares of common stock issuable upon exercise of our
      outstanding warrants. The issuance of common stock upon conversion of the
      warrants will result in immediate and substantial dilution to the interests
      of
      other stockholders.




**Our
      certificate of incorporation authorizes our board to create new series of
      preferred stock without further approval by our stockholders, which could
      adversely affect the rights of the holders of our common
      stock.**




Our
      board
      of directors has the authority to fix and determine the relative rights and
      preferences of preferred stock. Our board of directors also has the authority
      to
      issue preferred stock without further stockholder approval. As a result, our
      board of directors could authorize the issuance of a series of preferred stock
      that, among other things, would grant to holders the preferred right to our
      assets upon liquidation, the right to receive dividend payments before dividends
      are distributed to the holders of common stock and the right to the redemption
      of the shares, together with a premium, prior to the redemption of our common
      stock. In addition our board of directors could authorize the issuance of a
      series of preferred stock that has greater voting power than our common stock
      or
      that is convertible into our common stock, which could decrease the relative
      voting power of our common stock or result in dilution to our existing
      stockholders.




27




**Delaware
      law and our charter contain provisions that could discourage or prevent a
      potential takeover, even if such transaction would be beneficial to our
      stockholders.**




Provisions
      of Delaware law and our certificate of incorporation and bylaws could make
      more
      difficult the acquisition of us or for our stockholders to remove existing
      management, and may discourage a third party from offering to acquire us, even
      if a change in control or in management would be beneficial to our
      stockholders.




**Our
      compliance with the Sarbanes-Oxley Act and SEC rules concerning internal
      controls may be time consuming, difficult and costly.**




As
      a
      public reporting company we are subject to the information and reporting
      requirements of the Securities Exchange Act of 1934, as amended (“Exchange Act”)
      and other federal securities laws, including compliance with the Sarbanes-Oxley
      Act. It may be time consuming, difficult and costly for us to develop and
      implement the internal controls and reporting procedures required by the
      Sarbanes-Oxley Act, when applicable to us. We may need to recruit, hire, train
      and retain additional financial reporting, internal controls and other personnel
      in order to develop and implement appropriate internal controls and reporting
      procedures. If we are unable to comply with the internal controls requirements
      of the Sarbanes-Oxley Act in a timely and effective fashion, our ability to
      comply with our financial reporting requirements and other rules that apply
      to
      reporting companies could be impaired. Any failure to maintain effective
      internal controls could have a negative impact on our ability to manage our
      business and on our stock price.





28




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


Report
        of
        Independent Registered Public Accounting Firm
  Board
        of
        Directors and Stockholders
 Surfect
        Holdings, Inc.
  We
        have
        audited the accompanying consolidated balance sheets of Surfect Holdings,
        Inc.
        and subsidiary (Surfect) (a development stage company) as of December 31,
        2007
        and 2006, and the related consolidated statements of operations, stockholders’
equity and cash flows for the years ended December 31, 2007, 2006, and 2005,
        and
        for the period from inception (December 26, 2000) through December 31, 2007.
        These financial statements are the responsibility of Surfect’s management. Our
        responsibility is to express an opinion on these financial statements based
        on
        our audits.
  We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audits to obtain reasonable assurance about whether the
        financial statements are free of material misstatement. Surfect is not required
        to have, nor were we engaged to perform, an audit of its internal control
        over
        financial reporting. Our audits included consideration of internal control
        over
        financial reporting as a basis for designing audit procedures that are
        appropriate in the circumstances, but not for the purpose of expressing an
        opinion on the effectiveness of Surfect’s internal control over financial
        reporting. Accordingly, we express no such opinion. An audit also includes
        examining, on a test basis, evidence supporting the amounts and disclosures
        in
        the financial statements, assessing the accounting principles used and
        significant estimates made by management, as well as evaluating the overall
        financial statement presentation. We believe our audits provide a reasonable
        basis for our opinion.
  In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the financial position of Surfect Holdings, Inc.
        and
        subsidiary as of December 31, 2007 and 2006, and the results of their operations
        and their cash flows for the years ended December 31, 2007, 2006, and 2005,
        and
        for the period from inception through December 31, 2007, in conformity with
        accounting principles generally accepted in the United State of
        America.
  The
        accompanying financial statements have been prepared assuming that Surfect
        will
        continue as a going concern. As discussed in Note 10, in the accompanying
        financial statements, Surfect has incurred net losses since its inception
        and
        net losses have continued to the date of these financial statements. During
        2007, Surfect received equity funding to meet its short-term working capital
        needs; however, Surfect remains in the development stage and its ability
        to
        continue as a going concern is initially dependent on its ability to raise
        adequate capital to fund necessary market entry activities and subsequently
        on
        sufficient inflow of operating revenue derived from sale of its products
        at
        sufficient profit margin to cover operating expenses. The financial statements
        do not include any adjustments that might result from the outcome of this
        uncertainty.
  /s/
        REDW
        LLC
  Albuquerque,
        New Mexico
 March
        26,
        2008
  F–1
  **Surfect
        Holdings, Inc. and Subsidiary**
 **(a
        development stage company)**
 **Consolidated
        Balance Sheets**
 **December
        31,**
 
 **2007**
              
              **2006****Assets****Current
                  assets**Cash
                  and cash equivalents
              
              $
              12,373
              
              $
              1,983,326Cash
                  escrowed in advance of equity financing
              
              
              765,000
              
              
              -Inventory
              
              
              373,366
              
              
              359,984Prepaid
                  expenses and other assets
              
              
              121,123
              
              
              130,295**Total
                  current assets**
              
              
              1,271,862
              
              
              2,473,605**Fixed
                  assets**Furniture
                  and machinery
              
              
              467,854
              
              
              256,479Office
                  and computer equipment
              
              
              140,014
              
              
              111,829Leasehold
                  improvements
              
              
              36,697
              
              
              69,339644,565
              
              
              437,647Less
                  accumulated depreciation and amortization
              
              
              (236,106
              )
              
              (216,230
              )**Total
                  fixed assets**
              
              
              408,459
              
              
              221,417**Intangibles**Pending
                  patents and trademarks
              
              
              169,966
              
              
              107,721Issued
                  patents, net of accumulated amortization of $5,508 and$3,223
                  as of December 31, 2007 and 2006, respectively
              
              
              40,305
              
              
              42,590**Total
                  intangibles**
              
              
              210,271
              
              
              150,311**Total
                  assets**
              
              $
              1,890,592
              
              $
              2,845,333
  The
          accompanying notes are an integral part of these statements.
  F–2
 
 **Surfect
        Holdings, Inc. and Subsidiary**
 **(a
        development stage company)**
 **Consolidated
        Balance Sheets –
        continued**
 **December
        31,**
 
 **2007**
              
              **2006****Liabilities
                  and Stockholders' Equity****Current
                  liabilities**Accounts
                  payable
              
              $
              348,326
              
              $
              305,725Escrowed
                  proceeds from equity offering
              
              
              765,000
              
              
              -Notes
                  payable
              
              
              240,036
              
              
              45,868Current
                  portion of capital lease
              
              
              2,375
              
              
              2,125Warranty
                  reserve
              
              
              -
              
              
              44,189Other
                  accrued liabilities
              
              
              217,886
              
              
              189,299**Total
                  current liabilities**
              
              
              1,573,623
              
              
              587,206**Long-term
                  liabilities, less current portion**Capital
                  lease
              
              
              2,472
              
              
              5,095**Total
                  long-term liabilities**
              
              
              2,472
              
              
              5,095**Total
                  liabilities**
              
              
              1,576,095
              
              
              592,301**Stockholders'
                  equity**Preferred
                  stock, 10,000,000 shares authorized, none outstanding
              
              
              -
              
              
              -Common
                  stock, par value $0.0001; 500,000,000 authorized, 65,949,949 issued
                  at
                  December 31, 2007
              
              
              6,595
              
              
              1,420Additional
                  paid-in capital
              
              
              12,822,707
              
              
              9,921,019Deficit
                  accumulated during development stage
              
              
              (12,514,805
              )
              
              (7,669,407
              )**Total
                  stockholders' equity**
              
              
              314,497
              
              
              2,253,032**Total
                  liabilities and stockholders' equity**
              
              $
              1,890,592
              
              $
              2,845,333
  The
          accompanying notes are an integral part of these statements.
  F–3
 **Surfect
        Holdings, Inc. and Subsidiary**
 **(a
        development stage company)**
 **Consolidated
        Statements of Operations**
 **Inception
        (December 26, 2000) through December 31, 2007**
 
 **Years
                  ended December 31,**
              
              **For
                  the**
                **Period
                  from**
                **December
                  26,**
                **2000**
                **(Inception)
                  to**
                **December
                  31,****2007**
              
              **2006**
              
              **2005**
              
              **2007****Sales**
              
              $
              -
              
              $
              220,939
              
              $
              -
              
              $
              220,939**Cost
                  of sales**
              
              
              234,439
              
              
              110,734
              
              
              -
              
              
              345,173**Gross
                  profit**
              
              
              (234,439
              )
              
              110,205
              
              
              -
              
              
              (124,234
              )**Expenses**Payroll
                  and employee benefits
              
              
              1,432,970
              
              
              1,373,254
              
              
              944,415
              
              
              4,686,907Research
                  and development
              
              
              331,511
              
              
              599,547
              
              
              727,321
              
              
              2,092,935General
                  and administrative
              
              
              1,740,422
              
              
              852,480
              
              
              649,872
              
              
              3,896,020Sales
                  and marketing
              
              
              206,549
              
              
              134,169
              
              
              113,743
              
              
              542,339Depreciation
                  and amortization
              
              
              90,907
              
              
              97,784
              
              
              71,815
              
              
              335,242Interest
              
              
              855,736
              
              
              10,772
              
              
              4,578
              
              
              1,010,102**Total
                  expenses**
              
              
              4,658,095
              
              
              3,068,006
              
              
              2,511,744
              
              
              12,563,545**Other
                  income**
              
              
              47,136
              
              
              7,687
              
              
              14,725
              
              
              172,974**Net
                  loss**
              
              $
              4,845,398
              
              $
              2,950,114
              
              $
              2,497,019
              
              $
              12,514,805Net
                  loss per share attributable to commonstockholders,
                  basic and diluted
              
              $
              0.27
              
              $
              0.40
              
              $
              0.50
              
              $
              1.74Shares
                  used in computing basic and diluted net lossper
                  share attributable to common stockholders
              
              
              17,950,743
              
              
              7,434,904
              
              
              5,020,000
              
              
              7,202,050
 
 The
          accompanying notes are an integral part of these statements.
  F–4
 **Surfect
        Holdings, Inc. and Subsidiary**
 **(a
        development stage company)**
 **Consolidated
        Statements of Stockholders’ Equity**
 **Inception
        (December 26, 2000) through December 31, 2007**
 
 **Common Stock**
              
              **Preferred Stock Series A**
              
              **Additional**
                **Paid-In**
              
              **Deficit**
                **Accumulated**
                **During**
                **Development**
              
              **Total**
                **Stockholders'****Shares**
              
              **Amount**
              
              **Shares**
              
              **Amount**
              
              **Capital**
              
              **Stage**
              
              **Equity**December
                  26, 2000 - initial issuance of shares at $0.02 per share
              
              
              5,020,000
              
              $
              100,400
              
              
              -
              
              $
              -
              
              $
              918
              
              $
              -
              
              $
              101,318Net
                  loss from inception to December 31, 2003
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (777,717
              )
              
              (777,717
              )Balance
                  at December 31, 2003
              
              
              5,020,000
              
              
              100,400
              
              
              -
              
              
              -
              
              
              918
              
              
              (777,717
              )
              
              (676,399
              )Issuance
                  of Series A preferred stock for $2,954,832 cash consideration,conversion
                  of convertible notes and accrued interest
              
              
              -
              
              
              -
              
              
              12,549,568
              
              
              4,113,879
              
              
              -
              
              
              -
              
              
              4,113,879Net
                  loss for the year ended December 31, 2004
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (1,444,557
              )
              
              (1,444,557
              )Balance
                  at December 31, 2004
              
              
              5,020,000
              
              
              100,400
              
              
              12,549,568
              
              
              4,113,879
              
              
              918
              
              
              (2,222,274
              )
              
              1,992,923Share-based
                  compensation - employee
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              14,000
              
              
              -
              
              
              14,000Share-based
                  compensation - non-employee
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              5,000
              
              
              -
              
              
              5,000Net
                  loss for the year ended December 31, 2005
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (2,497,019
              )
              
              (2,497,019
              )Balance
                  at December 31, 2005
              
              
              5,020,000
              
              
              100,400
              
              
              12,549,568
              
              
              4,113,879
              
              
              19,918
              
              
              (4,719,293
              )
              
              (485,096
              )Issuance
                  of Series A-1 preferred stock for $1,993,453 cash consideration,
                  conversion of convertible notes and accrued interest in January
                  andMay
                  2006
              
              
              -
              
              
              -
              
              
              16,666,667
              
              
              2,500,000
              
              
              -
              
              
              -
              
              
              2,500,000Issuance
                  of Common Stock at $0.02 upon exercise of options
              
              
              302,679
              
              
              6,054
              
              
              -
              
              
              -
              
              
              (248
              )
              
              -
              
              
              5,806Grant
                  date fair value of stock options granted to employees
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              52,267
              
              
              -
              
              
              52,267Grant
                  date fair value of stock options granted to non-employees
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              5,096
              
              
              -
              
              
              5,096Compensation
                  resulting from management exercise of option bonus
              
              
              4,599,626
              
              
              197,785
              
              
              -
              
              
              -
              
              
              (52,267
              )
              
              -
              
              
              145,518Balance
                  prior to September 27, 2006 Recapitalization
              
              
              9,922,305
              
              
              304,239
              
              
              29,216,235
              
              
              6,613,879
              
              
              24,766
              
              
              (4,719,293
              )
              
              2,223,591
 
 The
          accompanying notes are an integral part of these
          statements.
  F–5
  **Surfect
        Holdings, Inc. and Subsidiary**
 **(a
        development stage company)**
 **Consolidated
        Statements of Stockholders’ Equity — continued**
 **Inception
        (December 26, 2000) through December 31, 2007**
 
 **Common
                  Stock**
              
              **Preferred
                  Stock**
              
              **Additional**
                **Paid-In**
              
              **Deficit**
                **Accumulated**
                **During
                  the**
                **Development**
              
              **Total**
                **Stockholders'****Shares**
              
              **Amount**
              
              **Shares**
              
              **Amount**
              
              **Capital**
              
              **Stage**
              
              **Equity**Balance
                  prior to September 27, 2006 Recapitalization
              
              
              9,922,305
              
              $
              304,239
              
              
              29,216,235
              
              $
              6,613,879
              
              $
              24,766
              
              $
              (4,719,293
              )
              $
              2,223,591Conversion
                  of preferred shares to common
              
              
              45,948,992
              
              
              6,613,879
              
              
              (29,216,235
              )
              
              (6,613,879
              )
              
              -
              
              
              -
              
              
              -Cancellation
                  of Surfect Technologies, Inc. (STI) Common Stock
              
              
              (55,548,618
              )
              
              (6,904,243
              )
              
              -
              
              
              -
              
              
              6,904,243
              
              
              -
              
              
              -Conversion
                  of Windy Creek Developments Common Stock uponmerger
                  with Windy Creek-DE
              
              
              2,500,001
              
              
              250
              
              
              -
              
              
              -
              
              
              41,750
              
              
              -
              
              
              42,000Purchase
                  and cancellation of STI non-qualified investor common
                  shares
              
              
              (322,679
              )
              
              (13,875
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (13,875
              )Issuance
                  of SHI Common Stock to STI Holders
              
              
              8,001,666
              
              
              800
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              800Issuance
                  of Common stock for net proceeds of $2,950,630 cash, andincluding
                  conversion of a $500,000 demand note payable to a principalshareholder
              
              
              3,700,000
              
              
              370
              
              
              -
              
              
              -
              
              
              2,950,260
              
              
              -
              
              
              2,950,630Net
                  loss for the year ended December 31, 2006
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (2,950,114
              )
              
              (2,950,114
              )Balance
                  at December 31, 2006
              
              
              14,201,667
              
              
              1,420
              
              
              -
              
              
              -
              
              
              9,921,019
              
              
              (7,669,407
              )
              
              2,253,032Penalty
                  shares issued due to delayed registration
              
              
              112,000
              
              
              11
              
              
              -
              
              
              -
              
              
              (11
              )
              
              -
              
              
              -Issuance
                  of common stock to originate$1,500,000
                  convertible promissory notes payable
              
              
              660,000
              
              
              66
              
              
              -
              
              
              -
              
              
              620,334
              
              
              -
              
              
              620,400Issuance
                  of common stock to originate$300,000
                  convertible promissory notes payable
              
              
              144,000
              
              
              14
              
              
              -
              
              
              -
              
              
              136,786
              
              
              -
              
              
              136,800Issuance
                  of common stock as a portion of severance to employee
              
              
              50,000
              
              
              5
              
              
              -
              
              
              -
              
              
              29,995
              
              
              -
              
              
              30,000Issuance
                  of common stock to a consultant
              
              
              75,000
              
              
              8
              
              
              -
              
              
              -
              
              
              15,750
              
              
              -
              
              
              15,758Net
                  proceeds from issuance of common stock at $0.04 per share
              
              
              21,500,000
              
              
              2,150
              
              
              -
              
              
              -
              
              
              764,869
              
              
              -
              
              
              767,019Issuance
                  of common stock to a bridge loan holder in exchange for $188,750
                  demand
                  note
              
              
              200,000
              
              
              20
              
              
              -
              
              
              -
              
              
              188,730
              
              
              -
              
              
              188,750Issuance
                  of common stock to bridge loan holders to convert $995,000 of debt
                  plus
                  related accrued interest
              
              
              29,007,282
              
              
              2,901
              
              
              -
              
              
              -
              
              
              1,038,494
              
              
              -
              
              
              1,041,395Share-based
                  compensation - employee
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              46,470
              
              
              -
              
              
              46,470Share-based
                  compensation - non-employee
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              60,271
              
              
              -
              
              
              60,271Net
                  loss for the year ended December 31, 2007
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (4,845,398
              )
              
              (4,845,398
              )Balance
                  at December 31, 2007(1)
              
              
              65,949,949
              
              $
              6,595
              
              
              -
              
              $
              -
              
              $
              12,822,707
              
              $
              (12,514,805
              )
              $
              314,497
 
 (1)
              Excludes
                  1,440,000 shares issued to a Placement Agent in February,
                  2008.
  The
          accompanying notes are an integral part of these statements.
  F–6
 **Surfect
        Holdings, Inc. and Subsidiary**
 **(a
        development stage company)**
 **Consolidated
        Statements of Cash Flows**
 **Inception
        (December 26, 2000) through December 31, 2007**
 
 **Years
                  ended December 31,**
              
              **For
                  the**
                **Period
                  from**
                **December
                  26,**
                **2000**
                **(Inception)
                  to**
                **December
                  31,****2007**
              
              **2006**
              
              **2005**
              
              **2007****Operating
                  activities**Net
                  loss
              
              $
              (4,845,398
              )
              $
              (2,950,114
              )
              $
              (2,497,019
              )
              $
              (12,514,805
              )Adjustments
                  to reconcile net loss to net cashused
                  in operating activitiesDepreciation
                  and amortization
              
              
              90,907
              
              
              97,784
              
              
              71,814
              
              
              335,242Loss
                  on disposal of assets
              
              
              -
              
              
              8,010
              
              
              10,006
              
              
              26,873Stock
                  based compensation
              
              
              152,499
              
              
              237,612
              
              
              19,000
              
              
              409,111Interest
                  accrued converted to preferred stock
              
              
              -
              
              
              6,547
              
              
              -
              
              
              120,426Interest
                  accrued converted to common stock
              
              
              46,395
              
              
              -
              
              
              -
              
              
              46,395Expenses
                  payable converted to preferred stock
              
              
              -
              
              
              -
              
              
              -
              
              
              45,168Warranty
                  recovery
              
              
              (44,189
              )
              
              -
              
              
              -
              
              
              (44,189
              )Inventory
                  impairment charged to cost of sales
              
              
              278,628
              
              
              -
              
              
              -
              
              
              278,628Amortization
                  of debt discount
              
              
              757,200
              
              
              -
              
              
              -
              
              
              757,200Changes
                  in operating assets and liabilitiesInventory
              
              
              (503,385
              )
              
              (359,984
              )
              
              -
              
              
              (863,369
              )Prepaid
                  expenses and other current assets
              
              
              9,172
              
              
              (114,861
              )
              
              16,399
              
              
              (121,124
              )Accounts
                  payable
              
              
              42,601
              
              
              110,444
              
              
              158,762
              
              
              348,326Deposits
                  payable
              
              
              -
              
              
              (261,750
              )
              
              (25,000
              )
              
              -Accrued
                  liabilities
              
              
              28,587
              
              
              189,417
              
              
              (36,136
              )
              
              262,075Net
                  cash used in operating activities
              
              
              (3,986,983
              )
              
              (3,036,895
              )
              
              (2,282,174
              )
              
              (10,914,043
              )**Investing
                  activities**Investment
                  in intangibles
              
              
              (62,246
              )
              
              (37,513
              )
              
              (46,592
              )
              
              (215,780
              )Investment
                  in fixed assets
              
              
              (64,288
              )
              
              (16,261
              )
              
              (188,615
              )
              
              (495,838
              )Net
                  cash used in investing activities
              
              
              (126,534
              )
              
              (53,774
              )
              
              (235,207
              )
              
              (711,618
              )**Financing
                  activities**Bank
                  overdraft
              
              
              -
              
              
              (114,136
              )
              
              114,136
              
              
              -Proceeds
                  from notes payable
              
              
              1,944,168
              
              
              1,135,338
              
              
              300,000
              
              
              4,379,506Repayments
                  on notes payable
              
              
              (566,250
              )
              
              (389,469
              )
              
              -
              
              
              (955,719
              )Proceeds
                  from loans from officers
              
              
              -
              
              
              -
              
              
              -
              
              
              86,769Repayments
                  on loans from officers
              
              
              -
              
              
              -
              
              
              (457
              )
              
              (86,769
              )Net
                  proceeds from issuance of common stock
              
              
              767,019
              
              
              2,450,630
              
              
              -
              
              
              3,318,967Proceeds
                  from issuance of preferred stock
              
              
              -
              
              
              1,993,453
              
              
              -
              
              
              4,948,285Net
                  payments against capital lease
              
              
              (2,373
              )
              
              (1,971
              )
              
              (2,057
              )
              
              (6,844
              )Repayments
                  on leasehold improvement notes
              
              
              -
              
              
              -
              
              
              (14,428
              )
              
              (46,161
              )Net
                  cash provided by financing activities
              
              
              2,142,564
              
              
              5,073,845
              
              
              397,194
              
              
              11,638,034Net
                  increase (decrease) in cash and cash equivalents
              
              
              (1,970,953
              )
              
              1,983,176
              
              
              (2,120,187
              )
              
              12,373Cash
                  and cash equivalents at beginning of period
              
              
              1,983,326
              
              
              150
              
              
              2,120,337
              
              
              -Cash
                  and cash equivalents at end of period
              
              $
              12,373
              
              $
              1,983,326
              
              $
              150
              
              $
              12,373
 
 The
        accompanying notes are an integral part of these statements.
  F–7
 
 **Surfect
        Holdings, Inc. and Subsidiary**
 **(a
        development stage company)**
 **Consolidated
        Statements of Cash Flows - continued**
 **Inception
        (December 26, 2000) through December 31, 2007**
 
 **Years
                  ended December 31,**
              
              **For
                  the**
                **Period
                  from**
                **December
                  26,**
                **2000**
                **(Inception)
                  to**
                **December
                  31,****2007**
              
              **2006**
              
              **2005**
              
              **2007****Interest
                  paid**
              
              $
              50,376
              
              $
              13,509
              
              $
              1,841
              
              $
              79,574**Supplemental
                  Schedule of Noncash Investing and Financing
                  Activities**Copier
                  acquired under capital lease
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              11,691Leasehold
                  improvements acquired via notes payable
              
              
              -
              
              
              -
              
              
              -
              
              
              46,161Series
                  A preferred stock issued for $1,000,000 in demandnotes
                  payable, $113,879 of accrued interest and $45,168related
                  accounts payable
              
              
              -
              
              
              -
              
              
              -
              
              
              1,159,047Series
                  A-1 preferred stock issued for $1,993,453 in cashconsideration,
                  convertible demand notes payable of$500,000
                  and accrued interest
              
              
              -
              
              
              500,000
              
              
              -
              
              
              500,000Conversion
                  of $500,000 demand note for 500,000 shares ofcommon
                  stock and warrants to purchase 250,000shares
                  (See Note 11 below)
              
              
              -
              
              
              500,000
              
              
              -
              
              
              500,000Issuance
                  of 400,000 shares of common stock to investorrelations
                  consultants as part of recapitalization
              
              
              -
              
              
              400,000
              
              
              -
              
              
              400,000Debt
                  discount in connection with issuance of 660,000 shares of common
                  stock and
                  bridge loan of $1,500,000
              
              
              620,400
              
              
              -
              
              
              -
              
              
              620,400Debt
                  discount in connection with issuance of 144,000 shares of common
                  stock and
                  bridge loan of $300,000
              
              
              136,800
              
              
              -
              
              
              -
              
              
              136,800Conversion
                  of $188,750 demand note for 200,000 shares ofcommon
                  stock
              
              
              188,750
              
              
              -
              
              
              -
              
              
              188,750Common
                  stock issued in exchange for $995,000 bridge loans plus accrued
                  interest
              
              
              1,041,395
              
              
              -
              
              
              -
              
              
              1,041,395Transfer
                  of inventory to fixed assets
              
              
              211,374
              
              
              -
              
              
              -
              
              
              211,374Writeoff
                of fully
                depreciated fixed assets
              
              
              68,745
              
              
              -
              
              
              -
              
              
              68,745
 
 The
        accompanying notes are an integral part of these statements.
  F–8
  **Surfect
        Holdings, Inc. and Subsidiary**
 **(a
        development stage company)**
 **Notes
        to Financial Statements**
 **Inception
        (December 26, 2000) through December 31, 2007**
  **1)**
              **Description
                  of Operations and Development Stage
                  Status**
  Surfect
        Holdings, Inc., together with its subsidiary, Surfect Technologies, Inc.
        (“Surfect” or the “Company”) is a development stage company based in Tempe,
        Arizona. Surfect Technologies, Inc. was incorporated on December 26, 2000
        (See
        2006 Recapitalization at Note 11). The Company was formed to develop and
        commercialize certain intellectual property and research in connection with
        the
        use of electro deposition technologies to enable 3-D stacked die packaging
        innovations to increase semiconductor performance. Since inception through
        2007,
        the Company’s activities have been substantially limited to research and
        development of technologies for commercialization. In November 2006, the
        Company
        concluded its first tool sale; however, as the majority of the Company’s efforts
        remained dedicated to establishment of vendor relationships, supply chain
        and
        market entry and no additional sales are being reported for 2007, these
        financials are prepared as a development stage company as defined by SFAS
        7.
  The
        consolidated statement of operations for the year ended December 31, 2006,
        includes the historical financial statements of Surfect Technologies, Inc.
        and
        gives effect to the September 27, 2006, recapitalization transaction described
        in Note 11 below. Since the date of recapitalization, all material intercompany
        transactions and balances have been eliminated in consolidation.
  **2)**
              **Summary
                  of Significant Accounting
                  Policies**
  Concentration
        of Risk
 Credit
        Concentration—Financial instruments potentially subjecting the Company to
        concentrations of credit risk consist primarily of deposits of cash and cash
        equivalents in excess of FDIC limits. The Company’s deposits are placed with
        major financial institutions, and management believes that it is not exposed
        to
        undue credit risk for any deposits that may, from time to time, exceed the
        federally insured limits.
  Financing
        Concentration—The Company remains in the development (preoperational) stage and
        the majority of its debt and equity financing has come from its principal
        investors.
  Supplier
        Concentration—The Company is heavily reliant on outsourcing firms to manufacture
        its products. The Company is attempting to develop a broader base of
        relationships to diversify its risk concentration.
  Cash
        and Cash Equivalents
 At
        December 31, 2007, $765,000 of cash and cash equivalents is restricted for
        use
        until the closing of the equity funding in January 2008 (see Note 16). For
        purposes of the statement of cash flows, the Company considers all short-term
        debt securities purchased with a maturity of three months or less to be cash
        equivalents.
  F–9
  **Surfect
        Holdings, Inc. and Subsidiary**
 **(a
        development stage company)**
 **Notes
        to Financial Statements**
 **Inception
        (December 26, 2000) through December 31, 2007**
  2)
              Summary
                  of Significant Accounting Policies —
continued
  Inventories
 Inventories
        are carried at the lower of first-in, first-out (FIFO) cost or net realizable
        value. The Company reviewed its inventories to identify items with cost in
        excess of estimated net realizable value and recorded an impairment allowance
        of
        $278,628 as cost of sales at December 31, 2007. It is reasonably possible
        that
        the Company’s estimates of net realizable values could be revised again in the
        near term due to technological and other changes.
  Fixed
        Assets, Depreciation and Amortization
 Fixed
        assets are carried at cost. Costs are reviewed regularly for idle and obsolete
        items. No assets are considered impaired in value at any balance sheet date
        reported herein.
  Depreciation
        and amortization has been provided by the Company to reduce the net value
        of
        fixed assets over estimated useful lives. The Company uses the straight-line
        method for financial reporting purposes for all classes of assets. Office
        and
        computer equipment, including computer software, are depreciated and amortized
        over five- and three-year lives, respectively. Furniture and machinery are
        depreciated over seven-year lives. Leasehold improvements are amortized over
        the
        original life of the lease, plus known options to extend the lease, or the
        remaining life of the lease whichever is shorter.
  Research
        and Development Costs
 Research
        and Development (R&D) expense consists of project materials, laboratory
        costs, consulting fees and other costs associated with product development
        efforts. Research and development costs are expensed as incurred. Research
        and
        development expense amounts reported include non-payroll amounts. Payroll
        costs
        of research and development are reported as payroll.
  Estimates
 The
        preparation of financial statements in conformity with generally accepted
        accounting principles requires the Company to make estimates and assumptions
        affecting the reported amounts of assets, liabilities, revenues and expenses,
        and the disclosure of contingent assets and liabilities. Estimated amounts
        could
        differ from actual results.
  Loss
        per Common Share
 Loss
        per
        share has been calculated in accordance with Statement of Financial Accounting
        Standards (SFAS) No. 128 “Earnings Per Share,” which provides for the
        calculation of “Basic” and “Diluted” earnings per share. Basic loss per share
        includes no dilution and is computed by dividing (loss) to common shareholders
        by the weighted average number of common shares outstanding during the period.
        Diluted loss per share excludes from the diluted loss per share calculation,
        common shares potentially issuable as a result of possible preferred share
        conversions, cumulative dividends on preferred shares, and the possible exercise
        of warrants and stock options, since their impact would be anti-dilutive.
        (See
        further discussion at Note 15.)
  Income
        Taxes
 Income
        taxes are recognized using enacted tax rates, and are composed of taxes on
        financial accounting income that is adjusted for the requirements of current
        tax
        law and deferred taxes. Deferred taxes are the expected future tax consequences
        of temporary differences between the financial statement carrying amounts
        and
        tax bases of existing assets and liabilities. The Company does not expect
        to
        have current income taxes payable or deferred tax balances not offset by
        valuation allowances for the foreseeable future. Accordingly, no income tax
        provisions have been reported.
  F–10
  **Surfect
        Holdings, Inc. and Subsidiary**
 **(a
        development stage company)**
 **Notes
        to Financial Statements**
 **Inception
        (December 26, 2000) through December 31, 2007**
  2)
              Summary
                  of Significant Accounting Policies —
continued
  Other
        Comprehensive Income
 From
        inception through December 31, 2007, the Company had no changes in equity
        which
        constitute components of other comprehensive income.
  Stock
        Option Plan
  *Option
        grants to employees*
 Prior
        to
        January 1, 2006, the Company accounted for employee options under the
        recognition and measurement provisions of Accounting Principles Board Opinion
        No. 25 (“APB 25”). Accordingly, the Company recognized compensation expense only
        to the extent that it granted options with a discounted exercise price. Any
        resulting compensation expense was recognized ratably over the associated
        service period.
  Effective
        January 1, 2006, the Company adopted the fair value recognition provisions
        of
        SFAS No. 123(R), Share-Based Compensation, using the modified prospective
        transition method and therefore has not restated prior periods’ results. Under
        this transition method, employee stock-based compensation expense for the
        year
        ended December 31, 2006, included compensation expense for all stock-based
        compensation awards granted, but not yet fully exercisable, prior to January
        1,
        2006. The fair value of the options granted was determined at the original
        grant
        dates in accordance with the provisions of SFAS 123(R).
  Stock-based
        compensation expense for all employee share-based payment awards granted
        after
        December 31, 2005, are based on the grant-date fair value estimated in
        accordance with the provisions of SFAS 123(R). The Company recognizes these
        compensation costs over the requisite service period of the award, which
        is
        generally the vesting term of the options associated with the underlying
        employment agreement, where applicable (See further discussion at Note
        12.)
  *Option
        grants to non-employees*
 The
        Company accounts for equity instruments issued to non-employees in accordance
        with the provisions of SFAS 123 and the Emerging Issues Task Force (“EITF”)
        Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other
        Than Employees for Acquiring, or In Conjunction with Selling, Goods or Services”
(EITF 96-18), which require that such equity instruments are recorded at
        their
        fair value on the measurement date, which date is typically upon the inception
        of the services. (See further discussion at Note 12).
  Fair
        Value of Financial Instruments
 The
        fair
        value of the Company’s financial instruments, principally cash, payables and
        debt, approximates their carrying value.
  F–11
  **Surfect
        Holdings, Inc. and Subsidiary**
 **(a
        development stage company)**
 **Notes
        to Financial Statements**
 **Inception
        (December 26, 2000) through December 31, 2007**
  2)
              Summary
                  of Significant Accounting Policies —
continued
  Revenue
        Recognition
 In
        December 1999, the staff of the Securities and Exchange Commission (SEC)
        issued
        Staff Accounting Bulletin No. 101 (SAB 101), “Revenue Recognition in Financial
        Statements,” which has been subsequently updated by Staff Accounting Bulletin
        No. 104 (SAB 104), “Revenue Recognition.” Under this method, revenue is
        recognized only when the following persuasive evidence of an arrangement
        exists:
 
 •
              delivery
                  has occurred or services have been
                  rendered;
 •
              the
                  seller’s price is fixed or determinable
                  and;
 •
              collectibility
                  is reasonably assured.
  As
        of
        December 31, 2007, the Company has not entered into any ongoing material
        revenue
        arrangements.
  The
        Company anticipates that:
 •
              any
                  spare parts sales will be recognized upon shipment when title and
                  risk of
                  loss pass to the customer;
 •
              the
                  Company’s product sales will generally contain formal customer acceptance
                  provisions. Sales of products are not and will not be recognized
                  until
                  customer acceptance. Any deposit(s) received at the time of acceptance
                  of
                  order or upon delivery are and will be carried as a liability until
                  formal
                  customer acceptance and sign off has
                  occurred;
 •
              once
                  a formal customer acceptance has occurred, no further rights of
                  return
                  will exist except as provided for defective components under warranty
                  (see
                  Warranty Obligations below);
 •
              revenue
                  related to services are recognized upon completion of performance
                  of the
                  service or ratably as the work is performed over the life of the
                  related
                  service contract.
 
 Due
        to
        the nature of the Company’s products and services, the Company does not at this
        time anticipate any sales that will involve multiple elements or multiple
        deliverables as defined in EITF No 00-21.
  During
        November 2006, the Company sold and delivered one Rio Electroless development
        tool to C. Uyemura & Co., Ltd. (“Uyemura”), Japan. This tool was delivered,
        installed, and tested prior to acceptance in 2006 by Uyemura, which now holds
        title. This sale for $220,939 represents a “one of a kind” order and the
        transaction between the Company and Uyemura was non-refundable. At December
        31,
        2007, the Company completed ongoing warranty support for which a warranty
        reserve of $44,189 was included in 2006 cost of sales. This unused reserve
        amount was reversed to 2007 cost of sales when the warranty period
        expired.
  F–12
  **Surfect
        Holdings, Inc. and Subsidiary**
 **(a
        development stage company)**
 **Notes
        to Financial Statements**
 **Inception
        (December 26, 2000) through December 31, 2007**
  2)
              Summary
                  of Significant Accounting Policies —
continued
  Warranty
        Obligations
 The
        Company anticipates that obligations for warranty expense will be accrued
        concurrently with the revenue recognized on the related equipment. As the
        Company has limited sales history, the Company will make provisions for its
        warranty obligations based upon management’s judgment. Due to the significant
        uncertainties and judgments involved in estimating the Company’s warranty
        obligations, including changing product designs and specifications, the ultimate
        amount incurred for warranty costs could change.
  The
        Company’s future warranty provision will provide for general operational support
        and replacement of components which may fail for a period of one year from
        the
        date of acceptance of the product.
  Recently
        Issued Accounting Pronouncements
 Management
        has considered the impact of recently issued accounting pronouncements and
        is
        aware of no matters that will have a material prospective affect on these
        financial statements when they become effective.
  **3)**
              **Inventories**
  The
        Company outsources all of its manufacturing services and as such generally
        carries finished goods inventory. At December 31, 2007, the Company’s inventory
        consisted of two tools and certain associated replacement parts. These tools
        and
        replacement parts have both hardware and/or programming considered by the
        Company to be marketable to end customers in their present form. The Company
        currently anticipates that these tools will be delivered during the first
        half
        of 2008 and sales will be recognized if and when customer acceptance is
        confirmed.
  During
        2007, the Company transferred its oldest production tool from finished goods
        inventory into fixed assets at its Tempe, AZ facility and began utilizing
        this
        tool for customer service related tasks anticipated to generate future revenue.
        As a result, the value of this tool, $211,374, was reclassified as a fixed
        asset, to be depreciated over its useful life.
  **4)**
              **Intangibles**
  Patents
        at December 31, 2007 and 2006, include capitalized costs of $40,305 and
        $42,590, net of accumulated amortization of $5,508 and $3,223, respectively.
        These balances consist of filing fees and executory costs related to acquiring
        a
        trademark and U.S. and international patents. Costs incurred to acquire
        trademarks and pending patents with related costs of $169,966 and $107,721,
        respectively, have not commenced amortization pending receipt of the related
        trademarks and patents. None of these costs are considered impaired at any
        balance sheet date reported herein.
  Filing
        fees and executory costs associated with patent applications are capitalized
        at
        the time incurred. Upon acceptance of a patent filing, the Company amortizes
        the
        costs over the associated life of the patent. In the event of denial or in
        the
        event a capitalized patent is deemed to be without worth, the unamortized
        balance is expensed.
  F–13
  **Surfect
        Holdings, Inc. and Subsidiary**
 **(a
        development stage company)**
 **Notes
        to Financial Statements**
 **Inception
        (December 26, 2000) through December 31, 2007**
  **5)**
              **Income
                  Taxes**
  The
        Company has no taxable income and no income tax liability during the periods
        reported.
  Through
        June 30, 2004, the Company was an S corporation and its taxable income and
        losses flowed through to its shareholders. Effective July 1, 2004, as a
        result of venture capital investment, the Company was required to file its
        tax
        returns as a C corporation whereby the Company became responsible for paying
        its
        income tax liabilities. For the period from July 1, 2004 through
        December 31, 2007, the Company incurred taxable losses totaling
        approximately $10,839,000, which are available to offset future taxable income
        through 2026, subject to ownership change limitations.
  **6)**
              **Related
                  Party Transactions and
                  Contingencies**
  During
        the period from inception through December 31, 2005, the Company had
        substantial transactions with Griego Electrochemical Technologies, Inc. (GET),
        a
        company majority owned and operated by the founder and former president of
        Surfect. Transactions by reporting period are summarized as follows (in
        thousands):
  **2007**
              
              **2006**
              
              **2005**
              
              **Since**
                **Inception**Loan
                  advances from GET
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              (91
              )Loan
                  repayments to GET
              
              
              -
              
              
              -
              
              
              -
              
              
              91Loan
                  advances to GET
              
              
              -
              
              
              -
              
              
              -
              
              
              230Loan
                  repayments from GET
              
              
              -
              
              
              -
              
              
              -
              
              
              (230
              )Fixed
                  asset purchases from GET
              
              
              -
              
              
              -
              
              
              -
              
              
              45Receivable
                  (payable) balance at end of each period
              
              
              -
              
              
              -
              
              
              -
              
              
              -Cash
                  disbursed by Surfect to GET related tooperational
                  reimbursementsCharged
                  to:General
                  and administrative expensesRent
              
              
              -
              
              
              -
              
              
              -
              
              
              85Utilities,
                  insurance, etc.
              
              
              -
              
              
              -
              
              
              1
              
              
              38Payroll
                  and related expenses
              
              
              -
              
              
              -
              
              
              -
              
              
              210Research
                  and development expenses
              
              
              -
              
              
              -
              
              
              49
              
              
              142Total
                  expenses per period
              
              $
              -
              
              $
              -
              
              $
              50
              
              $
              475
  Since
        2005, the Company had no further dealings with GET. Management is not aware
        of
        any claims or contingent liabilities that apply to the Company related to
        GET.
  F–14
  **Surfect
        Holdings, Inc. and Subsidiary**
 **(a
        development stage company)**
 **Notes
        to Financial Statements**
 **Inception
        (December 26, 2000) through December 31, 2007**
  **7)**
              **Debt**
  The
        Company has the following short-term debt at December 31,
        2007:
  2007
              
              2006Bridge
                  note, 10% per annum, interest accrued monthly, subsequently converted
                  to
                  equity
              
              $
              50,000
              
              $
              -12%
                  senior secured convertible note, converted to equity in January
                  2008
              
              
              140,000Note
                  to insurance carrier, 8.5% interest
              
              
              50,036
              
              
              45,868$
              240,036
              
              $
              45,868
  *Bridge
        Financing -* On
        June
        1, 2007, the Company issued 10% senior secured convertible promissory notes
        due
        October 29, 2007 (“Bridge Notes”), to certain accredited investors in the
        aggregate principal amount of $1,500,000 for which the Company received net
        proceeds of $1,475,000 in cash. The Bridge Notes were collateralized by all
        of
        the Company’s assets and the assets of its subsidiary. On July 20, 2007 the
        Company issued additional Bridge Notes in the aggregate principal amount
        of
        $300,000, all of which the Company received as net proceeds. A total of 804,000
        shares of the Company’s common stock was issued as an inducement to lend.
  *Equity
        Financing Used Partially to Repay Bridge Investor -* On
        November 30, 2007, the Company accepted subscriptions in a private offering
        for
        an aggregate of (i) 21,500,000 shares of Common Stock, and (ii) five-year
        warrants to purchase an aggregate of 21,500,000 shares of Common Stock at
        an
        exercise price of $0.08 per share, for which the Company received gross proceeds
        of $860,000 and net proceeds of $767,019. The net proceeds were partially
        used
        to repay the Bridge Investor discussed in the following paragraph. The warrants
        may be exercised, at the option of the holder, by cash payment of the exercise
        price or by “cashless exercise”.
  *Partial
        Repayment of Bridge Investor -* On
        November 30, 2007, the Company redeemed an outstanding Bridge Note in the
        principal amount of $755,000, in exchange for (i) a cash payment to retire
        $566,250 of principal, plus accrued interest on the entire loan and (ii)
        issue
        the Bridge Investor 200,000 shares of the Company’s common stock in exchange for
        the remaining $188,750 principal amount.
  *Agreement
        with Remaining Bridge Investors -* On
        November 30, 2007, the Company reached an agreement in principle with the
        remaining Bridge Note holders (“Bridge Investors”) to recapitalize, pursuant to
        which all of the indebtedness owing to the Bridge Investors which matured
        on
        October 29, 2007 and were in default, would be extinguished through conversion
        to the Company’s common shares.
  *Conversion
        of Bridge Notes -* On
        December 14, 2007 the Company entered into a Waiver and Investment Agreement
        and
        an Acknowledgement and Agreement to Modification of Waiver and Investment
        Agreement (collectively, the “Waiver”) with the Bridge Investors in the
        aggregate principal amount of $995,000. Pursuant to the Waiver, the Bridge
        Investors agreed to extinguish the Bridge Notes and to waive any and all
        existing or prior breaches or defaults under the Bridge Notes and any other
        rights, including the penalties to which the Bridge Investors were entitled
        in
        exchange for the right to convert the outstanding principal amount of the
        Bridge
        Notes, plus all accrued and unpaid interest through November 30, 2007 into
        (i)
        shares of Common Stock at a conversion price of $0.04 per share and (ii)
        a
        five-year year warrant to purchase the same number of shares of Common Stock
        issued upon conversion of the Bridge Notes, at an exercise price of $0.08
        per
        share. On January 11, 2008, the remaining $50,000 Bridge Notes were converted
        to
        common shares and warrants in the same manner as the other Bridge Notes (See
        Note 16).
  F–15
  **Surfect
        Holdings, Inc. and Subsidiary**
 **(a
        development stage company)**
 **Notes
        to Financial Statements**
 **Inception
        (December 26, 2000) through December 31, 2007**
  **7)**
              Debt
                  continued
  On
        December 6, 2007 and December 14, 2007 the Company issued short-term promissory
        notes (“Short-Term Notes”), in the aggregate principal amounts of $100,000 and
        $40,000, respectively, which notes bear interest at the rate of 12% per annum,
        and which outstanding principal and accrued interest, pursuant to the terms
        of
        the Short-Term Notes, automatically converted into the same securities offered
        in our private placement offering at a 50% discount to the offering price
        on
        January 11, 2008 (See Note 16).
  **8)**
              **Leases**
  At
        December 31, 2007, the Company had the following capital lease
        obligation:
  Year
                  Ending December 31,2008
              
              $
              3,0622009
              
              
              2,296Net
                  minimum lease payments
              
              
              5,358Less
                  amount representing interest
              
              
              (511
              )Present
                  value of minimum lease payments
              
              
              4,847Less
                  current maturities
              
              
              (2,375
              )Long-term
                  portion of lease obligation
              
              $
              2,472
  The
        cost
        of equipment under capital lease is $11,691 with accumulated amortization
        of
        $7,404 at December 31, 2007
  The
        Company had an operating lease for its Albuquerque, New Mexico facilities
        that
        expired in December 2006. The lease was being continued on a month-to-month
        basis until terminating the lease on September 30, 2007. The monthly rent
        was
        $3,300. Rent expense for the operating lease for the facility for 2007, 2006,
        and 2005 was approximately $29,700, $39,600, and $24,000,
        respectively.
  In
        February, 2007, the company entered into a two year facility operating lease
        for
        a 5,250 square foot customer sales and service center located in Tempe, Arizona
        which later in the year was designated as the corporate headquarters. The
        monthly lease expense is approximately $5,400, including fees and taxes.
        Rent
        expense including required facility maintenance for 2007 was approximately
        $54,600. The remaining obligation on the lease through January 2009 is $78,750.
  During
        2007, the Company entered into a 48 month operating lease for office equipment,
        with monthly payments of $605 (approximately $5,000 total payments in 2007).The
        remaining obligation on the lease through April 2010 approximates $24,000.
  F–16
  **Surfect
        Holdings, Inc. and Subsidiary**
 **(a
        development stage company)**
 **Notes
        to Financial Statements**
 **Inception
        (December 26, 2000) through December 31, 2007**
  **9)**
              **Employee
                  Benefit Plan**
  During
        2004, the Company continued a qualified voluntary Safe Harbor 401(k) Plan
        that
        covers all employees meeting certain age and length of service requirements.
        The
        Plan provides for voluntary employee contributions as well as also providing
        a
        discretionary matching contribution from the Company. The Safe Harbor
        contribution matches participant contributions at 100% of the first 3% and
        50%
        of the next 2% of each participant’s compensation. Employer
        discretionary contributions vest on a stepped basis over six years of service.
        The Safe Harbor contribution vests immediately. The Company made matching
        contributions totaling $10,642, $14,007, and $13,160 during the years ended
        December 31, 2007, 2006 and 2005, respectively.
  **10)**
              **Going
                  Concern Uncertainty**
  The
        accompanying financial statements have been prepared assuming that Surfect
        will
        continue as a going concern. As shown in the accompanying financial statements,
        Surfect has incurred net losses since its inception and net losses have
        continued to the date of these financial statements. As described in Note
        11,
        during 2007, Surfect received net proceeds of $767,019 from equity funding,
        a
        $1,800,000 bridge financing and $140,000 of short-term convertible notes
        to meet
        its short-term working capital needs. As discussed in Note 16, on January
        11,
        2008 and January 16, 2008, the Company sold additional
        equity securities and received gross proceeds of $1,430,000 and $395,000,
        respectively. However, Surfect remains in the development stage and its ability
        to continue as a going concern is initially dependent on its ability to raise
        adequate capital to fund necessary market entry activities and subsequently
        on
        sufficient inflow of operating revenue derived from sale of its products
        at
        sufficient profit margin to cover operating expenses. The accompanying financial
        statements do not include any adjustments that might result from the outcome
        of
        this uncertainty.
  Endeavoring
        to secure the Company’s ability to continue as a going concern, management is
        continuing to pursue additional working capital to fund operations until
        the
        Company has reached a point where its cash requirements can be met by the
        cash
        generated from ongoing operations. No assurances can be made that the Company
        will be successful in obtaining such additional working capital.
  **11)**
              **Equity
                  Transactions**
  **(a)
        2006 Recapitalization**
  On
        September 27, 2006, Surfect Technologies merged with Surfect Holdings, Inc.’s,
        wholly owned subsidiary, Surfect Acquisition Corp., resulting in Surfect
        Technologies being 100% owned by Surfect Holdings. This transaction was
        accounted for as a recapitalization.
  Surfect
        Technologies has been treated as the acquirer for accounting purposes.
        Accordingly, the historical assets, liabilities and operations of Surfect
        Holdings before the recapitalization are those of Surfect Technologies, Inc.
        Subsequent to the recapitalization, the consolidated financial statements
        include the assets and liabilities of Surfect Technologies and Surfect Holdings,
        Inc., formerly Windy Creek Developments, Inc., and the historical operations
        of
        Surfect Technologies, Inc. and the operations of Surfect Holdings,
        Inc.
  Immediately
        prior to the recapitalization, Surfect Technologies had a total of 55,871,297
        shares of common stock issued and outstanding. In connection with the
        recapitalization, Surfect Holdings issued 8,001,666 shares of its common
        stock
        to Surfect Technologies’ stockholders who qualified as accredited investors in
        exchange for 55,548,618 shares of Surfect Technologies’ common stock. The
        remaining 322,679 shares of Surfect Technologies’ common stock held by
        non-accredited investors were redeemed for a purchase price of $0.043 per
        share.
  F–17
  **Surfect
        Holdings, Inc. and Subsidiary**
 **(a
        development stage company)**
 **Notes
        to Financial Statements**
 **Inception
        (December 26, 2000) through December 31, 2007**
  11)
              (a)
                  2006 Recapitalization — continued
  Also
        in
        connection with the recapitalization, (i) options to purchase a total of
        13,872,696 shares of Surfect Technologies’ common stock held by certain members
        of Surfect Technologies’ management team were converted into options to purchase
        1,998,334 shares of Surfect Holdings’ common stock at the same exercise price
        and on the terms set forth in the original option grants and (ii) options
        to
        purchase a total of 4,069,000 shares of Surfect Technologies common stock
        were
        converted into options to purchase 586,131 shares of Surfect Holdings common
        stock under the 2006 Stock Option Plan at the same exercise price and on
        the
        terms set forth in the original grants.
  Such
        issuances of common stock and options in connection with the recapitalization
        were made pursuant to an exemption from registration under Section 4(2) of
        the
        Securities Act of 1933.
  In
        connection with the recapitalization, the Company completed the closing of
        a
        private placement of its common stock on September 27, 2006, in which the
        Company sold an aggregate of 112 units to 37 accredited investors. Each unit
        consisted of 25,000 shares of Common Stock and a four-year warrant to purchase
        12,500 shares of Common Stock at $2.00 per share, at a purchase price of
        $25,000
        per unit. In addition, on September 27, 2006, concurrently with the private
        placement, the Company issued (i) 500,000 shares of Common Stock upon conversion
        of a 9% promissory note in the principal amount of $500,000, dated August
        10,
        2006, and (ii) a four-year warrant to purchase 250,000 shares of Common Stock
        at
        an exercise price of $2.00 to ITU Ventures, our principal stockholder. The
        Company also issued 400,000 shares of Common Stock to investor relations
        consultants as part of the transaction.
  The
        common stock issued and the warrants issuable in the private placement are
        subject to registration rights whereby liquidated damages may accrue and
        are
        payable in common stock at the rate of 1% (up to a maximum of 10%) of the
        aggregate amount of common shares received by the investors in the private
        placement per one-week period if (i) a registration statement is not filed
        within 60 days of October 21, 2006; (ii) such registration statement is not
        declared effective within 180 days of October 21, 2006; and (iii) such
        registration statement is not kept effective for the earlier of (a) 24 months
        or
        (b) the date when all registerable securities have been sold. Notwithstanding
        the foregoing, upon notification by the Company of the occurrence of a potential
        material event (as such term is defined in the subscription agreements for
        the
        private placement) an investor’s right to offer, sell or otherwise engage in a
        transaction involving shares covered by the registration statement may be
        suspended for up to 60 days. During 2007, the Company issued 112,000 penalty
        shares of its common stock in satisfaction of the delayed registration.
  F–18
  **Surfect
        Holdings, Inc. and Subsidiary**
 **(a
        development stage company)**
 **Notes
        to Financial Statements**
 **Inception
        (December 26, 2000) through December 31, 2007**
  11)
              (a)
                  2006 Recapitalization — continued
  The
        table
        below shows the effect on equity of the recapitalization
        transaction:
  **Common shares**
              
              **Preferred shares**
              
              **Additional**
                **Paid-In****Recapitalization**
              
              **Date**
              ****
              **Shares**
              ****
              **$**
              ****
              **Shares**
              ****
              **$**
              ****
              **Capital**Equity
                  balances of Surfect Technologies, Inc. (STI) immediatelyprior
                  to recapitalization
              
              09/01/2006
              
              
              9,922,305
              
              $
              304,239
              
              
              29,216,235
              
              $
              6,613,879
              
              $
              24,766Conversion
                  of preferred shares to common stock
              
              09/26/2006
              
              
              45,948,992
              
              
              6,613,879
              
              
              (29,216,235
              )
              
              (6,613,879
              )
              
              -(1)
                  Cancellation of STI common stock
              
              09/27/2006
              
              
              (55,548,618
              )
              
              (6,904,243
              )
              
              -
              
              
              -
              
              
              6,904,243(2)
                  Purchase and cancellation of STI non-qualified investorcommon
                  shares
              
              09/27/2006
              
              
              (322,679
              )
              
              (13,875
              )
              
              -
              
              
              -
              
              
              -Conversion
                  of Windy Creek Development Common Stock uponmerger
                  with Windy Creek-DE
              
              09/27/2006
              
              
              2,500,001
              
              
              250
              
              
              -
              
              
              -
              
              
              41,750Issuance
                  of common shares to STI stockholders
              
              09/27/2006
              
              
              8,001,666
              
              
              800
              
              
              -
              
              
              -
              
              
              -Issuance
                  of Common Stock for net proceeds of $2,950,630cash,
                  including conversion of a $500,000 demandnote
                  payable to a principal shareholder
              
              09/27/2006
              
              
              3,300,000
              
              
              330
              
              
              -
              
              
              -
              
              
              2,550,300Issuance
                  of common shares to investor relation consultants
              
              09/27/2006
              
              
              400,000
              
              
              40
              
              
              -
              
              
              -
              
              
              399,96014,201,667
              
              $
              1,420
              
              
              -
              
              $
              -
              
              $
              9,921,019
  An
        aggregate of 400,000 shares of common stock were issued under non-refundable
        agreements with certain consultants for investor relations services provided
        in
        connection with the recapitalization and private placement offering by the
        Company. These agreements provide that each of two consulting firms would
        receive 200,000 post recapitalization shares as a “Commencement Bonus.” The
“Commencement Bonus” being defined as a nonrefundable, non-apportioned, and
        non-ratable retainer and not a prepayment for future services. Such
“Commencement Bonus” is considered a specific incremental cost directly
        attributable to and within 90 days of the September private placement in
        accordance with SAB Topic 5A. The value of the shares issued were determined
        to
        be $1.00 per share to be consistent with the amount being paid for units
        in the
        private placement (no value was associated with the warrants; see warrant
        discussion below). The resulting financial transaction is recorded as $400,000
        of additional proceeds offset by an equal $400,000 associated cost of
        closing.
  The
        agreements further provide for cash compensation for ongoing consulting services
        at an aggregate rate of $8,000 per month through August 2007, subject to
        termination at any time without refund or further financial obligation. The
        continuing consulting service is recorded as period expenses as
        incurred.
  F–19
  **Surfect
        Holdings, Inc. and Subsidiary**
 **(a
        development stage company)**
 **Notes
        to Financial Statements**
 **Inception
        (December 26, 2000) through December 31, 2007**
  11)
              2006
                  Recapitalization — continued
  The
        Company additionally issued 108,250 freestanding warrants (in addition to
        the
        warrants included in the units sold as described above) to its placement
        agents
        in the private placement. In accordance with EITF 00-19 ‘Accounting for
        Derivitive Financial Instruments Indexed to, and Potentially Settled in,
        a
        Company’s Own Stock,’ these issuances have been treated as permanent equity
        transactions. As the exercise price of the warrants significantly exceeded
        the
        fair value of the stock on the date of issuance, the fair value of the warrants
        is immaterial.
  **(b)
        2007 Equity Transactions**
  *Equity
        Raise -* On
        November 30, 2007, The Company accepted subscriptions in a private offering
        for
        an aggregate of (i) 21,500,000 shares of Common Stock, and (ii) five-year
        warrants to purchase an aggregate of 21,500,000 shares of Common Stock at
        an
        exercise price of $0.08 per share, for which the Company received
        gross proceeds of $860,000 and net proceeds of $767,019. The warrants may
        be
        exercised, at the option of the holder, by cash payment of the exercise price
        or
        by “cashless exercise”
  If
        the
        holder elects the cashless exercise method of payment, the Company shall
        issue
        to the holder a number of shares of Warrant Stock determined in accordance
        with
        the following formula:
  X
                
                =
                Y(A
                    - B)AWhere:
                
                X
                    =
                    the number of shares of warrant stock to be issued to the
                    holder;Y
                    =
                    the number of shares of stock with respect to which the warrant
                    is being
                    exercised;A
                    =
                    the fair value per share of common stock on the date of exercise
                    of the
                    warrant; andB
                    =
                    the then-current warrant price of the
                    warrant.
  *Agreement
        with Certain Bridge Investors -* On
        December 14, 2007 the Company entered into a Waiver and Investment Agreement
        and
        an Acknowledgement and Agreement to Modification of Waiver and Investment
        Agreement (collectively, the “Waiver”) with the holders of the Company’s
        outstanding 10% senior secured convertible notes (the “Bridge Notes”) in the
        aggregate principal amount of $995,000 (“Bridge Investors”). Pursuant to the
        Waiver, the Bridge Investors agreed to extinguish the Bridge Notes which
        matured
        on October 29, 2007 and to waive any and all existing or prior breaches or
        defaults under the Bridge Notes and any other rights, including the penalties
        to
        which the Bridge Investors were entitled in exchange for the right to convert
        the outstanding principal amount of the Bridge Notes, plus all accrued and
        unpaid interest through November 30, 2007 into (i) shares of the Company’s
        common stock par value $0.0001 per share (“Common Stock”) at a conversion price
        of $0.04 per share and (ii) a five-year year warrant to purchase the same
        number
        of shares of Common Stock issued upon conversion of the Bridge Notes, at
        an
        exercise price of $0.08 per share.
  Pursuant
        to the terms of the Waiver, on December 14, 2007 the Company issued an aggregate
        of (i) 25,658,000 shares of Common Stock, and (ii) five-year warrants to
        purchase an aggregate of 26,034,875 shares of Common Stock at an exercise
        price
        of $0.08 per share (the “Warrant Shares”), to the Bridge Investors. The warrants
        may be exercised, at the option of the holder, by cash payment of the exercise
        price or by “cashless exercise”. The warrants also provide the holder with
        anti-dilution price protection. The Common Stock and warrants were offered
        and
        sold solely to “accredited investors” in reliance on the exemption from
        registration afforded by Rule 506 of Regulation D promulgated under Section
        4(2)
        of the Securities Act of 1933, as amended.
  F–20
  **Surfect
        Holdings, Inc. and Subsidiary**
 **(a
        development stage company)**
 **Notes
        to Financial Statements**
 **Inception
        (December 26, 2000) through December 31, 2007**
  11)
              (b)
                  2007 Equity Transactions —
continued
  In
        addition, pursuant to the terms of the Waiver and the Bridge Investors agreeing
        to convert the Bridge Notes, the Company issued an aggregate of an additional
        3,349,282 shares of Common Stock to these Bridge Investors pro rata with
        their
        Bridge Note investment. These shares represent a distribution of 5,000,000
        shares overall as a condition of the bridge loan conversion, 239,234 of which
        were distributed to the remaining bridge holder in January, 2008 and a
        Substitute Warrant for 1,411,483 shares which was distributed to an investor
        to
        purchase shares of the Company’s stock at $0.0001. Except for the
        exercise price, the Substitute Warrant has the same terms as the Bridge Investor
        Warrants.
  Pursuant
        to a registration rights agreement, the Company has agreed to file a
        registration statement covering the resale of the Common Stock, Warrant Shares
        and Substitute Warrant Shares no later than January 25, 2008 (the “Filing
        Date”). The Company filed the required registration statement on January 25, as
        required.
  In
        addition, the registration statement must be declared effective on or before
        60
        days from the Filing Date. If the Company does not cause the registration
        statement to be declared effective by the required date, then each investor
        in
        the offering will be entitled to liquidated damages, payable in cash or Common
        Stock, at the company’s option, equal to 1% of the aggregate purchase price paid
        by such investor for the securities, and an additional 1% for each month
        that
        the Company does not cause it to be declared effective. Notwithstanding the
        foregoing, in no event shall liquidated damages exceed 10% of the aggregate
        gross proceeds of the offering.
  **12)**
              **Stock
                  Options**
  On
        December 31, 2007, the Company had two share-based compensation plans which
        are
        described below. The main plan, the 2006 Stock Plan listed below was the
        most
        recently adopted. The second plan relates to the 1,988,334 shares of Company
        Common Stock awarded in September, 2006 in conjunction with a recapitalization.
        The compensation cost that has been charged to operations for those plans
        was
        $106,741 for the fiscal year ended December 31, 2007, $57,363 for the fiscal
        year ended December 31, 2006, and $183,100 for the period since inception
        (December 26, 2000). Except as discussed in Note 13 ‘Management Exercise,’ no
        tax or other benefit has been recognized within the statement of operations
        of
        any period presented.
  **2006
        Stock Plan and Other Options**
  The
        Company’s 2006 Stock Plan was adopted by the directors and stockholders on
        September 25, 2006. An aggregate of 1,500,000 shares of Common Stock have
        been
        reserved for issuance under the Plan. The purpose of the Plan is to provide
        an
        incentive to retain directors, officers, consultants and employees of the
        Company and its affiliates whose services are considered valuable. Under
        the
        Plan, the Company is authorized to issue incentive stock options intended
        to
        qualify under Section 422 of the Internal Revenue Code, non-qualified stock
        options and restricted stock. The Plan is administered by the Company’s board of
        directors. Option awards are granted at an exercise price equal to the average
        closing price of the Company’s Common Stock for the ten trading days immediately
        prior to the grant; those options generally vest based upon a 1- to 3-year
        period of continuous service and have a 10-year term. As of December 31,
        2007, no shares of Common Stock had been issued under the Plan; options to
        purchase 1,315,452 shares of Common Stock were outstanding and 184,548 shares
        of
        Common Stock remain available for issuance under the Plan.
  In
        September 2006, options to purchase an aggregate of 13,872,696 shares of
        Surfect
        Technologies’ common stock held by certain of its management were converted into
        options to purchase an aggregate of 1,998,334 shares of the Company’s Common
        Stock in accordance with their terms in connection with the recapitalization.
        These options have terms consistent with the 2006 Stock Plan discussed above
        but
        are accounted for separately from the 2006 Stock Plan as a reserve against
        authorized but unissued Common Stock.
  F–21
  **Surfect
        Holdings, Inc. and Subsidiary**
 **(a
        development stage company)**
 **Notes
        to Financial Statements**
 **Inception
        (December 26, 2000) through December 31, 2007**
  12)
              Stock
                  Options — continued
  A
        summary
        of the Company’s stock options outstanding and exercisable at December 31, 2007,
        is presented in the table below:
  
 Option exercise price
              
              
              
              Intrinsic$
              0.14
              
              $
              0.22
              
              $
              0.30
              
              $
              0.90
              
              $
              1.13
              
              $
              2.27
              
              
              Total
              
              ValueOutstanding
              
              
              348,452
              
              
              72,000
              
              
              1,180,308
              
              
              525,000
              
              
              345,000
              
              
              25,000
              
              
              2,495,760
              
              $
              -Weighted
                  average remaining contractuallife
                  of options outstanding (in years)
              
              
              7.40
              
              
              9.86
              
              
              8.38
              
              
              9.53
              
              
              9.26
              
              
              8.91
              
              
              8.65
              
              
              -Exercisable
              
              
              272,252
              
              
              -
              
              
              531,188
              
              
              -
              
              
              -
              
              
              8,333
              
              
              811,773
              
              $
              -
  Accounting
        for option grants to employees
 Prior
        to
        January 1, 2006, the Company accounted for employee options under the
        recognition and measurement provisions of Accounting Principles Board Opinion
        No. 25 (“APB 25”). Accordingly, the Company recognized compensation expense only
        to the extent that it granted options with a discounted exercise price. Any
        resulting compensation expense was recognized ratably over the associated
        service period. The Company’s management determined, based upon information
        provided to the Board which included an analysis of (1) the market prices
        of
        stock of corporations engaged in the same or similar line of business having
        their stock actively traded in a free and open market, (2) the nature of
        the
        business and the history of the enterprise from its inception, (3) the economic
        outlook in general and the condition of the specific industry in particular,
        (4)
        the book value of the stock and the financial condition of the business,
        (5) and
        the Company’s earning and dividend-paying capacities, the fair value of the
        options in excess of exercise prices granted to employees that vested and
        remained unforfeited during 2005 and 2004 to be approximately $14,000, which
        was
        recorded as compensation expense in 2005.
  Prior
        to
        July 1, 2004, the Company was unfunded, except for modest founder funding.
        For
        stock options granted from inception through June 30, 2004, management
        determined the fair market value to be the cash value being contributed by
        founders for their stock holdings. Options granted during this period resulted
        in no compensation expense upon vesting.
  Effective
        January 1, 2006, the Company adopted the fair value recognition provisions
        of
        SFAS 123(R), using the modified prospective transition method and therefore
        has
        not restated prior periods’ results. Under this transition method, employee
        stock-based compensation expense for the year ended December 31, 2006, included
        compensation expense for all stock-based compensation awards granted, but
        not
        yet vested, prior to January 1, 2006. The fair value of the options granted
        was
        determined at the original grant dates in accordance with the provisions
        of SFAS
        123(R). Stock-based compensation expense for all share-based payment awards
        granted after December 31, 2005, is based on the grant-date fair value estimated
        in accordance with the provisions of SFAS 123(R). The Company recognizes
        these
        compensation costs over the requisite service period of the award, which
        is
        generally the vesting term of the options associated with the underlying
        employment agreement, where applicable.
  F–22
  **Surfect
        Holdings, Inc. and Subsidiary**
 **(a
        development stage company)**
 **Notes
        to Financial Statements**
 **Inception
        (December 26, 2000) through December 31, 2007**
  12)
              Stock
                  Options — continued
  Accounting
        for option grants to employees—
        continued
 As
        a
        result of adopting SFAS 123(R), 2007 compensation expense of $46,470 was
        recorded. At December 31, 2007, the unamortized value of employee stock options
        under SFAS 123(R) was approximately $228,433. The unamortized portion will
        be
        expensed over a weighted average period of approximately three
        years.
  Accounting
        for option grants to employees
 The
        fair
        value of each option award is estimated on the date of grant using the
        Black-Sholes option valuation model that uses the assumptions noted in the
        following table. Because option valuation models incorporate ranges of
        assumptions for inputs, those ranges are disclosed. As the Company was privately
        held prior to its recent recapitalization, its volatility has been based
        upon a
        study of the historical volatility of five similar high tech companies in
        their
        first five years of public trading. Limited comparable entities or indexes
        were
        available for comparison. The selected companies were semiconductor and
        healthcare equipment manufacturers who have become public entities during
        the
        last ten years and progressed through a startup process similar to the
        Company’s. Weighted average volatility for these companies for their first five
        years varied from 78.72% to 136.91%. Weighted average volatility was calculated
        using the first five years of trading history for the mean company within
        this
        representative group. As of December 31,2007, with only five quarters of
        actual
        trading history, the Company still possesses insufficient historical data
        to
        generate meaningful statistics that would yield results more relevant than
        the
        method adopted at the end of 2006. The Company will again re-evaluate this
        methodology at the end of the 2008 fiscal year.
  The
        Company uses historical data to estimate option exercise and employee forfeiture
        within the valuation model; separate groups of employees that have similar
        exercise and/or termination behavior (such as management vs. non-management
        labor) are treated independently for valuation purposes. Although is still
        remained high in 2007, considering the startup mode under which the Company
        has
        functioned to date, it is believed that the forfeiture rate of management
        and
        employees will decrease from historic rates . As a result, historic forfeiture
        rates have been reduced by one half to estimate future behavior. The risk
        free
        rate for the periods within the contractual life of the options are based
        upon
        the U.S. Treasury yield curve at the time of the grant.
  F–23
  **Surfect
        Holdings, Inc. and Subsidiary**
 **(a
        development stage company)**
 **Notes
        to Financial Statements**
 **Inception
        (December 26, 2000) through December 31, 2007**
  12)
              Stock
                  Options — continued
  Accounting
        for option grants to employees—
        continued
 The
        fair
        value of each option grant during the years ended December 31, 2006 and 2007,
        was estimated on the date of grant using the Black-Scholes option pricing
        model
        with the following weighted average assumptions used:
 
 For the years ended
                Dec 31, 2006 & 2007Dividend
                  yield
              
              
              0
              %Weighted
                  Average volatility
              
              
              100.83
              %Risk-free
                  interest rate (average)
              
              
              4.61
              %Expected
                  lives
              
              
              5
                  years
  The
        weighted average fair value of the employee options on the respective dates
        of
        grant, using the fair value based methodology for the year ended December
        31,
        2007 and 2006, was $0.53 and $0.43, respectively.
  A
        summary
        of the status of the outstanding options and the changes during the year
        ended
        December 31, 2007, is presented in the table below:
  Number of Options
                
                WeightedEmployee
                
                Non-Employee
                  *
                
                Total
                
                Average
                  Exercise PriceBalance
                    January 1, 2007
                
                
                2,466,672
                
                
                193,392
                
                
                2,660,064
                
                $
                0.43Granted
                
                
                1,062,136
                
                
                217,000
                
                
                1,279,136
                
                
                0.98Exercised
                
                
                -
                
                
                -
                
                
                -
                
                
                -Forfeited
                
                
                (1,443,440
                )
                
                -
                
                
                (1,443,440)
                
                
                0.73Balance
                    December 31, 2007
                
                
                2,085,368
                
                
                410,392
                
                
                2,495,760
                
                $
                0.54**Number
                    of Options Vested**Employee
                
                
                Non-Employee
                      *
                
                
                TotalVested
                    January 1, 2007
                
                
                341,263
                
                
                80,256
                
                
                421,519Vested
                    during period
                
                
                477,936
                
                
                151,645
                
                
                629,581Exercised
                    during period
                
                
                -
                
                
                -
                
                
                -Forfeited
                    during period
                
                
                (239,327
                )
                
                -
                
                
                (239,327
                )Vested
                    at December 31, 2007
                
                
                579,872
                
                
                231,901
                
                
                811,773
  *
                  See
                      'Option grants to non-employees'
                      below
  F–24
 **Surfect
          Holdings, Inc. and Subsidiary**
 **(a
          development stage company)**
 **Notes
          to Financial Statements**
 **Inception
          (December 26, 2000) through December 31, 2007**
  12)
                Stock
                    Options — continued
 
 For
          the
          year ended December 31, 2005, under APB 25, approximately $14,000 of stock-based
          employee compensation expense relating to the Company’s stock options was
          reflected in net loss, for options granted under its plan that had an exercise
          price less than the market value of the underlying Common Stock on their
          respective dates of grant.
 
 For
          the
          Company’s pro forma information for the year ended December 31, 2005, the fair
          value of each option grant was estimated on the respective date of grant
          using
          the Black-Scholes option pricing model described above with the following
          assumptions used;
 
 For
                    the years ended
                  Dec
                    31, 2005Dividend
                    yield
                
                
                0
                %Expected
                    volatility
                
                
                100.83
                %Risk-free
                    interest rate
                
                
                4.05
                %Expected
                    lives
                
                
                5
                    years
 
 The
          weighted average fair value of the options on the respective dates of grant,
          using the fair value based method, for the year ended December 31, 2005
          was
          $0.02.
  The
          following table illustrates the effect on net loss and net loss per share
          if the
          Company had applied the fair value recognition method under the provisions
          of
          SFAS 123.
 
 (All
                  numbers in 000’s except per share
                  data)
                
                For
                    the years ended
                  Dec
                    31, 2005Net
                    loss applicable to common stockholders, as reported
                
                $
                (2,497
                )Net
                    effect of difference between total stock-based employee compensation
                    expense determined under APB 25 method for all awards, net of
                    related tax
                    effects
                
                
                (3
                )Pro-forma
                    net loss
                
                $
                (2,500
                )Net
                    loss per share applicable to common stockholders - basic and
                    diluted:As
                  reported
                
                $
                (0.50
                )Pro
                  forma
                
                $
                (0.50
                )
 
 F-25
 **Surfect
            Holdings, Inc. and Subsidiary**
 **(a
          development stage company)**
 **Notes
        to Financial Statements**
 **Inception
        (December 26, 2000) through December 31, 2007**
  12)
              Stock
                  Options — continued
  Option
        grants to non-employees
 The
        Company accounts for equity instruments issued to non-employees in accordance
        with the provisions of SFAS 123(R) and the Emerging Issues Task Force (“EITF”)
        Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other
        Than Employees for Acquiring, or In Conjunction with Selling, Goods or Services”
(EITF 96-18), which require that such equity instruments are recorded at
        their
        fair value on the measurement date, which date is typically upon the inception
        of the services that will be performed.
  For
        the
        year ended December 31, 2007, the stock based compensation expense of $60,271
        was recorded for non-employees related to the grant of non-transferable stock
        options to purchase 217,000 shares of the Common Stock issued in connection
        with
        ongoing consulting service arrangements begun at various dates during 2007.
        These awards were granted to certain consultants and involved a combination
        of
        cash compensation plus stock options that have exercise prices ranging from
        $0.22 to $1.13. These options generally vest over a three-year service term,
        expire ten years from date of grant, and contain no performance-related or
        market condition provisions. Because the consulting arrangements included
        cash
        compensation, the options are not valued based on the value of consulting
        services received, but rather valued based on the value of the option
        consideration itself. The option compensation has been accounted for in
        accordance with SFAS 123(R) and EITF 96-18.
  The
        options are valued at their grant date fair value as determined using the
        Black-Scholes model and applying appropriate dividend yield, expected
        volatility, interest rate and expected life assumptions applicable to these
        non-employee options. The calculated fair value will be recorded as consulting
        expense ratably over the expected service term.
 
 The
        fair
        value of each option award was estimated on the date of grant using the
        Black-Sholes option valuation model that uses the assumptions noted in the
        following table, specific to non-employees. Because option valuation models
        incorporate ranges of assumptions for inputs, those ranges are disclosed.
        As the
        Company was privately held prior to its recent recapitalization, its volatility
        has been based upon a study of the historical volatility of five similar
        high
        tech companies in their first five years of public trading. Limited comparable
        entities or indexes were available for comparison. The selected companies
        were
        semiconductor and healthcare equipment manufacturers who have become public
        entities during the last ten years and progressed through a startup process
        similar to the Company’s. Weighted average volatility for these companies for
        their first five years varied from 78.72% to 136.91%. Weighted average
        volatility was calculated using the first five years of trading history for
        the
        mean company within this representative group. As of December 31,2007, with
        only
        five quarters of actual trading history, the Company still possesses
        insufficient historical data to generate meaningful statistics that would
        yield
        results more relevant than the method adopted at the end of 2006. The Company
        will again re-evaluate this methodology at the end of the 2008 fiscal
        year.
  F-26
  **Surfect
        Holdings, Inc. and Subsidiary**
 **(a
        development stage company)**
 **Notes
        to Financial Statements**
 **Inception
        (December 26, 2000) through December 31, 2007**
  12)
              Stock
                  Options — continued
  Option
        grants to non-employees—
        continued
 For
        non-employees, the rate of non-exercise was reduced to zero, since there
        is no
        forfeiture provision assigned to these options. Although these options expire
        ten years from the date of grant, an expected life of approximately three
        years
        was utilized in the calculation to account for the fact that their exercise
        will
        likely occur in a more expedited fashion, with limited forfeiture.
 For the years ended
                        Dec 31, 2006 & 2007Dividend
                          yield
                      
                      
                      0
                      %Expected
                          volatility
                      
                      
                      100.83
                      %Risk-free
                          interest rate
                      
                      
                      4.61
                      %Expected
                          lives
                      
                      
                      3
                          years
 The
              weighted average fair value of non-employee options on the respective
              dates of
              grant, using the fair value based methodology for non-employees for
              the year
              ended December 31, 2007 and 2006, was $0.56 and $0.57 respectively.
              The
              unamortized value of non-employee stock options under SFAS 123(R) was
              approximately $159,528 at December 31, 2007. The unamortized portion
              will be
              expensed over a period up to three years consistent with individual
              consulting
              service agreements, to be re-evaluated quarterly.
 For
                the
                year ended December 31, 2005, stock based compensation expense of
                approximately
                $5,000 (approximately $1,500 of which was earned during 2004) was
                recorded for
                non-employees related to the grant of stock options to purchase 364,000
                shares
                of the Common Stock issued in connection with ongoing consulting
                services begun
                at various dates between July 1, 2004 and July 10, 2005. Such compensation
                was
                accounted for under the provisions of EITF
                96-18.
  **13)**
              **Management
                  Exercise of Vested Stock
                  Options**
  Between
        November 15, 2004 and September 21, 2006, the Company issued options to purchase
        an aggregate of 11,403,322 shares of Common Stock of Surfect Technologies,
        Inc.
        to its executive management. The options were granted in the periods and
        at the
        amounts shown below. On September 26, 2007, the Company allowed its Executive
        Management to exercise their vested options and provided them a bonus to
        offset
        the exercise cash requirement. This transaction resulted in direct compensation
        as reflected in the table below. Additionally, the Company made associated
        federal and state tax deposits on behalf of its executive management of
        approximately $90,000.
  Number of
                Options
                Granted
              
              Number of
                Options
                Vested and
                Exercised
              
              Grant Date
                FMV and
                Original
                Exercise
                Price
              
              Exercise
                  Price
              
              Stock Option
                Compensation at
                Grant Date
              
              Compensation at
                Exercise/Bonus
                Date
              
              Total
                CompensationNov-04
              
              
              1,600,000
              
              
              586,667
              
              $
              0.02
              
              $
              0.043
              *
              $
              -
              
              $
              25,227
              
              $
              25,227Mar-06
              
              
              3,550,000
              
              
              1,733,333
              
              
              0.02
              
              
              0.043
              *
              
              2,661
              
              
              71,872
              
              
              74,533Jun-06
              
              
              2,480,000
              
              
              998,889
              
              
              0.02
              
              
              0.043
              *
              
              3,814
              
              
              39,138
              
              
              42,952Jul-06
              
              
              620,000
              
              
              229,630
              
              
              0.02
              
              
              0.043
              *
              
              593
              
              
              9,281
              
              
              9,874Sep-06
              
              
              3,153,322
              
              
              1,051,107
              
              
              0.04
              
              
              0.043
              
              
              45,199
              
              
              -
              
              
              45,199Total
              
              
              11,403,322
              
              
              4,599,626
              
              
              
              
              $
              0.043
              
              $
              52,267
              
              $
              145,518
              
              $
              197,785
  *
        The
        exercise price of options granted prior to September 22, 2006, was amended,
        by mutual agreement between the Company and the employee, to the
        September 22, 2006, fair market value prior to management’s exercise. In
        accordance with the provisions of SFAS 123(R), the modifications were treated
        as
        an exchange for a new award as of September 26, 2006, and the full amount
        of the fair value of all vested shares were recorded as compensation expense
        commensurate with the exercise of 4,599,626 options to purchase common shares
        of
        Surfect Technologies, Inc.  Compensation expense related to the unvested
        options remaining will be recognized over their requisite service
        periods.
 
 Compensation
        expense of approximately $52,267 was recognized in relation to share-based
        compensation earned under the provisions of SFAS 123(R) in relation to options
        granted to management employees during the year ended December 31, 2006.
  F-27
  **Surfect
        Holdings, Inc. and Subsidiary**
 **(a
        development stage company)**
 **Notes
        to Financial Statements**
 **Inception
        (December 26, 2000) through December 31, 2007**
  **14)**
              **Warrants**
  As
        of
        December 31, 2006, there were warrants to purchase an aggregate of 1,758,250
        shares of Common Stock, at an exercise price of $2.00 per share, outstanding.
        The warrants expire in September, 2010.
  On
        November 30, 2007, the Company accepted subscriptions in a private offering
        for
        an aggregate of (i) 21,500,000 shares of Common Stock, and (ii) five-year
        warrants to purchase an aggregate of 21,500,000 shares of Common Stock at
        an
        exercise price of $0.08 per share, for which the Company received gross proceeds
        of $860,000. The warrants may be exercised, at the option of the holder,
        by cash
        payment of the exercise price or by “cashless exercise”. Additionally, 1,935,000
        warrants exercisable at $.04 per share were granted to a placement agent
        prior
        to year end. These warrants expire in 2013.
  Pursuant
        to the terms of the Waiver, on December 14, 2007 the Company issued five-year
        warrants to purchase an aggregate of 26,034,875 shares of Common Stock at
        an
        exercise price of $0.08 per share (the “Warrant Shares”) and 1,788,333 shares of
        Common Stock at an exercise price of $.0001 per share, to the Bridge Investors.
        The warrants may be exercised, at the option of the holder, by cash payment
        of
        the exercise price or by “cashless exercise”. The
        warrants also provide the holder with anti-dilution price
        protection.
  **15)**
              **Loss
                  Per Share**
  The
        Company has incurred losses in all periods since inception.
  The
        effect of additional common stock issuable as a result of potential preferred
        share conversions, cumulative dividends on preferred shares, and exercise
        of
        warrants or stock options, net of treasury share repurchases from warrant
        and
        stock option proceeds, has not been included in the diluted loss per share
        calculation since their impact would be anti-dilutive. Such additional
        potentially issuable shares totaled 55,512,218, 4,418,313, and 3,714,000,
        at
        December 31, 2007, 2006, and 2005, respectively.
  F-28
  **Surfect
        Holdings, Inc. and Subsidiary**
 **(a
        development stage company)**
 **Notes
        to Financial Statements**
 **Inception
        (December 26, 2000) through December 31, 2007**
  **16)**
              **Subsequent
                  Events**
  On
        January 11, 2008 and January 16, 2008, the Company accepted
        subscriptions from accredited investors in a private offering for an aggregate
        of (i) 35,750,000 and 9,875,000 shares of Common Stock, respectively, and
        (ii) five-year warrants to purchase an aggregate of 35,750,000 and 9,875,000
        shares of Common Stock, respectively, at an exercise price of $0.08 per share,
        for which the Company received gross proceeds of $1,430,000 and $395,000,
        respectively. These funds included $765,000 received through December 31,
        2007.
  This
        equity funding also included issuing 1,530,859 of Common Stock in exchange
        for
        the remaining $50,000 of Bridge Notes outstanding which converted to 1,530,859
        shares of common stock at $0.04 per share and 1,291,625 warrants to purchase
        shares of common stock at $0.08 per share, as well as $140,000 of Short Term
        Notes which were converted into 7,000,000 shares of common stock at $0.02
        per
        share and 7,000,000 warrants to purchase shares at $0.08.
  In
        February, 2008 the Company issued 1,440,000 shares of Common Stock to a
        placement agent for services provided to the Company in connection with the
        Company’s Bridge Loan and the obtaining of waivers from the Bridge Investors.
  On
        February 19, 2008, the Company entered into an agreement to escrow $525,000
        of
        funds from the proceeds of the financing completed in January, 2008 with
        the
        intent of dedicating these funds to investor relations efforts for
        worldwide markets. To that end, the Company is pursuing an engagement with
        an independent investor relations specialist with terms that will
        authorize the release of escrowed funds in the support of the
        Company’s investor relations efforts.
  On
        March
        22, 2008 the Board of Directors approved the Surfect Holdings, Inc. Equity
        Incentive Plan (the “Plan”). This Plan is intended to advance the interests of
        the company by enhancing the ability of the Company to attract and retain
        qualified employees, consultants, Officers, and directors by creating incentives
        and rewards for their contributions to the success of the Company. This Plan
        is
        intended to comply in all respects with Rule 16b-3 and its successor rules
        as
        promulgated under Section 16(b) of the Securities Exchange Act of 1934 for
        participants who are subject to Section 16 of the Exchange Act. The aggregate
        number of shares of Common Stock which may be issued pursuant to the Plan
        is
        58,000,000. As of March 22, 2008, options to purchase 53,151,929 shares were
        outstanding and 4,848,071 shares remain available for issuance under the
        Plan.




F-29


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




None




**Item
                8A(T).**
            **Controls
                and Procedures.**




**Management’s
      Report on Internal Control Over Financial Reporting**




Our
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting, as such term is defined in Exchange Act Rule
      13a-15(f). Under the supervision and with the participation of our management,
      including our Chief Executive Officer and Chief Financial Officer, we conducted
      an evaluation of the effectiveness of our internal control over financial
      reporting as of December 31, 2007 based on the criteria set forth in Internal
      Control - Integrated Framework issued by the Committee of Sponsoring
      Organizations of the Treadway Commission. Based on our evaluation under that
      criteria, our management concluded that our internal control over financial
      reporting was effective as of December 31, 2007.




This
      Annual Report does not include an attestation report of our independent
      registered public accounting firm regarding internal control over financial
      reporting. We were not required to have, nor have we engaged our independent
      registered public accounting firm to perform, an audit on our internal control
      over financial reporting pursuant to the rules of the Securities and Exchange
      Commission that permit us to provide only management’s report in this Annual
      Report.


**Changes
        in Internal Control Over Financial Reporting**


There
      were no changes in our internal control over financial reporting during the
      fourth quarter of fiscal 2007 that have materially affected, or are reasonably
      likely to material affect, our internal control over financial
      reporting.




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


Not
                  Applicable




29





**PART
      III**




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







**DIRECTORS
      AND EXECUTIVE OFFICERS**




The
      following sets forth the names, ages and positions of our current directors
      and
      executive officers. All directors hold office for one-year terms until the
      election and qualification of their successors. Officers are elected annually
      by
      the board of directors and serve at the discretion of the board.




**Name**
            
            **Age**
            
            **Position**Steven
                Anderson
            
            53
            
            President,
                Chief Executive Officer, Chief Operating Officer, Secretary, Treasurer
                and
                DirectorAnthony
                M. Maffia, Jr.
            
            60
            
            Chief
                Financial OfficerSteve
                T. Cho
            
            45
            
            Chief
                Technology OfficerMark
                T. Cox
            
            51
            
            DirectorPio
                M. Verges
            
            54
            
            DirectorMichael
                G. Mezzapelle
            
            51
            
            DirectorLaurence
                P. Wagner
            
            47
            
            Director




*Steven
      Anderson* has
      served as our President, Chief Executive Officer, Secretary and Treasurer and
      a
      director since September 2006 and as our Chief Operating Officer since June
      2007. Mr. Anderson has also served as President, Chief Executive Officer
      and as a director of our subsidiary, Surfect Technologies since July 2005 and
      as
      its Vice President of Business Development from December 2004 to July 2005.
      Mr.
      Anderson has 28 years of packaging industry experience including marketing
      and technical development activities focused on electronics manufacturing and
      bringing new innovative interconnect technology to the semiconductor industry.
      Prior to joining Surfect Technologies, from 2002 through 2004, Mr. Anderson
      founded and served as president of Altgen, LLC, a solar fuel cell development
      company. From 2000 until 2002, Mr. Anderson served as the chief executive
      officer of Silicon Bandwidth, an optical interconnect development company,
      and
      from 1988 to 2000, as senior vice president of corporate marketing and business
      development at Amkor Technologies, a semiconductor industry assembly outsourcing
      company. Mr. Anderson holds a BSEE degree in Engineering from the University
      of
      North Dakota.





*Anthony
      M. Maffia, Jr.* has
      served as our Chief Financial Officer since April 5, 2007 and as Vice
      President-Finance of Surfect Technologies since January 2007. Mr. Maffia has
      29
      years of experience in the accounting and finance area, with over 14 years
      at
      Amkor Technology, Inc., a semiconductor manufacturing services company. While
      with Amkor, Mr. Maffia held positions as vice president of financial systems
      from 2006 to 2007, vice president of finance from 2003 to 2006 and senior
      director of operations finance from 1993 to 2003. In such capacities, Mr. Maffia
      provided financial and systems support to Amkor’s manufacturing operations
      throughout the Asia Pacific Rim. Mr. Maffia holds a BS in Computer Science
      from
      New Jersey Institute of Technology and a MBA from Rensselaer Polytechnic
      Institute.




*Steve
      T. Cho* has
      served as our Chief Technology Officer since June 2007. Dr. Cho has served
      as
      manager, new products development at Abbott Labs/Hospira, from 1997 until 2007.
      Dr. Cho has over 25 years’ experience in applying semiconductor technology to
      the biomedical, flat panel, military and ICC industries. Dr. Cho holds 29
      patents (granted or pending), authored 20 publications and has received 9
      technical awards in the area of chip design. Dr. Cho holds a Ph.D. from the
      University of Michigan, a MBA from UCLA a MSEE from Ohio State University and
      a
      BSEE from Massachusetts Institute of Technology.




30




*Mark
      T. Cox* has
      served as a director since January 11, 2008. In 2003, Mr. Cox founded New Energy
      Fund LP, a public equity hedge fund which focuses on sustainable energy and
      has
      served as its Chief Executive Officer since such time. Prior thereto from 1998
      to 2002, Mr. Cox was portfolio manager of Pinnacle International Management
      LLC.
      Mr. Cox has 23 years of investment experience in global equity markets as an
      analyst and portfolio manager. Mr. Cox holds an MBA from Columbia University,
      a
      MA from Dundee University and a BA from Université de Toulouse le Mirail,
      France.




*Pio
      M. Verges* has
      served as a director since January 11, 2008. Mr. Verges has been a financial
      consultant for various European companies since the early 1990s. Mr. Verges
      has
      been a professor of finance at La Salle Universities for its MBA and Master
      in
      Information Management programs and at the European University for its BBA
      and
      MBA programs in Barcelona, Spain. Mr. Verges holds a law degree from the School
      of Law, University of Navarra, Pamplona, Spain and an MBA from I.E.S.E.
      University of Navarra, Barcelona, Spain.




*Michael
      G. Mezzapelle* has
      served as a director since January 11, 2008. In December 2002, Mr. Mezzapelle
      founded Mezzapelle & Associates, LLC, a certified public accounting firm,
      which primarily services clients in the Connecticut, New York and New Jersey
      area. Prior thereto, from 1981 to November 2002, Mr. Mezzapelle was a partner
      of
      Strada & Mezzapelle, LLC of Stamford, Connecticut. Mr. Mezzapelle is a
      Certified Public Accountant and holds a BS degree in Accounting from Fairfield
      University.





*Laurence
      P. Wagner* has
      served as a director since September 2006. Mr. Wagner has also served as a
      director of Surfect Technologies since 2004. Mr. Wagner has 22 years’ experience
      in the semiconductor industry and has since August 2004, served as vice
      president of strategic business development at KLA-Tencor Corp. From 2001
      through 2004, Mr. Wagner was a principal with the Excellerate Group, a
      management consulting firm. Mr. Wagner worked at FSI International, Inc., a
      tooling manufacturer (“FSI”), from May 2001 through June 2003, where he served
      as both senior vice president of FSI and president of its microlithography
      division and was involved with, among other things, business development,
      Asia-Pacific and European customer relationships, process re-engineering and
      product development. Mr. Wagner holds a Masters degree in Chemical Engineering
      Practice and a Bachelors Degree in Chemical Engineering, both from the
      Massachusetts Institute of Technology.




There
      are
      no family relationships between any of our directors and executive
      officers.




**Committees
      of the Board of Directors**




*Audit
      Committee*




The
      audit
      committee’s duties are to recommend to our board of directors the engagement of
      independent auditors to audit our financial statements and to review our
      accounting and auditing principles. The audit committee reviews the scope,
      timing and fees for the annual audit and the results of audit examinations
      performed by us and our independent registered public accounting firm, including
      their recommendations to improve the system of accounting and internal controls.
      The audit committee will at all times be composed exclusively of directors
      who
      are, in the opinion of our board of directors, free from any relationship which
      would interfere with the exercise of independent judgment as a committee member
      and who possess an understanding of financial statements and generally accepted
      accounting principles. Messrs. Mezzapelle and Verges are our current
      audit committee members.




31




*Compensation
      Committee*




The
      compensation committee reviews and approves our salary and benefits policies,
      including compensation of executive officers. The compensation committee also
      administers our stock option plan and 2008 Equity Incentive Plan and recommends
      and approves grants of stock and options under such Plan. Messrs.
      Mezzapelle, Wagner and Anderson are our current compensation
      committee members.




**Board
      Independence**




We
      believe that each of Laurence Wagner, Michael Mezzapelle and Pio Verges is
      an
“independent director,” as that term is defined by applicable listing standards
      of The Nasdaq Stock Market, including the rules relating to the independence
      standards of an audit committee and the non-employee director definition of
      Rule
      16b-3 promulgated under the Securities and Exchange Act of 1934.




**** **Code
      of Ethics**




Our
      management has adopted a Code of Ethics that applies to all of our employees,
      including our Chief Executive Officer and Chief Financial Officer. Although
      not
      required, the Code of Ethics also applies to our Board of Directors. We have
      presented it to our Board of Directors for formal approval and expect it will
      be
      adopted at the next meeting or by unanimous consent. The Code provides written
      standards that we believe are reasonably designed to deter wrongdoing and
      promote honest and ethical conduct, including the ethical handling of actual
      or
      apparent conflicts of interest between personal and professional relationships,
      full, fair, accurate, timely and understandable disclosure and compliance with
      laws, rules and regulations, including insider trading, corporate opportunities
      and whistle-blowing or the prompt reporting of illegal or unethical behavior.
      We
      will provide a copy of the Code of Ethics to any
      person without charge, upon request. The request for a copy can be made in
      writing to Surfect Holdings, Inc., 1800 W. Broadway Road, Tempe, Arizona 85282,
      Attention: Mr. Anthony Maffia, Jr.








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




The
      following table sets forth certain information about compensation paid, earned
      or accrued for services by (i) our Chief Executive Officer and (ii) the two
      highest compensated other executive officers who earned in excess of $100,000
      in
      the fiscal year ended December 31, 2007 and were employed by us at December
      31,
      2007 (“Named Executive Officers”).




Summary
      Compensation Table





Name
                and Principal Position
            
            Year
            
            Salary
            
            Option
              Awards(1)
            
            All
                Other
              Compensation
            
            
            
            TotalSteven
                Anderson
            
            
            2007
            
            $
            143,621
            
            $
            27,774
            
            
            -
            
            
            
            
            $
            172,395Chief
                Executive Officer,
            
            
            2006
            
            $
            173,654
            
            $
            9,156
            
            $
            137,783
            (2)
            
            
            
            $
            320,593President,
                Chief OperatingOfficer
                and directorAnthony
                M. Maffia, Jr.
            
            
            2007
            
            $
            85,275
            
            $
            28,727
            
            
            
            
            
            
            
            $
            114,002Chief
                Financial Officer
            
            
            2006
            
            
            
            
            
            
            
            
            -
            
            
            
            
            
            -Mark
                W. Eichhorn(3)
            
            
            2007
            
            $
            117,660
            
            $
            7,047
            
            
            -
            
            
            
            
            $
            124,707Vice
                President Sales and
            
            
            2006
            
            $
            41,885
            
            $
            1,762
            
            
            -
            
            
            
            
            $
            43,697Marketing




32





(1)
            Based
                upon the aggregate grant date fair value calculated in accordance
                with the
                Financial Accounting Standards Board (“FASB”) Statement of Financial
                Accounting Standard (“FAS”) No. 123(R), Share Based Payment. Our policy
                and assumptions made in valuation of share based payments are contained
                in
                Note 12 to our December 31, 2007 financial
                statements.




(2)
            Represents
                (i) the exercise of 2,503,333 shares of common stock paid by us and
                (ii) a
                “gross up” amount of $49,042 and reimbursed by us for the payment of taxes
                incurred in connection with such exercises for Mr.
                Anderson.




(3)
            Mr.
                Eichhorn resigned from our company on January 7,
                2008.




The
      stock
      options granted below are subject to future vesting conditioned upon employment,
      or in the case of our directors, service as a director on each applicable
      vesting date.





On
      each
      of March 31, 2006, June 19, 2006 and September 22, 2006, we granted Mr. Anderson
      a 10-year option to purchase 2,800,000, 1,240,000 and 3,496,276 shares of common
      stock at $0.02 per share, which options vest as to one-third of such shares
      on
      the date of grant and in equal monthly installments as to the balance of the
      shares subject to the option commencing with the first day of the month
      immediately following the date of grant. Based upon a third party appraisal,
      the
      exercise price of these options was adjusted to $0.043 per share on September
      22, 2006 to more accurately reflect the fair market value of such shares on
      the
      grant dates.




On
      each
      of June 16, 2006, September 21, 2006, and September 21, 2006, we granted Mr.
      Eichhorn a 10-year option to purchase 620,000, 620,000, and 768,685 shares
      of
      common stock at $0.02 per share which options vest as to one-third of such
      shares on the date of grant and in equal monthly installments as to the balance
      of the shares subject to the option commencing with the first day of the month
      immediately following the date of grant. Based upon a third party appraisal,
      the
      exercise price of these options were adjusted to $0.043 per share on September
      22, 2006 to reflect the fair market value of the common stock on the grant
      dates.





On
      September 21, 2006, we granted Mr. Miles A. Prim, our former Chief Operating
      Officer, 10-year options to purchase an aggregate of 1,004,342 shares of common
      stock at an exercise price of $0.02 per share which options vest as to one-third
      of such shares on the date of grant and which options vest as to one-third
      of
      such shares on the first anniversary of grant, and in equal installments as
      to
      the balance on each anniversary thereafter. Based upon a third party
      appraisal, the exercise price of these options were adjusted to $0.043 per
      share
      on September 22, 2006 to reflect the fair market value of the common stock
      on
      the dates of grant. An aggregate of 114,904 options were forfeited upon Mr.
      Prim’s resignation on June 26, 2007.




On
      each
      of November 30, 2006 and April 5, 2007, we granted Mr. Prim a 10-year option
      to
      purchase 144,647 and 197,135 shares of common Stock at exercise prices of $2.27
      and $1.13, respectively, which options vest as to one-third of such shares
      on
      the first anniversary of the date of grant, and in equal installments as to
      the
      balance on each anniversary thereafter. All of such options had not vested
      and
      expired upon Mr. Prim’s resignation on June 26, 2007.




On
      April
      5, 2007, we granted Mr. Maffia a 10-year option to purchase an aggregate of
      325,000 shares of common stock at an exercise price of $1.13 per share, which
      options vest as to one-third of such shares on the first anniversary of the
      date
      of grant, and in equal installments as to the balance on each anniversary
      thereafter.




33





**OUTSTANDING
                EQUITY AWARDS AT FISCAL YEAR-END**OPTION
                AWARDS**Name**
              **(a)**
            
            **Number
                of Securities Underlying Unexercised Options**
              **(#)**
              **Exercisable**
              **(b)**
            
            **Number
                of Securities Underlying Unexercised Options**
              **(#)**
              **Unexercisable**
              **(c)**
            
            **Option
                Exercise Price**
              **($)**
              **(e)**
            
            **Option
                Expiration Date**
              **(f)**Steven
                Anderson
            
            
            36,492
            
            
            109,476
            
            $
            0.30
            
            
            10/15/2014126,042
            
            
            75,625
            
            $
            0.30
            
            
            3/31/201665,122
            
            
            39,073
            
            $
            0.30
            
            
            6/19/2016209,846
            
            
            293,785
            
            $
            0.30
            
            
            9/22/2016Mark
                W. Eichhorn
            
            
            22,741
            
            
            31,837
            
            $
            0.30
            
            
            6/19/201624,808
            
            
            34,732
            
            $
            0.30
            
            
            9/6/201646,137
            
            
            64,591
            
            $
            0.30
            
            
            9/22/2016Anthony
                M. Maffia, Jr.
            
            
            0
            
            
            325,000
            
            $
            1.13
            
            
            4/5/2017







**2006
      Stock Plan**




Our
      2006
      Stock Plan was adopted by our directors and stockholders on September 25, 2006.
      An aggregate of 1,500,000 shares of common stock have been reserved for issuance
      under the Plan. The purpose of the Plan is to provide an incentive to retain
      directors, officers, consultants and employees of our company and our affiliates
      whose services are considered valuable. Under the Plan, we are authorized to
      issue incentive stock options intended to qualify under Section 422 of the
      Internal Revenue Code, non-qualified stock options and restricted stock. The
      Plan is administered by our board of directors or the Compensation Committee.
      As
      of December 31, 2007, no shares of common stock have been issued under the
      Plan,
      options to purchase 1,315,452 shares of common stock were outstanding and
      184,548 shares of common stock remain available for issuance under the Plan.




**2008
      Equity Incentive Plan**





On
      March
      22, 2008, our board of directors approved the 2008 Equity Incentive Plan (the
      “Plan”) covering stock rights to purchase up to 58,000,000 shares of common
      stock. Under the Plan, the board of directors or Compensation Committee may
      authorize options, grants of restricted stock and restricted stock units, and
      cash and stock-settled stock appreciation rights. On the same date, under the
      Plan the board approved the granting of five-year non-qualified options
      exercisable at $0.12 per share to the following executive officers:





**Optionee**
            **Position**
            **No.
                of Options**Steven
                Anderson
            Director,
                Chief Executive Officer
            1,927,731Anthony
                M. Maffia, Jr.
            Chief
                Financial Officer
            1,393,500Steve
                T. Cho
            Chief
                Technology Officer
            1,162,731




34




Under
      the
      Plan, these same persons were also granted five-year non-qualified options
      at an
      exercise price of $0.15 per share:







**Optionee**
            **No.
                of Options**Steven
                Anderson
            22,632,000Anthony
                M. Maffia, Jr.
            11,316,000Steve
                T. Cho
            8,487,000




The
      options vest over a three-year period on the last calendar day of each fiscal
      quarter beginning June 30, 2008, as long as each optionee continues to be
      employed by the Company as of the applicable vesting date. All of the shares
      of
      common stock issuable upon exercise of the options referenced in the above
      two
      tables may not be publicly sold for a period of 18-months from the date of
      grant.




Under
      the
      Plan, each of the Company’s non-employee directors received automatic grants of
      five-year non-qualified options, exercisable at $0.12 per share as
      follows:







**Name**
            **No.
                of Options**
            **Purpose**Mark
                Cox
            200,000
            Service
                as a DirectorMichael
                Mezzapelle
            200,000
            Service
                as a Director50,000
            Service
                as Chairman of the Audit CommitteePio
                Verges
            200,000
            Service
                as a DirectorLaurence
                Wagner
            200,000
            Service
                as a Director




The
      options vest over a three-year period on the last calendar day of each fiscal
      quarter beginning June 30, 2008, as long as each optionee continues to be a
      director (or Committee Chairman) as of the applicable vesting date.




**Director
      Compensation**




The
      following table lists compensation accrued to non-employee directors in
      2007:





**DIRECTOR
                COMPENSATION****Name**
              **(a)**
            **Option
                Awards**
              **($)**
              **(d)**
            **Total**
              **($)**
              **(j)**Laurence
                P. Wagner(1)(2)(3)
            $756
              $6,389
            $756
              $6,389






35





(1)
            Based
                upon the aggregate grant date fair value calculated in accordance
                with FAS
                123(R), Share Based Payments. Our policy and assumptions made in
                the
                valuation of share based payments are contained in Note 12 to our
                December
                31, 2007 financial statements. The amounts expensed relate to awards
                of
                options in prior years.





(2)
            On
                September 24, 2004, Mr. Wagner was granted a 10-year option to purchase
                an
                aggregate of 150,000 shares of common stock at an exercise price
                of $0.02
                per share. On September 27, 2006, in connection with the Merger,
                each
                share of common stock subject to the option was converted into 0.144048
                shares of common stock resulting in an outstanding option to purchase
                21,607 shares of common stock as of December 31,
                2006.





(3)
            On
                June 19, 2006, Mr. Wagner was granted a 10-year option to purchase
                an
                aggregate of 470,000 shares of common stock at an exercise price
                of $0.02
                per share, which option vests as to one-third of such shares on the
                date
                of grant and in equal monthly installments as to the balance of such
                shares, commencing on July 1, 2006 through June 19, 2009. On September
                27,
                2006, in connection with the Merger, each share of common stock subject
                to
                the option was converted into 0.144048 shares of common stock resulting
                in
                an outstanding option to purchase 67,703 shares of common stock as
                of
                December 31, 2006.




Other
      than as set forth above, we have not paid, and currently do not intend to pay
      our directors cash fees for their services. We reimburse the members of our
      board of directors for reasonable expenses incurred in connection with their
      attendance at board and committee meetings. Under the 2008 Equity Incentive
      Plan, non-employee directors and Chairman of the Board, if any, and Chairman
      of
      Committees receive automatic grants of five-year options each year as
      follows:




Chairman
                  of the Board
              100,000
                  optionsDirectors
              200,000
                  optionsChairman
                  of a Committee
              50,000
                  options





The
      options are granted at fair market value and vest quarterly over a three-year
      period, subject to remaining as a director, Chairman of the Board or Chairman
      of
      a committee on each applicable vesting date.





**Other
      Options**




In
      September 2006, options to purchase an aggregate of 13,872,696 shares of Surfect
      Technologies’ common stock held by certain of its management were converted into
      options to purchase an aggregate of 1,998,334 shares of our common stock in
      accordance with their terms in connection with the Merger. As of March 28,
      2008,
      options to purchase an aggregate of 995,462 shares remain
      outstanding.




**Employment
      Agreements**




36




We
      currently do not have written employment agreements with any of our executive
      officers. We pay our executive officers salaries as follows:





**Name**
            **Title**
            **Annual
                Salary**Steven
                Anderson
            Chief
                Executive Officer
            $175,000Anthony
                M. Maffia, Jr.
            Chief
                Financial Officer
            $130,000Steve
                T. Cho
            Chief
                Technology Officer
            $130,000











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




The
      following table sets forth information as of March 24, 2008 regarding the number
      of shares of common stock beneficially owned by: (i) each person or entity
      known
      to us to be the beneficial owner of more than 5% of our common stock, (ii)
      each
      Named Executive Officer, (iii) each director, and (iv) all of our directors
      and
      executive officers as a group. Except as otherwise indicated, each of the
      stockholders named below has sole voting and disposition power with respect
      to
      such shares of common stock.




**Name
                and Address of Beneficial Owner(1)**
            
            **No.
                of Shares Beneficially Owned**
            
            **Percentage
                Beneficially Owned(2)(3)****Officers
                and Directors**Steven
                Anderson(4)
            
            2,813,334
            
            1.2%Anthony
                M. Maffia, Jr.(5)
            
            1,501,833
            
            *Mark
                W. Eichhorn(6)
            
            64,501
            
            *Laurence
                Wagner(7)
            
            72,070
            
            *Mark
                T. Cox(8)
            
            9,642,857
            
            7.9%Michael
                G. Mezzapelle(9)
            
            500,000
            
            *Pio
                Verges
            
            714,286
            
            *All
                Officers and Directors as a group
              (8
                persons) (10)
            
            17,594,562
            
            13.8%**5%
                Shareholders**Leichtensteinische
                Landesbank AG(11)
              Staedtle
                44
              Vaduz
                9490
            
            17,988,583
            
            14.8%Whalehaven
                Capital Fund Ltd.(12)
              160
                Summit Avenue
              Montvale,
                New Jersey 07645
            
            17,000,000
            
            14.0%




37




Excalibur
                Small Cap Opportunity LP(13)
              33
                Prince Arthur Avenue
              Toronto,
                Ontario M5R 1B2, Canada
            
            11,250,000
            
            9.3%Gemini
                Master Fund, Ltd.(14)
              c/o
                Gemini Strategies
              12220
                El Camino Real, #400
              San
                Diego, California 92130
            
            7,371,700
            
            6.2%New
                Energy Fund LP(8)
              527
                Madison Avenue
              New
                York, New York 10022
            
            9,642,857
            
            7.9%ITU
                Ventures West I, L.P. (15)
              1900
                Avenue of the Stars
              Suite
                2701
              Los
                Angeles, California 90067
            
            6,572,316
            
            5.6%Tundra
                Alternative Energy Fund Ltd. (16)
              Sir
                Walter Raleigh House
              48-50
                Esplanade
              St.
                Heller, Jersey Jel 4HH
            
            7,142,857
            
            5.9%


_______________


*
      Less
      than 1%





(1)
            Except
                as otherwise indicated, the address of each of the stockholders listed
                below is: c/o Surfect Holdings, Inc., 1800 West Broadway Road, Tempe,
                Arizona 85282. Because we are not required to file reports with the
                Securities and Exchange Commission under Section 13 of the Exchange
                Act,
                the information on 5% stockholders is based upon our
                knowledge.




(2)
            Beneficial
                ownership is determined in accordance with the rules of the SEC.
                In
                computing the number of shares beneficially owned by a stockholder
                and the
                percentage ownership of that stockholder, shares of common stock
                issuable
                upon the exercise of stock options or warrants or the conversion
                of other
                securities held by that stockholder that are currently exercisable
                or
                convertible, or are exercisable or convertible within 60 days, are
                deemed
                to be issued and outstanding. These shares, however, are not deemed
                outstanding for the purposes of computing percentage ownership of
                each
                other stockholder. Shares issuable under certain outstanding warrants,
                having contractual provisions limiting exercise to the extent such
                exercise would cause such beneficial owner, together with its affiliates
                or members of a “group,” to beneficially own a number of shares of common
                stock that would exceed 4.99% of our then outstanding shares of common
                stock following such exercise are excluded from the shares and percentage
                ownership indicated in the table.





(3)
            Based
                on 121,545,809 shares of common stock outstanding as of March 7,
                2008.





(4)
            Includes
                2,452,734 shares issuable upon the exercise of currently exercisable
                stock
                options.





(5)
            Includes
                1,393,500 shares issuable upon the exercise of currently exercisable
                stock
                options and 108,333 exercisable within 60
                days.





(6)
            Mr.
                Eichhorn resigned from our company on January 4,
                2008.




38




(7)
            Represents
              options
              exercisable presently or within 60 days.(8)
            Mark
                T. Cox is chief executive officer of New Energy Fund LP and has sole
                voting and investment power over shares held by it. He disclaims
                beneficial ownership of the shares owned by it.





(9)
            Includes
                (i) 250,000 shares owned by Goliath Holdings LLC (“Goliath”), of which Mr.
                Mezzapelle is the president, and (ii) 250,000 shares issuable upon
                the
                exercise of currently exercisable warrants. Mr. Mezzapelle disclaims
                beneficial ownership of such
                shares.





(10)
            Includes
                the Company’s Chief Technology
                Officer.





(11)
            Michael
                Aebli, Assistant Manager of Liechtensteinische Landesbank AG, has
                voting
                and investment power over the shares held by Liechtensteinische Landesbank
                AG. Excludes 8,458,125 shares issuable upon exercise of
                warrants.





(12)
            Michael
                Finkelstein, investment manager, Arthur Jones and Trevor Williams,
                directors, and Brian Mazzella, chief financial officer of Whalehaven
                Capital Fund Limited, share voting and investment power over the
                shares
                held by Whalehaven Capital Fund Limited. Messrs. Finkelstein, Jones,
                Williams and Mazzella each disclaim beneficial ownership of such
                shares.
                Excludes 15,000,000 shares issuable upon exercise of
                warrants.





(13)
            Will
                Hechter, the president of Excalibur Capital Management Inc., the
                general
                partner of Excalibur Small Cap Opportunities LP, has sole voting
                and
                investment power over shares held by Excalibur Small Cap Opportunities
                LP.
                Mr. Hechter disclaims beneficial ownership of such shares.
                Excludes 11,250 shares issuable upon exercise of
                warrants.





(14)
            Steven
                W. Winters, the managing member of Gemini Strategies, LLC, the investment
                manager of Gemini Master Fund, Ltd., has sole voting and investment
                power
                over shares held by Gemini Master Fund, Ltd. Mr. Winters disclaims
                beneficial ownership of such shares. Includes 100,000 shares issuable
                upon
                exercise of currently exercisable warrants. Excludes 9,540,208 shares
                issuable upon exercise of warrants.





(15)
            Chad
                Brownstein and Jonah Schnel, managing partners of ITU Ventures West
                Capital Management, L.P., the manager of ITU Ventures West I, L.P.,
                have
                voting and investment power over the shares held by it. Includes
                250,000
                shares issuable upon exercise of currently exercisable
                warrants.





(16)
            Gerard
                Reid, fund manager of Tundra Alternative Energy Fund, has sole voting
                and
                investment power over shares held by Tundra Alternative Energy Fund.
                Mr.
                Reid disclaims beneficial ownership of such shares. Excludes
                5,000,000 shares issuable upon exercise of
                warrants.


**Item
                12.**
            **Certain
                Relationships and Related Transactions, and Director
                Independence.**




All
      of
      our officers and directors and 5% stockholders at the time of the Merger
      received 0.144048 shares of common stock in the Merger for each share of common
      stock held by them prior to the Merger, which represented the same conversion
      ratio as our other stockholders received, except for ITU Ventures which paid
      additional compensation of $500,000 for its shares. We issued a total of
      7,455,123 shares of common stock to our officers, directors and 5% stockholders,
      out of a total of 8,001,666 shares issued in the Merger and 1,998,334 shares
      reserved for issuance pursuant to stock options held by management in connection
      with the Merger. ITU Ventures is a 5% stockholder.




39




On
      September 27, 2006, concurrently with the 2006 Private Placement, we issued
      (i)
      500,000 shares of common stock upon conversion of a 9% promissory note in the
      principal amount of $500,000, dated August 10, 2006, and (ii) a four-year
      warrant to purchase 250,000 shares of common stock at an exercise price of
      $2.00
      to ITU Ventures, a 5% stockholder.







**Item
                  13.**
              **Exhibits****.**ExhibitNumber
              Description2.1
              Agreement
                  of Merger and Plan of Reorganization (1)3.1
              Certificate
                  of Incorporation (1)3.2
              Certificate
                  of Amendment (1)3.3
              Certificate
                  of Amendment (6)3.4
              Certificate
                  of Amendment (2)3.5
              Bylaws
                  (3)4.1
              Form
                  of Warrant issued under Common Stock Subscription Agreement
                  (1)4.2
              Form
                  of Placement Agent and Finders Warrant (8)4.3
              Placement
                  Agent Letter Agreement between Granite Financial Group, LLC and
                  Surfect
                  Technologies, Inc. (1)4.4
              Placement
                  Agent Letter Agreement between WFG Investments, Inc. and Surfect
                  Technologies, Inc. (1)4.5
              Letter
                  Agreement between Westminster Securities Corporation and Surfect
                  Technologies, Inc. (1)4.6
              Form
                  of Warrant (5)4.6
              Engagement
                  Letter with Westminster Securities Corporation (5)4.8
              Amendment
                  to Westminster Securities Corporation Engagement Letter
                  (5)10.1
              Form
                  of Unit Subscription Agreement (1)10.2
              Form
                  of Subscription Agreement (10)10.3
              Form
                  of Supplement No. 1 to Subscription Agreement (5)10.4
              Form
                  of Registration Rights Agreement (5)10.5
              2006
                  Option Plan (1)10.6
              2008
                  Equity Incentive Plan (11)10.7
              Form
                  of Option Agreement (1)10.8
              Form
                  of Promissory Note (5)10.9
              Form
                  of Waiver and Investment Agreement with the Bridge Investors
                  (6)10.10
              Form
                  of Acknowledgment and Agreement to Modification of Waiver and Investment
                  Agreement (6)10.11
              Lock-Up
                  Agreement with ITU Ventures West, I, L.P. (5)10.12
              Separation
                  Agreement with Thomas Griego (1)10.13
              Separation
                  and Release Agreement with Miles Prim (9)10.14
              Separation
                  and Release Agreement with Mark Eichhorn (9)10.15
              Lease
                  Agreement (9)21.1
              List
                  of Subsidiaries (7)31.1
              Certification
                  of Chief Executive Officer (Section 302)31.2
              Certification
                  of Chief Financial Officer (Section 302)32.1
              Certification
                  of Chief Executive Officer (Section 906)32.2
              Certification
                  of Chief Financial Officer (Section 906)_______________
   40
  (1)
              Contained
                  in Form 8-K filed on October 3, 2006.(2)
              Contained
                  in Form 8-K filed on March 5, 2008.(3)
              Contained
                  in Form 8-K filed on September 18, 2006.(4)
              Contained
                  in Form 8-K filed on June 1, 2007.(5)
              Contained
                  in Form 8-K filed on November 30, 2007.(6)
              Contained
                  in Form 8-K filed on December 14, 2007.(7)
              Contained
                  in the SB-2 filed November 30, 2006.(8)
              Contained
                  in the SB-2/A filed May 14, 2007.(9)
              Contained
                  in the S-1/A filed March 13, 2008.(10)
              Contained
                  in Form 8-K filed January 11, 2008.(11)
              Contained
                  in Form 8-K filed March 27,
                  2008.





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




REDW,
      LLC
      (“REDW”) has served as our independent registered public accounting firm since
      October 23, 2006 and as Surfect Technologies’ independent registered public
      accounting firm since July 18, 2006. The following table sets forth the
      aggregate fees billed to us for the fiscal years ended December 31, 2006 and
      December 31, 2005 by REDW.




2007
            
            2006Audit
                Fees(1)
            
            $
            89,467
            
            $
            52,626Audit-Related
                Fees(2)
            
            $
            19,889
            
            $
            15,846Tax
                Fees(3)
            
            $
            7,884
            
            $
            3,059All
                Other Fees
            
            $
            0
            
            $
            0






(1)
            Comprised
                of fees for the audit of our annual financial statements and review
                of our
                quarterly reports on Form 10-QSB.


(2)
            Includes
                fees related to the review of our Current Reports on Form 8-K and
                Registration Statements on Form SB-2 and amendments thereto.


(3)
            Comprised
                of services for tax compliance and tax
                research.







On
      September 27, 2006, we dismissed Moore & Associates, Chartered (“Moore”) as
      our independent registered public accounting firm as disclosed in our Current
      Report on Form 8-K, dated September 27, 2006. The following table sets forth
      the
      aggregate fees billed to us for the fiscal year ended December 31, 2006 by
      Moore.




2006Audit
                Fees(1)
            
            $
            2,750Audit-Related
                Fees
            
            $
            0Tax
                Fees
            
            $
            0All
                Other Fees
            
            $
            0





(1)
            Comprised
                of the audit of our annual financial statements and reviews of our
                quarterly reports on Form 10-QSB.







41




**SIGNATURES**




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





Date:
      March 28, 2008


**SURFECT
                HOLDINGS, INC.**By:
            /s/
                Steven AndersonSteven
                AndersonChief
                Executive Officer and President
              (Principal
                Executive Officer)





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








**Signatures**
            
            **Title**
            **Date**/s/
                  Steven
                  Anderson
              Steven
                Anderson
            
            Director
            March
                28, 2008/s/
                  Anthony M. Maffia,
                  Jr.
              Anthony
                M. Maffia, Jr.
            
            Chief
                Financial Officer (Principal Financial and Accounting
                Officer)
            March
                28, 2008/s/
                  Laurence P. Wagner
                Laurence
                  P. Wagner
            
            Director
            March
                31, 2008/s/
                  Mark T.
                  Cox
              Mark
                T. Cox
            
            Director
            March
                28, 2008/s/
                  Pio M.
                  Verges
              Pio
                M. Verges
            
            Director
            March
                28, 2008/s/
                  Michael G.
                  Mezzapelle
              Michael
                G. Mezzapelle
            
            Director
            March
                28, 2008







42






Exhibit
      Index




ExhibitNumber
            Description2.1
            Agreement
                of Merger and Plan of Reorganization (1)3.1
            Certificate
                of Incorporation (1)3.2
            Certificate
                of Amendment (1)3.3
            Certificate
                of Amendment (6)3.4
            Certificate
                of Amendment (2)3.5
            Bylaws
                (3)4.1
            Form
                of Warrant issued under Common Stock Subscription Agreement
                (1)4.2
            Form
                of Placement Agent and Finders Warrant (8)4.3
            Placement
                Agent Letter Agreement between Granite Financial Group, LLC and Surfect
                Technologies, Inc. (1)4.4
            Placement
                Agent Letter Agreement between WFG Investments, Inc. and Surfect
                Technologies, Inc. (1)4.5
            Letter
                Agreement between Westminster Securities Corporation and Surfect
                Technologies, Inc. (1)4.6
            Form
                of Warrant (5)4.6
            Engagement
                Letter with Westminster Securities Corporation (5)4.8
            Amendment
                to Westminster Securities Corporation Engagement Letter
                (5)10.1
            Form
                of Unit Subscription Agreement (1)10.2
            Form
                of Subscription Agreement (10)10.3
            Form
                of Supplement No. 1 to Subscription Agreement (5)10.4
            Form
                of Registration Rights Agreement (5)10.5
            2006
                Option Plan (1)10.6
            2008
                Equity Incentive Plan (11)10.7
            Form
                of Option Agreement (1)10.8
            Form
                of Promissory Note (5)10.9
            Form
                of Waiver and Investment Agreement with the Bridge Investors
                (6)10.10
            Form
                of Acknowledgment and Agreement to Modification of Waiver and Investment
                Agreement (6)10.11
            Lock-Up
                Agreement with ITU Ventures West, I, L.P. (5)10.12
            Separation
                Agreement with Thomas Griego (1)10.13
            Separation
                and Release Agreement with Miles Prim (9)10.14
            Separation
                and Release Agreement with Mark Eichhorn (9)10.15
            Lease
                Agreement (9)21.1
            List
                of Subsidiaries (7)31.1
            Certification
                of Chief Executive Officer (Section 302)31.2
            Certification
                of Chief Financial Officer (Section 302)32.1
            Certification
                of Chief Executive Officer (Section 906)32.2
            Certification
                of Chief Financial Officer (Section 906)_______________ (1)
              Contained
                  in Form 8-K filed on October 3, 2006.(2)
              Contained
                  in Form 8-K filed on March 5, 2008.(3)
              Contained
                  in Form 8-K filed on September 18, 2006.(4)
              Contained
                  in Form 8-K filed on June 1, 2007.(5)
              Contained
                  in Form 8-K filed on November 30,
                  2007.
  43
  (6)
              Contained
                  in Form 8-K filed on December 14, 2007.(7)
              Contained
                  in the SB-2 filed November 30, 2006.(8)
              Contained
                  in the SB-2/A filed May 14, 2007.(9)
              Contained
                  in the S-1/A filed March 13, 2008.(10)
              Contained
                  in Form 8-K filed January 11, 2008.(11)
              Contained
                  in Form 8-K filed March 27,
                  2008.






44