UNITED STATES


Securities and Exchange
Commission


Washington, DC 20549





Form 10-K





(Mark One)


x
            ANNUAL REPORT PURSUANT TO SECTION
      13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
  1934




For the fiscal year ended December 31,
2008




OR


o
            TRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For the transition period from
_____________ to ________________.




Commission File Number
000-50494


QNECTIVE,
INC.
 (Exact Name of Registrant as Specified
in Its Charter)


Nevada
                
                57-1094726(State or Other Jurisdiction
      of
                
                (I.R.S.
      EmployerIncorporation or
      Organization)
                
                Identification
      Number)





c/o Qnective (Switzerland)
AG


Thurgauerstrasse
54, CH-8050, Zurich, Switzerland


(Address of principal executive
offices)





Registrant’s telephone number, including
area code: +41-44-307-5020




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


Securities registered pursuant to
Section 12(g) of the Act: Common Stock, $0.001 par value.





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


YESoNOx





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


o NO x




Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports) and
(2) has been subject to such filing requirements for the past 90
days.





YESxNOo





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





YESoNOx









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


(Check
one):





Large accelerated filer o                                                      Accelerated
filer x





Non-accelerated
filero                                                      Smaller reporting companyo


(Do not check if a smaller reporting
company)





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





YESoNOx





State the aggregate market value of the
voting and non-voting common equity held by non-affiliates computed by reference
to the price at which the common equity was sold, or the average bid and asked
price of such common equity, as of June 30, 2008:
$102,960,000.





The number of shares of Common Stock,
$.001 par value, outstanding on March 13, 2009 is
65,400,000.





Documents Incorporated by Reference:
None











QNECTIVE, INC.


Annual Report on Form
10-KSB


FOR THE FISCAL YEAR
ENDED


DECEMBER 31, 2008





INDEX TO REPORT ON FORM
10-K




PagePART
      IItem 1.
                  Business
                  1Item 1A.
                  Risk
Factors
                  5Item 1B.
                  Unresolved Staff
      Comments
                  11Item 2.
                  Properties
                  11Item 3.
                  Legal
      Proceedings
                  11Item 4.
                  Submission of Matters to a Vote of
      Security Holders
                  11PART IIItem 5.
                  Market for Registrant’s Common
      Equity, Related Stockholder Matters, and Issuer Purchases of Equity
      Securities
                  12Item 6.
                  Selected Financial
      Data
                  13Item 7.
                  Management’s Discussion and
      Analysis of Financial Condition and Results of
      Operations
                  14Item 7A.
                  Quantitative and Qualitative
      Disclosures About Marker Risk
                  21Item 8.
                  Financial Statements and
      Supplementary Data
                  22Item 9.
                  Changes in and Disagreements With
      Accountants on Accounting and Financial Disclosure
                  22Item 9A.
                  Controls and
      Procedures
                  22Item 9B.
                  Other
      Information
                  25PART IIIItem 10.
                  Directors, Executive Officers and
      Corporate Governance
                  26Item 11.
                  Executive
      Compensation
                  28Item 12.
                  Security Ownership of Certain
      Beneficial Owners and Management and Related Stockholders
      Matters
                  30Item 13.
                  Certain Relationships and Related
      Transactions, and Director Independence
                  32Item 14.
                  Principal Accountant Fees and
      Services
                  33PART IVItem 15.
                  Exhibits and financial statement
      schedules
                  34









PART
I





We have made forward-looking statements
which relate to future events or our future financial performance. In some
cases, you can identify forward-looking statements by words such as "may",
"should", "expects", "plans", "anticipates", "believes", "estimates",
"predicts", "potential" or "continue" or the negative of these words or other
comparable terms. Forward-looking statements involve risks and uncertainties
that may cause our actual results or performance to be materially different from
those expressed in or implied by the forward-looking statements. These
uncertainties include, among others, our need to raise additional financing;
risks related to current and future research and development; risks related to
customer acceptance of our products; risks related to competition in the
telecommunications field; our history of losses; absence of trading in our
shares of stock; and general market conditions, including the current financial
crisis; and the risks in the section entitled "Risk Factors" that may cause our
historical and actual results, level of activity and performance to be
materially different from future results, level of activity, or performance as
expressed in or implied by these forward-looking statements.





Except as may be required by applicable
law, we do not undertake or intend to update or revise our forward-looking
statements, and we assume no obligation to update any forward-looking statement
as a result of new information or future events or
developments.





Item 1.
Business





Recent Events





Qnective, formerly known as Sotech Inc.
(“Qnective” or the “Company”) was incorporated in Nevada on February 2, 2005, to
operate an internet website offering comparison shopping. In February 2007, our
Board of Directors determined that the comparison shopping business would not be
successful and sought other business opportunities,and transitioned from a comparison
shopping business to a new telecommunications business specializing in the
research, design, development, marketing and distribution of telecommunications
software and services.




As part of our transition strategy, we
entered into a letter agreement dated January 2, 2007, with MobilMedia Holdings
AG (“MobilMedia”), a Swiss company, to establish a joint venture to develop and
commercialize MobilMedia’s XMS (extended message service), a wireless mobile
technology.





On February 12, 2007, our Company,
MobilMedia, and a Nevada corporation formed on January 24, 2007, Qporter, Inc.
("Qporter"), entered into a shareholders' agreement (the “Shareholders'
Agreement”). Pursuant to the terms of the Shareholders' Agreement MobilMedia
transferred to QPorter certain technology for a converged communications
platform that integrates messenger and Voice-over Internet Protocol (“VoIP”)
with a number of features allowing users to use mobile devices or desktop
computers to communicate. In exchange for the transfer of technology, MobilMedia
received a cash payment of $625,000 from Qporter and 1,250,000 shares of common
stock of Qporter, Inc. (the “Qporter Stock”), representing 50% of the
outstanding common shares of Qporter, as nominee for Oswald Ortiz, our President
and Chief Executive Officer, Tan Siekmann and Stefan Schraps (the “MMH
Shareholders”). Also pursuant to the terms of the Shareholders’ Agreement, we
received 50% of the outstanding common shares of Qporter in exchange for an
agreement to invest $2,500,000 in Qporter. Qnective fulfilled
its investment obligation by providing equity financing of $1,250,000 and
debt financing of $1,250,000.





Under the terms of the Shareholders'
Agreement, Qnective had the sole and exclusive option to purchase, free of all
encumbrances, all of the shares of Qporter owned by MobilMedia, as nominee, in
exchange for 65% of the issued and outstanding shares of common stock of
Qnective (the “Qnective Stock”) subject to adjustment to account for dilution as
a result of the sale by Qnective of shares of Qnective stock in order to raise
funds to be invested in Qnective.





Effective
October 1, 2008, we entered into an Amended Shareholders’ Agreement (the
"Amended Shareholders' Agreement") by and among our Company, MobilMedia, the MMH
Shareholders, Qporter, Capella IV LLC, and Connwards Management,
Inc.





Pursuant
to the Amended Shareholders' Agreement, the parties agreed as
follows:





1.
            The
      original Shareholders’ Agreement was
terminated;




1




2.
            Capella
      agreed to make a capital contribution to our Company of 30,550,000 shares
      of Qnective Stock for
      aggregate consideration of $1.00, and we agreed to hold the Capella Shares
      as treasury shares;





3.
            The
      MMH Shareholders agreed to exchange their Qporter Stock, for 30,550,000
      shares of Qnective
      Stock (the “Share Exchange Transaction”) representing approximately
      51% of the outstanding shares of the Qnective Stock as of
      October 1, 2008. Under the terms of the Share Exchange Transaction, Mr.
      Ortiz, our President, Chief Executive Officer, and a director of our
      Company received 14,816,750 shares of Qnective Stock
      (representing 24% of the issued and outstanding shares of Qnective Stock after giving
      effect to the transactions contemplated by the Amended Shareholders’
      Agreement); Mr. Siekmann also received 14,816,750 shares of QnectiveStock; and Mr.
      Schraps received 916,500 shares of QnectiveStock;





4.
            Connwards
      acknowledged the issuance of 1,250,000 shares of QnectiveStock to evidence
      its prior $2,500,000 equity investment in our Company at a price of $2.00
      per share; and





5.
            Connwards
      prior loan to our Company of $1,800,000 was converted into 900,000 shares
      of QnectiveStock at
      a conversion price of $2.00 per
share.





As a
result of the Share Exchange Transaction, we acquired 1,250,000 shares of
Qporter Stock, representing the balance of the 50% equity interest in Qporter
not previously owned by our Company. Upon consummation of the Share Exchange
Transaction, effective October 1, 2008, Qporter became a wholly owned subsidiary
of our Company.





As noted
in the our Annual Report on Form 10-KSB for the fiscal year ended December 31,
2007, prior to the consummation of the Share Exchange Transaction, our sole
asset was our 50% equity interest in Qporter. For accounting purposes, our
interest in our 50%-owned subsidiary was previously accounted for as a joint
venture using the equity method of accounting.





After
giving effect to the Share Exchange Transaction, we consolidated the operations
of Qporter together with our Company effective as of October 1,
2008.  We have accounted for the Share Exchange Transaction as a
reverse acquisition.  As a result, the historical financial statements
prior to October 1, 2008 are those of Qporter, rather than those of the
Company.





We are continuing the development
of  the VoIP telecommunications software, and are seeking customers
for our products and services. We are in the development stage and have not
recognized revenue as of December 31, 2008.





Information about our Company is
available on our website at www.qnective.com. The information on, or accessible
through, our website is not part of this Form 10-K.





Products and
Services





Qnective and Qporter (hereinafter,
collectively “Qnective”)are developing, marketing and selling through
licensees high-quality VoIP and messaging services to mobile telephone users. We
have branded the VoIP for mobile telephone services as QtalkTM, Qtalk BusinessTM,
Qtalk SecureTM and our messenger services for mobile telephones as
QmessengerTM.





Each of QtalkTM, QtalkTM Business and
QtalkTM Secure is a pure software solution for complete secure mobile
communication that uses package-oriented networks such as 2.5G (GPRS), 3G (UMTS)
, 3.5G (HSDPA) or WiFi for the transmission of voice information. For a flat fee
users have access to a suite of full duplex VoIP services for mobile
communications. If both parties use one of these products, whether nationally or
internationally, the same flat communication rate applies. Data transferred is
charged by volume instead of time which can lead to considerable cost savings
for users of flat-rate data accounts. International and national calls are
charged through one fixed rate.   The only costs to the
subscriber are for data usage fees from the carrier, and the flat fee charged to
the subscriber. Each product is downloaded and installed directly to the mobile
phone enabling the user to add and use the software without having to change
handset or provider. A user can keep its existing phone number and there are no
set up or installation fees.





QtalkTM is a versatile consumer
high-quality VoIP service that has been developed for mobile and desktop
users.




2




Qtalk BusinessTM is the “light” version
of our high-encryption VoIP product for mobile communications. It is designed
for professionals who seek a VoIP solution which is both secure and cost
effective. Through static encryption QtalkTM Business offers a slightly limited
but still safe version of mobile telephony providing a solution for businesses
and professionals seeking a certain level of security while offering faster
speed and cost advantages.





Qtalk SecureTM is an encrypted VoIP
product designed for professionals who seek the highest level of security to
protect their mobile communications from interception using AES 256 bit. Dynamic
encryption means that the encryption key changes with every information exchange
and is never the same making it tap-proof.





QmessengerTM is a sophisticated software
communications tool for instant messaging, “push to talk” capability, VoIP and
exchange of multimedia files, voice clips and pictures, all in a single software
product. Consumers and businesses can use Qmessenger to communicate from a
desktop PC or on the road via mobile phone. Qmessenger is ISP independent and
compatible with mobile devices using JavaTM.




Distribution





We intend to distribute our products and
services through direct channels, indirect channels and resellers to both
consumers and businesses. For direct channels, we intend to sell our products
and services to businesses with a large mobile work force that are seeking a
secure and cost-effective communications technology. For indirect channels, we
contemplate entering into agreements with carriers that will license our
products and services so that the carriers can re-brand our products and
services and sell them to their subscribers.  We also contemplate
entering into agreements with resellers in a variety of geographic areas that
will sell our products and services under our name. Our initial target
geographic areas are Europe and North and South America. We intend to provide
our products and services to customers for a monthly fixed fee adjusted for the
services used by the customers.





BT Distribution
Agreement





Qnective,
through its subsidiary, Qporter entered into a Distribution and License
Agreement dated as of September 25, 2008 (the “Distribution Agreement”) with BT
inmo BV (“BT”), a 100% subsidiary of British Telecom (BT) Group Plc, whereby
Qporter appointed BT as its non-exclusive distributor to distribute its VoIP
services to mobile telephone users.





We
granted to BT a worldwide, non-exclusive license to use Qporter’s software and
services, and to permit BT to install the software on the mobile telephones of
BT’s subscribers.





Pursuant
to the Distribution Agreement, we agreed to customize software that is
compatible with specifications provided by BT so that BT’s subscribers can
download the Services. Qporter has also agreed to provide maintenance services
and support to BT.





BT agreed
to pay a license fee based on the number subscriptions for the services sold by
BT to its subscribers. BT will also pay an annual fee for the support services
we provide that will be equal to ten percent of the annual license fee paid by
BT. In addition, in consideration for our customization of the services for BT’s
subscribers, BT will pay us a one-time customization fee that will be payable
monthly for five months, some of which has been paid.





The
Distribution Agreement has a term of three years, and will be automatically
renewed on an annual basis, unless terminated pursuant to the terms of the
Agreement.





If the
license fees payable by BT exceed €10 million (approximately $12.7 million),
then BT will have the option to convert ten percent of the license fees paid by
BT, into an equity investment in Qnective Stock, based on the fair market value
of the Qnective Stock at the time of the conversion. The maximum amount of
license fees that can be converted into Qnective Stock is €7.5 million
(approximately $9.5 million).





Marketing
and Consultant Agreements





The
Company has entered into various marketing and consultant agreements, and
continues to negotiate additional agreements with third
parties.  Under the terms of these agreements, the Company appoints
the consultant on a non-exclusive basis to locate resellers or customers in a
designated territory in exchange for a percentage of the fees received from
resellers and customers.  In addition, the Company has issued to
certain consultants shares of Qnective Stock in consideration for their
services.




3




Competition





Qnective's
competitors consist of companies that offer VoIP products and
services.  In particular, we compete with  other alternative
telecommunication service providers.  As telecommunications moves from
traditional landline services to mobile and VoIP, the traditional
telecommunications companies can also be expected to compete with our products
and services.





Qnective's
competitors in the United States include Vonage, AT+T, Primus, Cablevision, 8X8,
and Verizon.  Potential competitors in the European market include
Swisscom, Vodafone, and Orange.  Potential customers generally
purchase mobile telephone services from one or more of these competing service
providers, therefore our success is dependent on our ability to attract these
customers away from their existing suppliers, or to enter into strategic
partnerships with these suppliers to offer our services to their customer
base.





The
traditional telecommunications companies have historically dominated their
respective regional markets with  large marketing budgets, large
customer bases and greater resources.  They also generally provide
broadband services which are required to use our services, and these competing
service providers could potentially attempt to block their users from using our
services.





Competitive
Advantage





The
Company believes its competitive advantage lies in its proprietary software
technology which provides users with high-quality encrypted telephone calls
using mobile telephones.  For a small monthly flat fee mobile
telephone users using the Company's proprietary software will have access to
unlimited telephone time with other users of our services over the
internet.  Each QtalkTM product is a pure software solution for
complete, secure, encrypted mobile telecommunications that uses package-oriented
networks such GPRS, UMTS, HSDA, or WiFi for the transmission of voice and
data.





The
Company and its predecessors have spent years on research and development of its
QtalkTM suite of products at an investment cost of approximately $4 million
creating a potential barrier to entry both in time and investment for potential
future competitors such as telecommunications companies, instant messaging
providers and internet service providers.





The
Company believes its related instant messaging product, QmessengerTM offers a
similar competitive advantage in the instant messaging market because of its
quality and level of encryption.





Personnel





Neither Qnective nor Qporter
had any employees at December 31, 2008.  Our wholly owned
subsidiaries in Switzerland and Poland collectively employ a total 24 people as
of March 1, 2009; 20 full-time and 4 part-time. Among these employees, 13 are
employed in technology development, 6 in sales and marketing, and 5 in
administrative.





Government
Regulation





To date, government regulations have not
materially restricted the use or expansion of the internet or use of VoIP
technology. However, the legal and regulatory framework for the internet and VoIPis uncertain and may change. New laws may cover issues that
include:





·
                                                                                    sales and other
      taxes;·
                                                                                    user
    privacy;·
                                                                                    pricing
      controls;·
                                                                                    characteristics and quality of
      products and services;·
                                                                                    consumer
      protection;·
                                                                                    libel and
      defamation;·
                                                                                    copyright, trademark and patent
      infringement; and·
                                                                                    other claims based on the nature
      and content of Internet
materials.




4




These new laws could impact our ability
to market and sell our suite of products in accordance with our business
plan.





We intend to target only liberalized
non-monopolistic telecommunications markets which provide access to their
channels on a non-discriminating basis. Markets which block proxies, ip
addresses, data and voice channels or where tower and radio operators must
provide internet access will be avoided.





Intellectual
Property





The
Company's strategy for the protection of its intellectual property includes
protecting its proprietary software as a "trade secret."  Only three
people have access to the source code.





The
Company is in the process of developing a trademark protection strategy for its
QTalkTM and QmessengerTM trademarks in a variety of jurisdictions based on
potential licensing and sales of its products in those
jurisdictions.  All third-party licenses of the Company's proprietary
software are subject to written license agreements.





Environmental




We are not aware of any environmental
laws that will be applicable to the operation of our
business.




ITEM 1A. Risk
Factors




We have not recognized any revenue and
we are not profitable, and if we continue to lose money and do not achieve
profitability, we may be unable to continue our business. There is substantial
doubt about our ability to continue as a going concern.




We have incurred losses since our
inception. We incurred net losses of $11,981,262 for the year ended December 31,
2008, and net losses of $13,539,424 since our inception in January 2007. We
expect to incur significant operating expenses over the next year in connection
with the continued development and expansion of our business. Our expenses
included product development and marketing expenses relating to products that
will not be introduced and products that will not generate revenue until later
periods, if at all. We expect we will continue to experience losses and negative
cash flow, some of which could be significant. Results of operations will depend
upon numerous factors, some of which are beyond our control, including market
acceptance of our products, new product introductions and
competition.




Because of our history of losses and our
current financial condition, the report of our Independent Registered Public
Accounting Firm includes an explanatory paragraph referring to substantial doubt
about our ability to continue as a going concern. Our financial statements do
not include any adjustments that might result from the outcome of this
substantial doubt, as discussed in Note 2 to our financial statements
for the year ended December 31, 2008.





If we are unsuccessful in raising
additional capital in the future, we may be unable to continue to
operate.




To date, we have had negative cash flows
from operations and have been dependent on sales of our equity securities and
debt financing to meet our cash requirements. We believe we currently do not
have adequate cash resources to fund anticipated cash requirements through
December 31, 2009. Based on our business plan we expect to need additional
funding from external sources of approximately $5,000,000 through December 31,
2009. Our ability to continue our operations and market and sell our services
will depend on our ability to raise additional financing or generate sufficient
revenues; and, if we are unable to obtain such financing or generate sufficient
revenues, we will not be able to develop our business. Any additional equity
financing will be dilutive to shareholders, and debt financing, if available,
will increase expenses and may involve restrictive covenants. We will be
required to raise additional capital on terms which are uncertain, especially
under the current capital market conditions. Under these circumstances, if we
are unable to obtain capital or are required to raise it on undesirable terms,
it may have a material adverse effect on our financial condition, which could
require us to:




5




·
                                          Curtail our operations
      significantly;·
                                          Sell significant
      assets;·
                                          Seek arrangements with strategic
      partners or other parties that may require us to relinquish rights to
      products, technologies or markets; or·
                                          Explore other strategic
      alternatives, including a merger or
sale.





We are a development stage company with
a limited operating history, which makes an investment in our Company
speculative.




We are a development stage company
with proprietary technology for communication software to enable mobile
telephone users and subscribers to communicate via VoIP. We have experienced
losses from our development stage operations, which have involved
developing and testing our communication technology and commencement of the
marketing, sales, and distribution portions of our business. We anticipate
losses until we are able to create a sustainable subscriber base. Our Company
has little meaningful historical financial or other information available upon
which you can base your evaluation of our business and prospects. The revenue
and income potential of our business is unproven. As a result, you should
consider our business and prospects in light of our lack of operating history
and the challenges that we will face as a development stage company
seeking to market and sell our services. If we are not able to develop our
business, we will not be able to achieve our goals and could suffer economic
loss, in which case you could lose your entire investment.




We have a history of losses and may not
operate profitably in the future.




We have incurred losses since our
inception as we have invested heavily in the development and marketing of our
VoIP products and services. We anticipate our net losses and negative cash flow
will continue until we are able to create a sustainable subscriber base. As of
December 31, 2008, our accumulated deficit since inception was $13,539,424. We
believe that our planned growth and profitability will depend in large part on
our ability to market our technology and services and gain enough clients to
reach critical mass. Accordingly, we intend to invest heavily in marketing,
strategic partnerships and development of our client base. If we are not
successful in expanding our client base, it will have a material adverse effect
on our financial condition and our ability to continue to operate our
business.





Our operating results are subject to
fluctuations caused by many factors that could cause us to fail to achieve our
revenue or profitability expectations, which in turn could cause our stock price
to decline.




Our operating results can vary
significantly depending upon a number of factors, many of which are outside our
control. Factors that may affect our operating results
include:




·
                                                                                                                  Market acceptance of, and changes
      in demand for, our products and services;·
                                                                                                                  Gain or loss of clients or
      strategic relationships;·
                                                                                                                  Announcement or introduction of
      new services and products by us or by our
    competitors;·
                                                                                                                  Our ability to build brand
      recognition;·
                                                                                                                  Price
      competition;·
                                                                                                                  Our ability to upgrade and develop
      systems and infrastructure to accommodate
growth;·
                                                                                                                  Our ability to attract and
      integrate new personnel in a timely and effective
      manner;·
                                                                                                                  General economic conditions,
      including economic conditions specific to the mobile and
      telecommunications industry; and·
                                                                                                                  Our ability to update our systems
      and technology to adapt to the evolution of mobile communication
      technology.




6




We depend on continued development of
existing infrastructure.




Our business model is dependent on
already available mobile telecommunications and internet technology to deliver
VoIP solutions to customers. While it is anticipated that the quality of the
infrastructure will continue to evolve and improve, there is no guarantee that
the current infrastructure will continue to evolve and improve. Should the
infrastructure not continually evolve and improve, this could impact our ability
to generate revenues.




Our services have never been sold on a
mass market commercial basis, and our success depends upon broad market
acceptance of VoIP.




VoIP services for mobile communications
are at a relatively early stage of development and the extent to which such
services will be widely adopted is uncertain. If our services are not accepted
by the market, our business plans, prospects, results of operations and
financial condition will suffer. In addition, the market for VoIP products and
services is relatively new and characterized by rapid technological change,
evolving industry standards and strong customer demand for new products,
applications, and services. As is typical of a new and rapidly evolving
industry, the demand for, and market acceptance of, recently introduced VoIP
products and services is highly uncertain. We can provide no assurances that the
use of VoIP telecommunications will become widespread. The commercial acceptance
of VoIP products and services may be affected by a number of factors
including:




·
                                              Quality of
      infrastructure;·
                                              Adoption of software or other
      technology;·
                                              Inconsistent quality of
      service;·
                                              Poor voice quality over VoIP
      networks; and·
                                              Lack of availability of
      cost-effective data network
access.




If the market for VoIP fails to develop,
develops more slowly than we anticipate, or if VoIP products and services fail
to achieve market acceptance, our business will be adversely
affected.





Our international operations which we
plan to expand will subject us to additional risks that may adversely affect our
operating results due to increased costs.




Our principal office is located in
Zurich, Switzerland. Pursuit of international opportunities requires us to make
significant investments, particularly marketing and servicing expenses, before
returns on such investments, if any, are realized. International operations are
subject to a number of risks and potential costs, including:




·
                                                                                                                        Unexpected changes in regulatory
      requirements and telecommunications standards;·
                                                                                                                        Tariffs and other trade
      barriers;·
                                                                                                                        Risk of loss in currency exchange
      transactions;·
                                                                                                                        Exchange controls and other
      currency restrictions;·
                                                                                                                        Difficulty in collecting
      receivables;·
                                                                                                                        The need to customize marketing
      and products;·
                                                                                                                        Inadequate protection of
      intellectual property;·
                                                                                                                        Adverse tax consequences;
      and·
                                                                                                                        Political and economic
      instability.





Any of these factors could prevent us
from increasing our revenue and otherwise adversely affect our operating
results. We may not be able to overcome some of these barriers and may incur
significant costs in addressing others.




7




If we lose key personnel we may not be
able to achieve our objectives.




We are dependent on the continued
efforts of our senior management team, including our Chairman and Chief
Executive Officer, Mr. Oswald Ortiz, our Chief Financial Officer, Mrs. Francoise
Lanter, and our Chief Technology Officer, Mr. Reto Largo. If for any reason,
these or other key members of management do not continue to be active in
management, then our business, financial condition, or results of operations
could be adversely affected. We cannot provide any assurances that we will be
able to retain our senior executives or other personnel necessary for the
maintenance and development of our business.  We do not maintain key
person life insurance on any of our executives.




We may not be able to hire and retain
highly skilled technical employees, or retain key management and other personnel
which could affect our ability to compete effectively and could adversely affect
our operating results.




We depend on highly skilled technical
personnel for research and development. To succeed, we must hire and retain
employees, independent contractors, or consultants who are highly skilled in
rapidly changing communications technologies. In particular, we will need
to:




·
                    Hire more employees, independent
      contractors or consultants with experience developing and providing
      advanced technology products and services;·
                    Retain future personnel to sell
      and support the advanced technology solutions that we intend to market in
      the future; and·
                    Retain personnel to maintain and
      support our
services.





Individuals who can perform the services
we need to provide for our products and services are scarce. Because of the
intense competition for qualified employees in our industry, hiring and
retaining qualified employees is both time-consuming and expensive. We may not
be able to hire enough qualified personnel to meet our needs as our business
grows or to retain the employees we currently have. Our inability to hire and
retain the individuals that we need could hinder our ability to sell our
existing products, systems, software or services or to develop and sell new
ones. If we are not able to attract and retain qualified employees, we will not
be able to successfully implement our business plan and our business will be
harmed.





Our success will depend upon the
continued service of key management personnel. The loss of services of any of
the key members of our management team or our failure to attract and retain
other key personnel could disrupt operations and have a negative effect on
employee productivity and morale and harm our financial results. We operate in a
market that is intensely and increasingly competitive, and if we are unable to
compete successfully, our revenue could decline and we may be unable to gain
market share.





We may have difficulty managing
growth.




Our development has required, and is
expected to continue to require, the full utilization of our management,
financial and other resources, which to date has had limited working capital.
Managing our growth will depend upon our ability to improve and expand our
operations, including our financial and management information systems, and to
recruit, train and manage executive staff and employees. We may not be able to
efficiently scale our operations, and this failure to manage effectively growth
may have a materially adverse effect on our operating results and financial
condition.





We may make acquisitions, which if
proven unsuccessful, could negatively affect our future profitability and
growth.




We believe the mobile communication
industry and the telecommunication industry will provide our company with
partnership opportunities and acquisition opportunities that provide strategic
advantages for our company to further expand and grow our business. We may not
be able to identify, acquire or profitably manage additional businesses that we
may invest in or acquire without substantial costs, delays or other problems. In
addition, acquisitions may involve a number of special risks,
including:




8




·
                  Diversion of management’s
      attention;·
                  Failure to retain key acquired
      personnel; and·
                  Risks associated with
      unanticipated events, circumstances or legal
      liabilities.





In addition, if an acquired business has
operating losses or negative operating cash flow, our ability to achieve
positive cash flow and profitability, as well as our liquidity, could be
adversely affected. Some or all of these risks could adversely affect our
operations and financial performance. For example, client satisfaction or
performance problems at an acquired business could adversely affect our
reputation and financial results. Further, any business acquired in the future
may not achieve anticipated revenues and earnings and therefore negatively
impact our financial position, results of operations and cash
flows.




We may face competition that could
adversely affect our ability to generate revenues and
profitability.





As
telecommunications moves from traditional landline services to mobile and VoIP,
the traditional telecommunications companies can also be expected to compete
with our products and services.  Potential customers generally
purchase mobile telephone services from one or more of these competing service
providers, therefore our success is dependent on our ability to attract these
customers away from their existing suppliers, or to enter into strategic
partnerships with these suppliers to offer our services to their customer
base.  The traditional telecommunications companies have historically
dominated their respective regional markets with large marketing budgets, large
customer bases and greater resources.  They also generally provide
broadband services which are required to use our services, and these competing
service providers could potentially attempt to block their users from using our
services.





We may be vulnerable to efforts of
telephone companies lobbying to protect their revenue streams and from
competition from such telephone companies.




Telephone companies could lobby for
change in the relevant legislation in their markets to protect their current
revenue streams or increase the fees for data transfer. Any adverse changes to
the regulations and policies of the mobile and telecommunications industries
could deter end-user purchasers of VoIP services. Any changes to government
regulation of telecommunications companies that favor telephone companies,
particularly with respect to fees and charges could affect our business model
and our results of operations.




If we are unable to protect our
intellectual property rights, our business may be harmed.




Although we attempt to protect our
intellectual property through trademarks, trade secrets, copyrights,
confidentiality, and non-disclosure agreements and other measures, intellectual
property is difficult to protect and these measures may not provide adequate
protection. Competitors may misappropriate our intellectual property, disputes
as to ownership of intellectual property may arise, and our intellectual
property may otherwise become known or independently developed by competitors.
The failure to protect our intellectual property could seriously harm our
business. If we do not obtain sufficient international protection for our
intellectual property, our competitiveness in international markets could be
significantly impaired, which would limit our growth and future
revenue.




Failure to protect our proprietary
technology and intellectual property rights would seriously impact our
competitiveness and any litigation to protect such intellectual property would
be time consuming and costly.




Our success and ability to compete
depends on our proprietary technology which is protected by trade secrets. We
could be subject to patent infringement or violation of other intellectual
property claims, the defense of which can be costly and time-consuming. Further,
an adverse decision could subject the Company to significant liability to third
parties, require us to seek licenses from third parties which may not be
available on reasonable terms, require us to redesign our services, or subject
us to limitations on the marketing and sale of our services.




9




We may be found to infringe on
third-party intellectual property rights.




Third parties may in the future assert
claims or initiate litigation related to their patent, copyright, trademark and
other intellectual property rights in technology that is important to us. The
asserted claims or litigation could include claims against us or our suppliers
alleging infringement of intellectual property rights with respect to our
products or components of those products. Regardless of the merits of the
claims, they could be time-consuming, result in costly litigation and diversion
of technical and management personnel, or require us to develop a non-infringing
technology or enter into license agreements. There can be no assurance that
licenses will be available on acceptable terms, if at all. Furthermore, because
of the potential for high court awards, which are not necessarily predictable,
it is not unusual to find even arguably unmeritorious claims resulting in large
settlements. If any infringement or other intellectual property claim made
against us by any third party is successful, or if we fail to develop
non-infringing technology or license the proprietary rights on commercially
reasonable terms and conditions, our business, operating results and financial
condition could be materially adversely affected.




All of our assets and all of our
directors and officers are outside the United States, therefore, it may be
difficult for investors to enforce within the United States any judgments
obtained against the Company or any of its officers or
directors.




Although we are organized under the laws
of the State of Nevada, our principal business office is located in Zurich,
Switzerland. All of our directors and officers reside outside the United States
and all of our assets are located outside of the United
States.  Therefore, it may be difficult for investors to enforce
judgments obtained in the United States against the Company or its officers and
directors, including actions based upon the civil liability provisions of the
U.S.'s federal securities laws or U.S. bankruptcy laws.





We may lose certain tax attributes as a
result of our acquisition program.




At December 31, 2008, Qnective had
available net operating loss (“NOL”) carry-forwards in various jurisdictions of
approximately $13,523,281. Under Section 382 of the Internal Revenue Code of
1986, as amended, the use of prior losses, including NOL’s, is limited if a
corporation undergoes an “ownership change”. Future issuances of equity
interests by us may result in an ownership change that is large enough for this
limitation to apply. If the limitation applies, we may be unable to use a
material portion of our available NOL carry-forwards to reduce future taxable
income.





Costs of compliance with Sarbanes-Oxley
Act of 2002 and the related SEC regulations represent a significant percentage
of our general and administrative expenses.




The Sarbanes-Oxley Act of 2002 requires
heightened financial disclosure and corporate governance for all public
companies. Although costs of compliance with the Sarbanes-Oxley Act are
uncertain due to several factors, we expect that our general and administrative
expenses will increase based on the required compliance. Failure to comply with
the Sarbanes-Oxley Act, Securities and Exchange Commission ("SEC") regulations
or OTCBB listing requirements, if need be, may result in penalties, fines, or
delisting of our securities from the OTCBB, which could limit our ability to
access the capital markets, having a negative impact on our financial condition
and results of operations.




Our board of directors does not yet have
an independent member, a compensation committee, an established audit committee
or an independent financial expert on its board. As a result, our shareholders
do not have the protection and benefit that such corporate governance measures
are intended to provide.




Currently,
we do not have any independent directors on our Board of
Directors.  We also do not have a Compensation Committee, an Audit
Committee, or an independent financial expert.  Having an independent
director, a Compensation Committee and an independent Audit Committee with a
financial expert would protect the rights of minority shareholders, oversee our
management, prevent self dealing by members of the Board of Directors, and
assist the Board of Directors in monitoring the integrity of our financial
statements, the qualifications, independence and performance of our public
accountants or the performance of our internal audit function.. Because we have
not implemented these corporate governance measures, our shareholders do not
have the protection and benefit that such measures are meant to
provide.
 
 Because
our Board of Directors is comprised of management and a controlling shareholder,
these individuals have the power to make all of our major decisions without a
shareholder vote, or solicitation of consents from any other shareholder or
other person. This discretion could lead to decisions that are not necessarily
in the best interest of the minority shareholders.


Our board of directors is comprised of
the company's management and a controlling shareholder. As a result, management
and the controlling shareholder are able to exercise significant influence over
our company, including but not limited to, any board approvals for the election
of our directors; and, indirectly, the selection of our senior management, new
securities issuances, compensation, mergers and acquisitions, and any amendments
to our bylaws or articles of incorporation. When voting on such matters our
shareholders' interests may conflict with that of the company's board of
directors and may not be in the best interests of minority
shareholders.




10
 
 Shareholders
that purchased Qnective Stock from our Company after October 1, 2008 may have a
claim against our Company for rescission, because these shareholders were not
aware that we issued treasury shares based on a share certificate representing
31,000,000 shares of Qnective Stock.  The holder of the share
certificate subsequently reported that the certificate was lost, and as a result
we may be required to issue these shares to a third party, if the third party
presents the lost certificate for transfer, which would significantly increase
the number of shares outstanding.
 Subsequent
to the execution by Capella IV of the Amended Shareholders' Agreement on October
1, 2008, and its agreement to deliver certificate no. 502, representing
31,000,000 shares of Qnective Stock to our Company, Capella reported to our
Company that the certificate has been lost. We issued Qnective Stock in reliance
on the fact that the share certificate would be tendered to the Company and
cancelled.  If the Company is required to issue the shares to a third
party, then shareholders who purchased shares of Qnective Stock since October 1,
2008, might have a right to seek rescission of their purchases, because we did
not disclose that the share certificate was lost and that we might be required
to issue to a third party the shares represented by the lost certificate. There
can be no assurance that we would have sufficient funds to satisfy these
claims.
 
 If
we are required to issue shares to a third party as a result of the lost share
certificate, then existing shareholders could suffer significant dilution, and
we may be required to increase our authorized capital.
 
 If a
bona fide purchaser
presents the lost share certificate for transfer, the number of issued and
outstanding shares could increase by up to 31,000,000 resulting in significant
dilution to our existing shareholders.  If we are required to issue
additional shares and there are not sufficient authorized shares, then we may be
required to use our best efforts to increase the number of authorized shares, or
pay damages for the failure to issue the additional shares.
 
 In
order to re-issue new shares from treasury stock that were cancelled based on
the lost certificate, we will need to indemnify our transfer agent for any
losses incurred by our transfer agent in connection with the lost certificate,
which could result in significant liability to our Company.
 
 Our
management has determined in its reasonable business judgment that it is in our
Company's and our shareholders' best interest to indemnify the transfer agent in
connection with the transfer agent's issuance of a replacement certificate for
the lost certificate. The costs and expenses of indemnifying the transfer agent
could be significant.  We are currently negotiating with certain
beneficial owners of Qnective Stock to indemnify our Company for any losses we
incur in connection with our indemnification of our transfer agent, and these
beneficial owners may pledge to our Company additional shares of Qnective Stock
as collateral security for their obligation to indemnify our Company, however,
there can be no assurance that we will enter into any agreement on such terms,
or at all.


Registrant
Information




We file annual, quarterly and special
reports and other information with the Securities and Exchange Commission
(“SEC”) that can be inspected and copied at the public reference facility
maintained by the SEC at 100 F. Street N.E., Room 1580, Washington, D.C.
20549-0405. Information regarding the public reference facilities may be
obtained from the SEC by telephone at 1-800-SEC-0330. The Company’s filings are
also available through the SEC’s Electronic Data Gathering Analysis and
Retrieval System which is publicly available through the SEC’s website
(www.sec.gov). Copies of such materials may also be
obtained by mail from the public reference section of the SEC at 100 F Street
N.E., Room 1580, Washington, D.C. 20549-0405 at prescribed rates. In addition,
all of our SEC filings and press releases can be accessed through our website
(www.qnective.com).





ITEM 1B. Unresolved Staff
Comments





None.





ITEM 2.Properties





We maintain offices at Thurgauerstrasse
54, CH-8050 Zurich, Switzerland. The property is approximately 455 square meters
and is rented on a month-to-month basis by Qnective (Switzerland) for a
monthly rental of approximately $15,000.





ITEM 3.Legal
Proceedings





We are not party to, nor are we aware of
any legal proceedings against us nor are we aware of any threatened or pending
legal proceedings.





ITEM 4.Submission of Matters
to a Vote of Security Holders





None.




11




PART
II




ITEM 5.Market for
Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of
Equity Securities





The graph
below compares the cumulative total stockholder return on our common stock with
the cumulative total return on the NASDAQ Stock Market and the Standard &
Poor’s Industry Index for the Telecommunication Services Sector (Wireless
Telecommunication Services sub-Sector) for each of the last two fiscal years
ended December 31, assuming an investment of $100 at the beginning of such
period and the reinvestment of any dividends. The comparisons in the graphs
below are based upon historical data and are not indicative of, nor intended to
forecast, future performance of our common stock.








Our common stock is traded on the OTC
Bulletin Board under the trading symbol “QNTV”. From August 7, 2006, to March 7,
2007, our common stock traded under the symbol “SOHN”. The following table sets
forth the quarterly high and low bid prices for our common stock during our last
two fiscal years, as reported by a Quarterly Trade and Quote Summary Report of
the OTC Bulletin Board. The quotations reflect inter-dealer prices, without
retail mark-up, markdown or commission, and may not necessarily represent actual
transactions.





Fiscal 2008
                                
                                
                                Fiscal 2007High
                                
                                
                                Low
                                
                                
                                High
                                
                                
                                Low1st Quarter
                                
                                $
                                3.96
                                
                                
                                $
                                3.96
                                
                                
                                $
                                0.00
                                
                                
                                $
                                0.002nd Quarter
                                
                                $
                                3.96
                                
                                
                                $
                                3.96
                                
                                
                                $
                                4.01
                                
                                
                                $
                                4.003rd Quarter
                                
                                $
                                3.55
                                
                                
                                $
                                3.55
                                
                                
                                $
                                3.96
                                
                                
                                $
                                4.004th Quarter
                                
                                $
                                3.85
                                
                                
                                $
                                3.85
                                
                                
                                $
                                3.96
                                
                                
                                $
                                4.00




12




Holders of Common
Stock





As of March 13, 2009, there were ten
holders of record. This does not reflect those shares held in "street"
name.





Dividends





It is our present policy not to pay cash
dividends and to retain future earnings to support our growth. We do not
anticipate paying any cash dividends in the foreseeable
future.





Securities Authorized for Issuance under
Equity Compensation Plans





None.




Issuer
Purchases of Equity Securities





We did
not repurchase any of our equity securities during fiscal 2008.





Recent Sales of Unregistered
Securities





All recent sales of unregistered
securities have been previously reported on the Company’s Current Reports on
Form 8-K.   See “Item 15. Exhibits”.





ITEM 6.Selected Financial
Data





The following table sets forth selected
consolidated financial data with respect to the fiscal year ended December 31,
2008 and the period from January 24, 2007 (inception) to December 31, 2007. The
selected consolidated statement of operations data set forth below for fiscal
year ended December 31, 2008 and the period from January 24, 2007 (inception) to December 31, 2007, and
the selected consolidated balance sheet data set forth below at December 31,
2008 and December 31, 2007, are derived from our consolidated financial
statements, which have been audited by BDO Visura, independent registered public
accounting firm, as indicated in their report included in this Annual Report.
The selected consolidated financial data should be read in conjunction with the
consolidated financial statements of the Company, and the Notes thereto,
included in this Annual Report, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in Item 7.





Balance Sheets




December 31,
                                                    2008
                                                  
                                                  
                                                  December 31,
                                                    2007$
                                                  
                                                  
                                                  
                                                  $Total Cash
                                                  
                                                  
                                                  1,497,536
                                                  
                                                  
                                                  
                                                  122,345Total current
      assets
                                                  
                                                  
                                                  1,766,677
                                                  
                                                  
                                                  
                                                  145,165Total long-term
      assets
                                                  
                                                  
                                                  1,837,592
                                                  
                                                  
                                                  
                                                  1,205,129Total current
      liabilities
                                                  
                                                  
                                                  1,109,618
                                                  
                                                  
                                                  
                                                  154,489Total long-term
      liabilities
                                                  
                                                  
                                                  402,602
                                                  
                                                  
                                                  
                                                  1,499,980Total liabilities and
      stockholders’ equity (deficiency)
                                                  
                                                  
                                                  3,604,269
                                                  
                                                  
                                                  
                                                  1,350,294




13




Statement of
Operations




Year Ended
      December31,2008
                                                  
                                                  
                                                  Period Ended
      December 31,2007$
                                                  
                                                  
                                                  
                                                  $Marketing
      expenses
                                                  
                                                  
                                                  832,577
                                                  
                                                  
                                                  
                                                  439,404General and administrative
      expenses
                                                  
                                                  
                                                  4,552,053
                                                  
                                                  
                                                  
                                                  1,019,192Research and development
      expenses
                                                  
                                                  
                                                  2,851,411
                                                  
                                                  
                                                  
                                                  2,040Foreign exchange
      loss
                                                  
                                                  
                                                  73,727
                                                  
                                                  
                                                  
                                                  96,849Loss on early extinguishment of
      debt
                                                  
                                                  
                                                  1,665,000
                                                  
                                                  
                                                  
                                                  0Interest
    income
                                                  
                                                  
                                                  (5,001
                                                  )
                                                  
                                                  
                                                  0Interest
      expense
                                                  
                                                  
                                                  2,011,495
                                                  
                                                  
                                                  
                                                  677Net loss
                                                  
                                                  
                                                  11,981,262
                                                  
                                                  
                                                  
                                                  1,558,162Foreign currency translation
      adjustments
                                                  
                                                  
                                                  68,885
                                                  
                                                  
                                                  
                                                  (3,987
                                                  )Change in pension
      liability
                                                  
                                                  
                                                  369,068
                                                  
                                                  
                                                  
                                                  0Comprehensive
      loss
                                                  
                                                  
                                                  12,419,185
                                                  
                                                  
                                                  
                                                  1,554,175




ITEM 7.Management’s
Discussionand Analysisof Financial Conditionand Resultsof
Operations


Overview





You should read the following discussion
of our financial condition and results of operations together with the audited
financial statements and the notes thereto included in this Annual Report on
Form 10-K for the year ended December 31, 2008. This discussion contains
forward-looking statements that reflect our plans, estimates and beliefs. Our
actual results may differ materially from those anticipated in these
forward-looking statements, including those set forth in this Annual Report on
Form 10-K.




We are engaged in the business of
researching, designing, developing, marketing and distributing
telecommunications services and software.





After giving effect to the Share
Exchange Transaction, we consolidated the operations of Qporter together withQnectiveeffective as of October 1,
2008.  We have accounted for the Share Exchange Transaction as a
reverse acquisition. The reverse acquisition resulted in a change of control of
Qnective, with the former50% shareholders of Qporter owning 51% oftheQnectiveStockand Qporter becoming a wholly owned
subsidiary of Qnective.As a result, the historical financial
statements prior to October 1, 2008 are those of Qporter, rather than those ofQnective.





During the year ended December 31, 2008,
we continued to develop our VoIP telecommunications software, entered into a significant license
agreement and entered into three marketing and consultant agreements to identify
customers and resellers.  We continue to engagein discussions to create a distribution
network and seek strategic partners.





The Company is in the development stage
and its principal operations have commenced, but there has not yet been any
recognized revenue therefrom.





Material Trends and
Uncertainties




Periodic changes occur in our Company’s
industry and business making it reasonably likely that aspects of our future
operating results could be materially different from our historical operating
results. Sometimes these matters have not occurred, but their existence is
sufficient to raise doubt regarding the likelihood that historical operating
results are an accurate gauge of future performance. Our Company attempts to
identify and describe these trends, events, and uncertainties to assist
shareholders in assessing the likely future performance of our Company.
Shareholders should understand that these matters typically are new, sometimes
unforeseen, and often are fluid in nature. Moreover, the matters described below
are not the only issues that may result in variances between past and future
performance nor are they necessarily the only material trends, events, and
uncertainties that will affect our Company. As a result, shareholders are
encouraged to use this and other information to judge for themselves the
likelihood that past performance will be indicative of future
performance.




14




The trends, events, and uncertainties
set out in the remainder of this section have been identified by our Company as
those we believe are reasonably likely to affect materially the comparison of
historical operating results reported herein to either past period results or to
future operating results.




We think that our ability to develop our
products and then to market and successfully penetrate important markets in
Europe and the Americas is reasonably likely to have a material impact on our
short-term and long-term liquidity. In particular, our ability to license our
products and services directly to businesses, and indirectly through carriers
and resellers will have a material impact on our ability to generate
revenues.





We also believe that the rollout of
mobile data networks by the operators of these networks is reasonably expected
to have a material impact on our net sales, or revenues or income from
operations, if any, since the use of our products and services is dependent on
these mobile data networks.




Plan of Operation




As of
December 31, 2008, we had $1,497,536 in cash.  After paying certain
costs and expenses related to operations and  professional fees,
including the cost of preparing and filing our reports with the SEC, management
estimates that we will have sufficient funds to operate for the next three
months.
 
 It will
be necessary for us to seek additional financing in order to continue as a going
concern through December 31, 2009.  We will most likely seek
additional funds from external sources of approximately
$5,000,000.  There can be no assurance that outside funding will be
available on terms acceptable to the Company, or at all.
 
 Research
and Development
 
 We plan
to continue our research and development of the Company's products and services
and we plan to hire two additional employees for technical development in our
subsidiary in Poland during the next twelve months. The anticipated cost will be
approximately $2,750,000.
 
 Marketing
and Sales
 
 We also
intend to continue our marketing and sales efforts to create a subscriber base
for the Company's products and services in Europe during the next twelve months.
We anticipate marketing expenses will be $2,100,000.
 
 General
and Administrative
 
 We expect
that we will hire two additional employees for administration during the next
twelve months. We anticipate general and administrative costs will be
approximately $1,650,000.
 
 Purchase
or Sale of Plant and Equipment
 
 We do not
anticipate any significant purchase or sale of plant and equipment during the
next twelve months.
  RESULTS OF OPERATIONS - COMPARISON OF
PERIODS ENDED DECEMBER 31, 2008 AND 2007




Net Loss




Our Company’s net loss for the period
ended December 31, 2008, was $11,981,262as compared to a net loss of $1,558,162
for the period ended December 31, 2007. The increase in net loss during the
period ended December 31, 2008, wasprimarily due to an increase in
personnel expenses of $1,260,826, a charge to general and administrative
expenses of $2,273,425 to reflect an incremental increase of one percent
ownership in Qporter by our CEO, a charge to research and development expenses
of $2,273,425 to reflect an incremental increase of one percent ownership in
Qporter by our former CTO,additional legal expenses of $141,322
andincreasedconsultant expenses of
$241,996comprised
primarily of consulting fees billed to the Company by the CEO, CFO and the
former CTO. In addition, we had an increase of $521,455 for stock-based
compensation expenses, and an increase of loss of $2,011,495 for interest
expenses in connection with a convertible debenture and an increase of loss of
$1,665,000 for early extinguishment of debt in connection with the conversion of
a loan into equity.




15




Operating Expenses





Operating expenses for the period ended
December 31, 2008, were $8,236,041as compared to operating expenses of
$1,460,636 for the period ended December 31, 2007.An increase in general and administrative expenses of$3,532,861comprised primarily of consulting fees
and personnel expenses, research anddevelopmentexpenses of $2,849,371and marketing expenses of $393,173represent the primary reasons for the
increase inour Company’s
operating expenses.





General and Administrative
Expenses





General
and administrative expenses for the period ended December 31, 2008 were
$4,552,053 compared to $1,019,192 for the period ended December 2007. The
increase was mainly due to a charge
to general and administrative expenses of $2,273,425 to reflect an incremental
increase of 1% ownership in Qporter by the CEO as a result of the Share Exchange
Transaction and personnel expenses of $64,772, consulting expenses of
$241,996 comprised of consulting
fees billed to the Company by the CEO, CFO and the former CTO,an
increase of stock-based compensation expense of $521,455, which is related to
our agreement with ZMG for the
issuance of stock options, an increase of $141,322 in legal fees, an
increase of phone and internet costs of $76,521, an increase in depreciation
expense of $122,242 and an increase in rent of $99,226.





Sales
and Marketing Expenses





Sales and
marketing expenses for the period ended December 31, 2008 were $832,577 compared
to $439,404 for the period ended December 31, 2007. The increase was mainly due
to personnel costs of $825,028 for marketing and selling our products and was
offset by a decrease in advertising expenses of $151,269, a decrease in
marketing expenses of $247,175 and a decrease in exhibition expenses of $34,597.
The Company employed six people for sales and marketing during the year ended
December 31, 2008.





Research
and Development Expenses





Research
and development expenses for the period ended December 31, 2008 were $2,851,411
compared to $2,040 for the period ended December 2007. The increase was mainly
due to personnel costs of $381,834 to develop our products, because our
headcount increased from nine developers on January 1, 2008 to thirteen
developers at December 31, 2008 and due
to incremental shares of Qnective stock issued to our former CTO in the
amount of $2,273,425.  In addition, we had an increase in
amortization costs for our XMS Platform of $130,592 and an increase of
development costs of $63,520 which was paid to a related party, First Media
AG.





We expect that as we continue to
implement our business plan these expenses will increase
accordingly.





Other Income
(Expense)




Loss on early extinguishment of debt in
conjunction with the conversion of a loan into equity simultaneously with the
reverse acquisition for the period ended December 31, 2008 was $1,665,000
compared to $0 for the period ended December 31, 2007. Interest expense relating
to the long-term convertible debenture was $2,011,495 (representing interest
expense plus amortization of discount) for the period ended December 31,
2008, while it was $677 for the corresponding period of the prior
year.





Liquidity and Capital
Resources




Our Company’s principal cash
requirements for the fiscal year ended December 31, 2008, were for operating
expenses, including consultancy, auditing and legal costs. As of December 31,
2008, our Company had a working capital of $657,059 compared with a working
capital of ($9,324) as of December 31, 2007. The cash and cash equivalents of
our Company were $1,497,536 as of December 31, 2008, as compared to $122,345 as
of December 31, 2007.




As of December 31, 2008 we had accounts
payable of $402,427 compared to $129,329 as of December 31, 2007. This increase
is due to amounts owed to consultants.




16




At December 31, 2008, we had short-term
debt in the amount of $63,639 compared to $1,478 as of December 31, 2007. The
short-term debt is owed to First Media, a related party, and will be paid back
during the fiscal year ending December 31, 2009.





At December 31, 2008 we had accrued
expenses of $336,226 compared to $23,682 at December 31, 2007. This increase is
mainly due to auditing and legal fees.





As of December 31, 2008 we had no loans
payable due to shareholders, as compared to $1,499,980 at December 31, 2007. The
decreasewas due to the elimination of the loan in the consolidated
financial statements as a result of the Share Exchange Transaction.




We currently have open pension
liabilities of $402,602,in
accordance withStatement
of Financial AccountingStandards (“SFAS”) No. 158, “Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans”,
anamendment of SFAS Nos. 87, 88, 106 and
132R (“SFAS 158”).





The ability of our Company to meet our
financial commitments is primarily dependent upon the continued issuance of
equity and debt financing, and our ability to achieve and maintain profitable
operations. Our Company received additional capital of $3,785,523 between
December 31, 2007, and December 31, 2008, in connection with the loan granted
from a shareholder prior to the reverse aquisition and the issuance of shares of
Qnective Stock.





Management believes that our Company's
cash and cash equivalents, cash provided by operating activities, and the cash
received from loans and from equity financing will not be sufficient to meet our
working capital requirements for the next twelve months.  We,
therefore, expect to need additional funding from internal sources of $1,500,000
and from external sources of approximately $5,000,000, through December 31,
2009. If we are unable to obtain such financing from external sources or
revenues, the Company will not be able to continue as a going
concern.





Due to our current financial situation
and our history of losses the report of our Independent Registered Public
Accounting Firm includes an explanatory paragraph referring to substantial doubt
about our ability to continue as a going concern as discussed in Note 2 to
our financial statements for the year ended December 31,
2008.




Management’s plans to improve its
financial condition are as follows:




·
            Promote distribution of our
      services through networks of service providers and
      operators;





·
            Encourage penetration of new
      markets through partners and
resellers;


·
              Seek equity financing to help fund
      our growth strategies; and


·
            Develop strategic alliances with
      dominant market players for mobile service
      distribution.




There can be no assurance that our
planned activities will be successful or that we will ultimately attain
profitability. Our long-term viability depends on our ability to grow our
business and to fund the continuation of our operations. We may use Qnective
Stock as payment for services of various consultants in order to help advance
our business plan.





We do not have any available credit,
bank financing or other external sources of liquidity. Due to historical
operating losses, our operations have not been a source of liquidity and we have
satisfied our cash requirements through loans and issuance of shares of Qnective
Stock. There is no assurance that we will be able to secure additional financing
or that it can be secured at rates acceptable to our Company. In addition,
should we be required to either issue stock for services or to secure equity
funding, due to the lack of liquidity in the market for the Qnective Stock, such
financing could result in significant dilution to existing
shareholders.





Operating Activities





Operating activities used net cash of
$2,634,649 for the year ended December 31, 2008, as compared to $1,425,892 used
in operating activities for the year ended December 31, 2007. The increase in
net cash used in operating activities was due to the increase in personnel and
the increase in other costs such as consultant fees, other general and
administrative expenses, marketing expenses and research and development
expenses.




17




Investing Activities




Net cash provided by investing
activities was $355,817 for the year ended December 31, 2008, as compared to
$1,206,105 used in investing activities for the year ended December 31, 2007.
The Company’s cash provided in the year ended December 31, 2008 was from the
reverse acquisition which was partly offset by cash invested in office and IT
equipment and continued development of its XMS Platform.




The net cash used in the
period ended December 31, 2007 was mainly for investments in our XMS
platform of $1,117,203.




Financing Activities




Net cash provided by financing
activities was $3,785,523 for the year ended December 31, 2008, as compared to
financing activities which provided net cash of $2,749,980 for the year ended
December 31, 2007.





The
cash received in 2008 was the result of proceeds from the issuance of shares of
Qnective Stock in the amount of $2,000,000 and of loans from Qnective prior to
the date of the reverse acquisition on October 1, 2008 of $1,785,523. The cash
received in 2007 was the result of proceeds from the issuance of shares of 
Qnective Stock in the amount of $1,250,000 and of loans from Qnective
shareholders of $1,499,980.




Off-Balance Sheet
Arrangements




Our Company has no outstanding
derivative financial instruments, interest rate swap transactions, or foreign
currency contracts. Our Company does not engage in trading activities involving
non-exchange traded contracts.




Critical Accounting
Policies




The
preparation of our consolidated financial statements in accordance with U.S.
generally accepted accounting principles requires management to make estimates,
judgments and assumptions that affect the reported amounts of assets and
liabilities as of the date of the financial statements, as well as the reported
amounts of revenue and expenses during the periods presented.  We
continually evaluate our estimates, judgments and assumptions based on available
information and experience.  We believe that our estimates, judgments and
assumptions are reasonable based on information available to us at the time they
are made.  To the extent there are differences between our estimates,
judgments and assumptions and actual results, our financial statements will be
affected.  Such differences may be material to our financial
statements.  The accounting policies that reflect our more significant
estimates, judgments and assumptions are described below.




Revenue
Recognition
 
 We
recognize revenue when persuasive evidence of an arrangement exists, delivery
has occurred or services have been rendered, the seller’s price is fixed or
determinable, and collectability is reasonably assured. We expect to derive
revenue from the customization of our software to meet the specific needs of BT
under the Distribution Agreement, so that BT’s subscribers can download the
services. This arrangement includes customer acceptance criteria. Since we not
yet satisfied the defined customer acceptance criteria, revenues from this
arrangement will be recognized upon the earlier of receipt of written customer
acceptance or expiration of the contractual acceptance period, provided all
other recognition criteria have been met.  The costs relating to the
BT project are capitalized as incurred until the revenue recognition criteria
have been met and the related revenue can be recognized. Once revenue can be
recognized, these costs will be expensed.
  Foreign Currency
Translation





The functional and reporting currency ofthe Company is the U.S.
Dollar, whereas the wholly owned subsidiaries, Qnective AG (formerly Qporter
AG)’s functional currency is the Swiss Franc and Qporter Poland Spzoo’s
functional currency is the Polish Zloty.  The financial statements of
the Company’s wholly owned subsidiaries are translated to U.S. Dollar
equivalents under the current method in accordance with SFAS No. 52, “Foreign
Currency Translation”. Assets and liabilities are translated into U.S. Dollar
equivalents at the rates of exchange in effect at the balance sheet date.
Average rates for the year are used to translate expenses. The cumulative
translation adjustment is reported as a component of accumulated other
comprehensive income (loss). Foreign currency differences from intercompany
receivables and payables are recorded as foreign exchange gains/losses in the
Statement of Operations.





Property and
Equipment





Equipment is recorded at cost and
depreciated using the straight-line method over the estimated useful lives of
the related assets ranging from 3 to 4 years. The cost of normal maintenance and
repairs is charged to operations as incurred. Major overhaul that extends the
useful life of existing assets is capitalized. When equipment is retired or
disposed, the costs and related accumulated depreciation are eliminated and the
resulting profit or loss is recognized in income.





18





Intangible assets (Research and
Development Cost)





The Company accounts for software
development costs in accordance with SFAS 86, Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed, under which certain
software development costs incurred subsequent to the establishment of
technological feasibility are capitalized and amortized based on the greater of
(a) the ratio of current gross sales to the anticipated future gross sales or
(b) on a straight-line basis over the remaining estimated lives of the related
products.  The Company amortizes its intangible assets on a
straight-line basis over their estimated useful lives, as it represents the
greater amount of these two methods. Technological feasibility is established
upon completion of a working model.





At each
balance sheet date, the unamortized capitalized software development costs of a
computer software product are compared to the net realizable value of that
product. The amount by which the unamortized capitalized costs of a computer
software product exceed the net realizable value of that asset will be written
off.





Long-Lived Assets





The Company accounts for long-lived
assets in accordance with the provisions of SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. The statement requires the Company
to evaluate its long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. When the sum of the undiscounted future net cash flows expected to
result from the use of the asset and its eventual disposition is less than its
carrying amount, impairment may exist. To determine the amount of impairment,
the Company compares the fair value of the asset to its carrying value. If the
carrying value of the asset exceeds its fair value, an impairment loss equal to
the difference is recognized.





Benefit
Plan





The
Company maintains a pension plan covering all employees in Switzerland; it is
considered a defined benefit plan and accounted for under SFAS No. 158,
“Employers’ Accounting for Defined Benefit Pension and Other Postretirement
Plans”, an amendment of SFAS Nos. 87, 88, 106 and 132R (“SFAS 158”). This model
allocates pension costs over the service period of employees in the plan. The
underlying principle is that employees render services ratably over this period,
and therefore, the income statement effects of pensions should follow a similar
pattern.





SFAS 158
requires recognition of the funded status, or difference between the fair value
of plan assets and the projected benefit obligations of the pension plan on the
balance sheet at December 31, 2008, and December 31, 2007, respectively, with a
corresponding adjustment to accumulated other comprehensive income. If the
projected benefit obligation exceeds the fair value of plan assets, then that
difference or unfunded status represents the pension liability.





The
Company records a net periodic pension cost in the statement of operations. The
liabilities and annual income or expense of the pension plan is determined using
methodologies that involve several actuarial assumptions, the most significant
of which are the discount rate and the long-term rate of asset return (based on
the market-related value of assets). The fair values of plan assets are
determined based on prevailing market prices.





In
Poland, the Company maintains a government defined contribution plan with
the annual contributions of 19.52% of gross pay are paid by the employer and the
employee.





Income Taxes





In accordance with SFAS No. 109,
“Accounting for Income Taxes”, the Company uses the asset and liability method
to account for income taxes, including recognition of deferred tax assets for
the anticipated future tax consequences attributable to differences between
financial statement amounts and their respective tax bases. The Company reviews
its deferred tax assets for recovery and a valuation allowance is established
when the Company believes that it is more likely than not that some portion of
its deferred tax asset will not be realized. Changes in valuation allowances
from period to period are included in the Company’s tax provision in the period
of change.  The determination of the amount of unrecognized deferred
tax liability for temporary differences related to investments in foreign
subsidiaries is not practicable and as such, no amount has been included in the
financial instruments.




19




Stock
Based Compensation





The
Company accounts for options granted to persons other than employees and
directors under SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”)
and EITF No. 96-18, Accounting
for Equity Investments That Are Issued to Other Than Employees for Acquiring or
in Conjunction with Selling Goods and Services.As such, the fair value
of such options is periodically re-measured during the vesting period using the
Black-Scholes option-pricing model and expense is recognized over the
service/vesting period.





Significant
Customers





For the twelve months ended December 31,
2008, the Company had one significant customer, as a result of the BT License
Agreement.  The Company had no customers in the year ended December
31, 2007.





Contractual
Obligations




We lease
facilities and certain equipment under agreements accounted for as operating
leases. These leases generally require us to pay all executory costs such as
maintenance and insurance.
  The
company has the following contractual obligations:
  Payments due by periodTotal
                    
                    
                    Less than1 year
                    
                    
                    1-3years
                    
                    
                    3-5years
                    
                    
                    More than5 yearsOperating
      lease obligations
                    
                    $
                    736,463
                    
                    
                    $
                    184,296
                    
                    
                    $
                    368,592
                    
                    
                    $
                    183,575
                    
                    
                    $
                    0Consultancy
      Agreements
                    
                    
                    152,555
                    
                    
                    
                    152,555
                    
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    0Pension
      Plan
                    
                    
                    464,178
                    
                    
                    
                    37,892
                    
                    
                    
                    80,521
                    
                    
                    
                    89,994
                    
                    
                    
                    255,771Total
      contractual obligations
                    
                    $
                    1,353,196
                    
                    
                    $
                    374,743
                    
                    
                    $
                    449,113
                    
                    
                    $
                    273,569
                    
                    
                    $
                    255,771


New
Accounting Pronouncement





In
September 2006, the Financial Accounting Standards Board (FASB) issued Statement
No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value for
financial accounting and reporting purposes, establishes a framework for
measuring fair value in accordance with generally accepted accounting principles
and expands disclosures about fair value instruments. This statement does not
require any new fair value measurements, rather, it applies under other
accounting pronouncements that require or permit fair value measurements. The
provisions of this statement are to be applied prospectively as of the beginning
of the fiscal year in which this statement is initially applied, with any
transition adjustment recognized as a cumulative effect adjustment to the
opening balance of retained earnings. SFAS 157 was effective and adopted by the
Company as of January 1, 2008. In order to determine the implications of
adopting SFAS 157, the Company reviewed all the assets and liabilities recorded
on its balance sheet. Based on the results of its review, the Company determined
that a majority of its assets and liabilities are either not required to be
measured at fair value in its financial statements, or are outside the scope of
SFAS 157. The adoption of SFAS 157 did not have a material impact on the
Company’s results of operations, cash flows or financial positions.





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities - Including an Amendment of FASB
Statement No. 115” (“SFAS 159”). SFAS 159 allows an entity to irrevocably elect
fair value for the initial and subsequent measurement of certain financial
instruments and other items that are not currently required to be measured at
fair value. When the fair value option is elected and a company chooses to
record eligible items at fair value, the company must report unrealized gains
and losses on those items in results of operations at each subsequent reporting
date. Additionally, the transition provisions of SFAS 159 permit a one-time
election for existing positions at the adoption date, with a cumulative effect
adjustment included in opening retained earnings. All future changes in fair
value will be reported in results of operations. Prior to this election, only
the unrealized losses were recorded in results of operations. The Company
adopted SFAS 159 effective for the fiscal year beginning January 1, 2008, and
the adoption had no impact on the Company’s financial position and results of
operations.




On
October 10, 2008, the Financial Accounting Standards Board issued FASB Staff
Position (FSP) No. FAS 157-3. This FSP applies to financial assets within the
scope of accounting pronouncements that require or permit fair value
measurements in accordance with Statement 157 and clarifies the application of
Statement 157 in a market that is not active and provides an example to
illustrate key considerations in determining the fair value of a financial asset
when the market for that financial asset is not active. The FSP is effective
upon issuance. The adoption of FSP FAS 157-3 did not have a material impact on
the Company’s results of operations, cash flows or financial
positions.




20




Recent
Accounting Pronouncements Not Yet Effective





In
December 2007, the FASB issued SFAS No. 141(R),“Business Combinations.” SFAS
141(R) requires all business combinations completed after the effective date to
be accounted for by applying the acquisition method (previously referred to as
the purchase method). Companies applying this method will have to identify the
acquirer, determine the acquisition date and purchase price and recognize at
their acquisition date fair values of the identifiable assets acquired,
liabilities assumed, and any non-controlling interests in the acquirer. In the
case of a bargain purchase the acquirer is required to reevaluate the
measurements of the recognized assets and liabilities at the acquisition date
and recognize a gain on that date if an excess remains. SFAS 141(R) becomes
effective for fiscal periods beginning after December 15, 2008. This statement
is not expected to have a significant effect on the Company's financial
statements.





In February 2008, the FASB
issued Staff Position (FSP) FAS 157-2, Effective Date of FASB Statement No. 157,
which defers the implementation for the non-recurring financial assets and
liabilities from fiscal years beginning after November 15, 2007 to fiscal years
beginning after November 15, 2008. The provisions of SFAS 157 will be applied
prospectively. The statement provisions effective as of January 1, 2008, do not
have a material effect on the Company’s financial position and results of
operations. Management does not believe that the remaining provisions will have
a material effect on the Company’s financial position and results of operations
when they become effective on January 1, 2009.




In
December 2007, the FASB issued Financial Accounting Standard No. 160,
Non-controlling Interests in Financial Statements—an amendment of ARB No. 51
(“SFAS 160”). SFAS 160 requires that a non-controlling interest in a subsidiary
be reported as equity and the amount of net income specifically attributable to
the non-controlling interest be identified in the financial statements. It also
calls for consistency in the manner of reporting changes in the parent’s
ownership interest and requires fair value measurement of any non-controlling
equity investment retained in a deconsolidation. SFAS 160 is effective for
fiscal years beginning after December 15, 2008, with early adoption prohibited.
This statement is not expected to have a significant effect on the Company’s
financial statements.





In March
2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments
and Hedging Activities, an amendment of FASB Statement No. 133" (“SFAS 161”).
SFAS 161 amends and expands the disclosure requirements of SFAS 133, "Accounting
for Derivative Instruments and Hedging Activities" (“SFAS 133”), by requiring
enhanced disclosures about how and why an entity uses derivative instruments,
how derivative instruments and related hedged items are accounted for under SFAS
133 and its related interpretations, and how derivative instruments and related
hedged items affect an entity's financial position, financial performance, and
cash flows. SFAS 161 requires qualitative disclosures about objectives and
strategies for using derivatives, quantitative disclosures about fair value
amounts of, and gains and losses on, derivative instruments, and disclosures
about credit-risk-related contingent features in derivative agreements. SFAS 161
will be effective for the Company as of January 1, 2009. As SFAS 161 provides
only disclosure requirements, the adoption of this standard will not have a
material impact on the Company’s results of operations, cash flows or financial
positions.





ITEM 7A.Quantitative and
Qualitative Disclosures About Market Risk





We do not
use derivative financial instruments in our investment portfolio and we have no
foreign exchange contracts. Our financial instruments consist of cash and cash
equivalents, accounts receivable, accounts payable, long-term loan due from
Mobil Media Holding AG and short term loan due to a related
party.





Interest
Rates.





Our
exposure to market risk for changes in interest rates relates primarily to
our long-term loan and short-term loan. We believe that, fluctuations
in interest rates would not have a material impact on the fair value of these
loans.





Foreign
Exchange Rates.





The
majority of our expenses from our operating subsidiaries are denominated in
Swiss Franc (“CHF”) and Polish Zloty (“PLN”). The Distribution Agreement with BT
is denominated in Euros (“EUR”). As a result, changes in the relative values of
U.S. Dollars EUR, PLN and CHF affect our reported levels of revenues,
expenses and profitability as the results are translated into U.S. Dollars
for reporting purposes. In particular, fluctuations in currency exchange rates
could have a significant impact on our financial stability due to a mismatch
among various foreign currency-denominated sales and costs. Fluctuations in
exchange rates between the U.S. dollar EUR, PLN and CHF affect our gross
and net profit margins and could result in foreign exchange and operating
losses.




21




Our
exposure to foreign exchange risk primarily relates to currency gains or losses
resulting from timing differences between the invoice and payment dates of our
receivables. Furthermore, we translate monetary assets and liabilities
denominated in other currencies into CHF, the functional currency of our
operating business. We have not used any forward contracts, currency options or
borrowings to hedge our exposure to foreign currency exchange risk. We cannot
predict the impact of future exchange rate fluctuations on our results of
operations and may incur net foreign currency losses in the future. As our sales
and expenses denominated in foreign currencies, such as CHF, EUR and
PLN continue to grow, we will consider using arrangements to hedge our
exposure to foreign currency exchange risk.





ITEM 8. Financial
Statements





The full text of our audited financial
statements as of December 31, 2008 and December 31, 2007, for the year ended
December 31, 2008, for the period ended December 31, 2007, and for the
period from January 24, 2007 (date of inception) to December 31, 2008, begins on
page F-1 of this Annual Report on Form 10-K.




ITEM
9.  Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure





Not applicable.




ITEM 9A.Controls and
Procedures





Evaluation of
Disclosure Control and Procedures.As of the end of the period covered by
this report, an evaluation was carried out under the supervision and with the
participation of our management, including our Chief Executive Officer and our
Chief Financial Officer, of the effectiveness of the design and operation of
management’s disclosure controls and procedures (as defined in rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) to ensure
information required to be disclosed in our filings under the Securities
Exchange Act of 1934, is (i) recorded, processed, summarized and reported
within the time periods specified in the SEC rules and forms; and
(ii) accumulated and communicated to our management, including our Chief
Executive Officer and our Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure. Management recognizes that any
controls and procedures, no matter how well designed and operated, can only
provide reasonable assurance of achieving desired control objectives, and
management is necessarily required to apply its judgment when evaluating the
cost-benefit relationship of potential controls and procedures. As described
below under “Report of Management on Internal Control Over Financial Reporting,”
we have identified material weaknesses in the internal control over financial
reporting as of December 31, 2008. Our Chief Executive Officer and Chief
Financial Officer have concluded that, as of the end of the period covered by
this Annual Report on Form 10-K, the Company’s disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act) were not effective as a result of the reported material
weaknesses.





Management’s
Report on Internal Control over Financial Reporting.Our management is
responsible for establishing and maintaining adequate internal controls over
financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act. Our internal control system has been designed to provide
reasonable, not absolute, assurance to our management and Board of Directors
that the objectives of our control system with respect to the integrity,
reliability and fair presentation of published financial statements are met. A
control system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the control system’s objectives will be
met. Further, the design of a control system must reflect the fact that there
are resource constraints. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within our company have been
detected. Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we assessed
the effectiveness of our internal controls over financial reporting as of
December 31, 2008. In making this assessment, we used the criteria
established in the framework on Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations (“COSO”) of
the Treadway Commission. Based on our assessment, which was conducted according
to the COSO criteria, we have concluded that our internal controls over
financial reporting were not effective in achieving its objectives as of
December 31, 2008 due to material weaknesses that exist in our internal
controls.





22




A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the company’s annual or interim financial
statements will not be prevented or detected on a timely basis.Management has identified the following material weaknesses which have
caused management to conclude that, as of December 31, 2008, our disclosure
controls and procedures were not effective at the reasonable assurance
level:





1.
              We have a material weakness
      regarding financial reporting under U.S. generally accepted accounting
      principlesand disclosure
      controls.




2.
              We havea material weakness because we do
      not havedocumentation of our internal control policies and procedures.





Our independent registered public
accounting firm, BDO Visura Zurich, has issued an attestation report, which
follows, that the Company’s
internal controlsover financial reporting werenot effective as of December 31,
2008.




Remediation Plan to Address the
Material Weaknesses in Internal Control over Financial
Reporting




During our current fiscal year, we intend to take the following steps to
remediate the material weakness described above which we believe are necessary
to address the issues associated with our material weakness over financial
reporting and disclosure controls to improve the design and operation of the
controls. Such planned changes include:




·
                Training people to get the proper
      experience with U.S. generally accepted accounting
      principles,·
                Hiring consultants with knowledge
      of U.S. generally accepted accounting principles on an as-needed basis to
      cure this weakness.·
                Our Chief Financial Officer
      started training in August 2008 to increase her knowledge of U.S.
      generally accepted accounting
principles.


urrently in
the process of putting
together the required documentation.  We expect that written
documentation of key internal controls over financial reporting will be completed and used
by us by December 31, 2009.




Changes
in Internal Control over Financial Reporting During the Fiscal Quarter Ended
December 31, 2008




There
were no changes in our internal control over financial reporting during the
fiscal quarter ended December 31, 2008 that have materially affected, or
are reasonable likely to materially affect, our internal control over financial
reporting.




23





REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Board of Directors and
Stockholders
 Qnective, Inc. (A Development Stage
Company)
  We have audited Qnective,
Inc.’s internal control
over financial reportingas of December 31, 2008,based on criteria established inInternal Control –
Integrated Frameworkissued
by the Committee of Sponsoring Organizations of the Treadway Commission (the
COSO criteria). Qnective’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the
accompanying “Item 9A, Management’s Annual Report on Internal Control Over
Financial Reporting”. Our responsibility is to express an opinion on the
company’s internal control over financial reporting based on our
audit.
  We conducted our audit in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit included obtaining
an understanding of internal control over financial reporting, assessing the
risk that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our
audit also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audit provides a reasonable basis for
our opinion.
  A company’s internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
  Because of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
  A material weakness is a deficiency, or
a combination of deficiencies, in internal control over financial reporting,
such that there is a reasonable possibility that a material misstatement of the
company’s annual or interim financial statements will not be prevented or
detected on a timely basis.  A material weakness regarding the
management’s failure to
maintain written documentation of their internal control policies and procedures
has been identified and described in management’s assessment.Further, a material weaknessregarding financial
reporting under U.S. generally accepted accounting principles and disclosure
controlshas been
identified and described in management’s assessment. Thesematerial weaknesses wereconsidered in determining the nature,
timing, and extent of audit tests applied in our audit of the 2008 financial
statements, and this report does not affect our report datedMarch 25, 2009 on those financial
statements.
  In our opinion, Qnective, Inc. did not
maintain, in all material respects, effective internal control over financial
reporting as of December 31, 2008, based on the COSO
criteria.
  We do not express an opinion or any
other form of assurance on management’s statements referring to any corrective
actions taken by the company after the date of management’s
assessment.
  Wealsohave audited, in accordance with the
standards of the Public Company Accounting Oversight Board (United States), theconsolidated balance sheets
of Qnective, Inc. as of December 31, 2008 and 2007, and the related consolidated
statements of operations and comprehensive loss, stockholders’ equity, and cash
flowsfor the year ended
December 31, 2008, the periodended December 31, 2007 and the period
from January 24, 2007 (date of inception) to December 31, 2008and our report datedMarch 25, 2009expressed anunqualifiedopinion thereon.
 
 Zurich, March 25, 2009
 
 BDO Visura
  /s/
      Andreas Wyss
                    
                    /s/
      Christoph TschumiAndreas
      Wyss
                    
                    Christoph
      TschumiAuditor
      in ChargeSwiss
      Certified Accountant / CPA
                    
                    Swiss
      Certified Accountant
  24


ITEM 9B.  Other
Information




None.




25




Part
III





ITEM 10.  Directors, Executive
Officers and Corporate Governance





The names, ages, and respective
positions of the directors and officers of the Company are set forth below. The
directors of our Company will serve until the next annual meeting of the
Company's shareholders or until their successors are duly elected and
qualified. Officers hold their positions at the will of the board of directors.
There are no arrangements, agreements, or understandings between non-management
shareholders and management under which non-management shareholders may directly
or indirectly participate in or influence the management of the Company's
affairs. There are no other promoters or control persons of the Registrant.
There are no legal proceedings involving the directors and officers of the
Company.





Name
                
                Position
                
                Age
                
                Date First Elected or
      AppointedOswald
Ortiz
                
                President and
      CEO
                
                40
                
                October 29,
      2007Francoise
      Lanter
                
                Secretary, Treasurer and
      CFO
                
                45
                
                November 15,
      2007Reto Largo
                
                Chief Technology
      Officer
                
                41
                
                October 6,
    2008





On July 25, 2008, Mr. Tan Siekmann
resigned as a director and Chief Technology Officer of the
Company.  On July 25, 2008, Mr. Carmine Pinto was appointed Chief
Technology Officer.  Mr. Pinto resigned on September 30,
2008.




Oswald Ortiz, Chief Executive Officer,
President and Director of Qnective




Mr.
Ortiz, 40, was appointed Chief Executive Officer of the Company in October
2007.  Since January 2007, Mr. Ortiz has served as President of
Qporter. From August 2003 to December 2006, he also served as Chief Executive
Officer of MobilMedia Holding AG, where he successfully built an international
mobile entertainment business. From January 2002 to July 2003, Mr. Ortiz was the
Chief Executive Officer of Tiscali, an internet service provider in Switzerland,
where he increased market share by 38% in a period of one year. Mr. Ortiz
previously served as Chief Marketing Officer for Callahan Broadband Wireless
Services GmbH in Switzerland from May 2001 to December 2001.  From
September 1996 to April 2001, he gained extensive experience in
high-tech/telecommunications sales and marketing working at Swisscom Wholesale
(Sales and Marketing Unit) where he was responsible for 130 employees with
annual revenues of CHF2.3 billion. He holds a bachelors degree in electronic
engineering and a masters degree from the ESADE Business School,
Madrid.




Francoise Lanter, Chief Financial
Officer, Secretary, Treasurer and Director of Qnective





Prior to becoming Chief Financial
Officer of the Company, Mrs. Lanter, 45, was from September 2004 to April 2007
Chief Financial Officer of Lawa Entertainment GmbH, a technology company based
in Switzerland. Mrs. Lanter is also currently Chief Financial Officer of
MobilMedia Holding AG, but devotes substantially all of her time to Qnective and
Qporter. From October 2001 to May 2004, Mrs. Lanter was a lecturer with KV
Baden, a business school. In her positions in finance and administration Mrs.
Lanter has been responsible for budgeting, capital expenditure planning, and
financial reporting in accordance with IFRS.




Reto Largo, Chief Technology Officer and
Director of Qnective




Mr. Largo, 41, was appointed Chief
Technology Officer and a director of the Company on October 6,
2008.Mr. Largo,
age 41, holds a masters degree in IT from ETH Zurich and a masters degree in
business administration from the Hochschule St. Gallen.  Mr. Largo is
an experienced IT manager and has lead various projects and line organizations,
mainly in the transportation and telecommunications industry.  From
September 2005 through May 2008, he was Head HRIS/PB Special Projects at Credit
Suisse, a Swiss bank.  From March 2005 through August 2005, he was in
charge of Swiss Special Projects at Credit Suisse.  From July 2003 to
February 2005, he was the IT COO at Swiss International Airlines where he was
responsible for engineering and operating large-scale IT solutions in
heterogeneous environments.  He also managed a small telecom company
in Germany from December 2001 to June 2003.





26




Committees of the
Board





Our Company currently does not have
nominating, compensation, or audit committees or committees performing similar
functions nor does our Company have a written nominating, compensation, or audit
committee charter. Our board of directors does not believe that it is necessary
to have such committees because it believes the functions of such committees can
be adequately performed by the board of directors.





All proceedings of our board of
directors are conducted by resolutions consented to in writing by all the
directors and filed with the minutes of the proceedings of the directors. Such
resolutions consented to in writing by the directors entitled to vote on that
resolution at a meeting of the directors are, according to the corporate laws of
the State of Nevada and the bylaws of our Company, as valid and effective as if
they had been passed at a meeting of the directors duly called and
held.




Our Company does not have any defined
policy or procedure requirements for shareholders to submit recommendations or
nominations for directors. The board of directors believes that given the early
stage of our development a specific nominating policy would be premature and of
little assistance until our business operations develop to a more advanced
level. Our Company does not currently have any specific or minimum criteria for
the election of nominees to the board of directors, and we do not have any
specific process or procedure for evaluating such nominees. The board of
directors assesses all candidates, whether submitted by management or
shareholders, and makes recommendations for election or
appointment.




Shareholder
Communications




A shareholder who wishes to communicate
with our board of directors may do so by directing a written request addressed
to our Chief Executive Officer, at the address appearing on the first page of
this Report.




Family Relationships




Oswald Ortiz and Michael Ortiz, Head,
Channel Management, Qporter, are brothers. There are no family relationships
between any of our directors and executive officers.




Code of Ethics




We have adopted a code of ethics that is
applicable to our officers, directors, and employees, including our principal
executive officer and principal financial officer or persons performing similar
functions. The code of ethics can be found as an Exhibit to this Annual Report
on Form 10-K and under the heading "Policy on Business Ethics for Directors,
Officers, and Employees" and on our website at www.qnective.com. We will supply
to any person without charge, upon request and in the manner described under the
heading “Stockholder Communications,” a copy of our code of
ethics.




Audit Committee




The Company does not currently have a
separately designated standing Audit Committee established in accordance with
Section 3(a)(58)(A) of the Exchange Act by the Board of Directors for the
purpose of overseeing our accounting and financial reporting processes and our
audits and financial statements. The entire board of directors is acting as the
Company's audit committee.




Audit Committee Financial
Expert




Our board of directors has determined
that we do not have a board member that qualifies as an "audit committee
financial expert" as defined in Item 407(d)(5) of Regulation
S-K.




We believe that in the present
situation, our board of directors is capable of analyzing and evaluating our
financial statements and understanding internal controls and procedures for
financial reporting. The board of directors of our Company does not believe that
it is necessary to have an audit committee because our Company believes that the
functions of an audit committee can be adequately performed by our board of
directors. In addition, we believe that retaining an independent director who
would qualify as an "audit committee financial expert" would be overly costly
and burdensome and is not warranted in our
circumstances giv en the stage of our
development.




27




Director
Independence




Our board of directors has determined
that none of our directors are “independent” as such term is defined by NASDAQ
Rule 4200(a)(15).




Section 16(a) Beneficial Ownership
Reporting Compliance




Section
16(a) of the Exchange Act requires the Company's executive officers, directors
and persons who own more than 10% of a registered class of the Company's equity
securities ("Reporting Persons") to file reports of ownership and changes in
ownership on Forms 3, 4, and 5 with the SEC.  These Reporting Persons
are required by SEC regulation to furnish the Company with copies of all Forms
3, 4 and 5 they file with the SEC.  Based solely on the Company's
review of the copies of the forms it has received, each of Messrs. Ortiz,
Siekmann and Largo and Mrs. Lanter failed to file a Form 3 on a timely basis
upon becoming a director of the Company; however, each was subsequently
filed.  Mr. Pinto did not file a Form 3 upon becoming an executive
officer of the Company prior to his resignation from the Company.  Mr.
Ortiz failed to timely file a Form 4/A covering the acquisition of shares of
Qnective Stock pursuant to the Share Exchange Transaction.  Mr.
Siekmann failed to timely file a Form 3 and a Form 3/A covering the acquisition
of shares of Qnective Stock pursuant to the Share Exchange Transaction. Messrs.
Ortiz and Siekmann subsequently filed the required Forms 4/A, 3 and 3/A,
respectively.  Cappella IV LLC did not file a Form 3 upon becoming a
10% holder of the Qnective Stock and did not file a Form 4 upon entering into
the Amended Shareholders’
Agreement dated as of October 1, 2008, among Mobil Media,the MMH Shareholders, Qnective,
Qporter, Capella IV
LLC, and Connwards
Management.See
“Item 13.Certain Relationships and Related Transactions, and Director
Independence".





Compensation
Committee Interlocks and Insider Participation





Messrs.
Ortiz and Largo and Mrs. Lanter are the members of the Board of Directors and
are officers of the Company.  Except as disclosed in "Item
13.  Certain Relationships and Related Transactions, and Director
Independence", no member of the Board of Directors had any relationship with the
Company requiring disclosure under Item 404 of Regulation S-K.  No
interlocking relationship exists between the members of the Board of Directors
and the board directors or compensation committee of any other
company.





ITEM
11.  Executive Compensation





The following table sets forth
compensation for services rendered during the fiscal year ended December 31,
2008, for our Principal Executive Officer, Principal Financial Officer and the
three most highly compensated executive officers as of December 31, 2008, whose
total annual salary and bonus for fiscal 2008 exceeded $100,000 (collectively,
the “Named Officers”).





Name and PrincipalPosition
                                                                                                                                                
                                                                                                                                                Year
                                                                                                                                                
                                                                                                                                                Salary ($)Oswald
Ortiz
                                                                                                                                                
                                                                                                                                                (a)2008
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                0President and
      CEO
                                                                                                                                                
                                                                                                                                                2007
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                n/a(Principal Executive
      Officer)
                                                                                                                                                
                                                                                                                                                2006
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                n/aFrancoise
      Lanter
                                                                                                                                                
                                                                                                                                                (b)2008
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                0CFO
                                                                                                                                                
                                                                                                                                                2007
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                n/a(Principal Financial
      Officer)
                                                                                                                                                
                                                                                                                                                2006
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                n/aReto Largo
                                                                                                                                                
                                                                                                                                                (e)2008
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                42,166CTO
                                                                                                                                                
                                                                                                                                                2007
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                n/a2006
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                n/aCarmine
    Pinto
                                                                                                                                                
                                                                                                                                                (c)2008
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                40,147CTO
                                                                                                                                                
                                                                                                                                                2007
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                n/a2006
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                n/aTan
Siekmann
                                                                                                                                                
                                                                                                                                                (d)2008
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                0CTO
                                                                                                                                                
                                                                                                                                                2007
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                n/a2006
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                n/aMichael
    Ortiz
                                                                                                                                                
                                                                                                                                                (f)2008
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                126,090Head, Channel Management,
      Qporter
                                                                                                                                                
                                                                                                                                                2007
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                02006
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                0Michal
    Madeyski
                                                                                                                                                
                                                                                                                                                (g)2008
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                105,075Head, Production,
      Qporter
                                                                                                                                                
                                                                                                                                                2007
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                02006
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                0




28




(a)
                        Mr. Oswald Ortiz has been the
      President, CEO, and a director of Qnective since October 29, 2007. Mr.
      Ortiz is paid as an independent consultant to Qnective. In 2008 Qnective
      paid Mr. Ortiz the amount of $138,000.(b)
                        Francoise Lanter has been the CFO
      and a director of Qnective, since November 15, 2007. Mrs. Lanter is paid
      as an independent consultant to Qnective, through her wholly owned
      company, Miraculix Treuhand GmbH. In 2008 Qnective paid Miraculix
      $82,800.(c)
                        Mr. Pinto resigned as CTO and a
      director of Qnective on September 30, 2008.(d)
                        Tan Siekmann resigned as CTO and a
      director of Qnective on July 25, 2008. Mr. Siekmann was paid as an
      independent consultant to Qnective. In 2008 Qnective paid Mr. Siekmann the
      amount of $50,954.(e)
                        Mr. Largo has been the CTO and
      Director of Qnective since October 6, 2008.(f)
                        Mr. Michael Ortiz has been the
      Head, Channel Management, Qporter since January 1,
      2008.(g)
                        Mr. Michal Madeyski has been the
      Head, Production, Qporter since January 3,
  2008.





Compensation
Discussion and Analysis





Overview of Compensation
Program and Philosophy





Our
compensation program is intended to:





w
            Attract,
      motivate, retain and reward executive officers of outstanding
      ability;


w
            Link
      changes in executive officers’ compensation to individual and corporate
      performance;


w
            Align
      executive officers’ interests with those of the
    shareholders.





The
ultimate objective of our compensation program is to increase shareholder value.
We seek to achieve these objectives with a compensation approach which takes
into account a competitive base salary.




29




Base
Salaries





Base
salaries paid to executive officers are intended to attract and retain highly
talented individuals. In setting base salaries, individual experience,
individual performance, the Company’s performance and job responsibilities
during the year are considered.  Executive salaries are evaluated
against companies of similar size and nature in the respective
country.





Compensation
Committee Report





The Board
of Directors, acting as the Compensation Committee of the Company, has received
and discussed the Compensation Discussion and Analysis section above with
management and, based on such review and discussion, the Board of Directors
determined that the Compensation Discussion and Analysis be included in this
Report.





Oswald
Ortiz


Francoise
Lanter


Reto
Largo





Stock Option
Plan





We do not have a stock option plan in
favor of any director, officer, consultant or
employee.




Stock Options/Stock
Awards




We have not granted any options or stock
awards to any of our officers or directors during our prior fiscal
year.




Employment
Agreements




None.




Compensation of
Directors





No director receives a fee for
attendance at any meeting of the Board of Directors; these directors are
reimbursed only for reasonable out-of-pocket expenses incurred in attending
meetings of the Board of Directors or of the committees
thereof.





ITEM 12. Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder
Matters





Equity Compensation
Plan Information




The Company does not have an equity
compensation plan.





Principal
Stockholders




The following table sets forth certain
information regarding our common stock beneficially owned as of March 13, 2009,
for (i) each shareholder we know to be the beneficial owner of 5% or more of our
outstanding common stock, (ii) each of our executive officers and directors, and
(iii) all executive officers and directors as a group. In general, a person is
deemed to be a beneficial owner of a security if that person has or shares the
power to vote or direct the voting of such security, or the power to dispose or
to direct the disposition of such security. A person is also
deemed


to be a beneficial owner of any
securities of which the person has the right to acquire beneficial ownership
within 60 days.




30




Name and Address of Beneficial Owner
                                                                  
                                                                  Amount and
                                                                    Nature of
                                                                    Beneficial
                                                                    Ownership
                                                                  
                                                                  
                                                                  Percent
                                                                    of ClassOswald Ortiz
                                                                    c/o Qnective
AG
                                                                    Thurgauerstrasse
      54
                                                                    CH-8050 Zurich,
      Switzerland
                                                                  
                                                                  
                                                                  30,550,000
                                                                  (1)
                                                                  
                                                                  46.7
                                                                  %Francoise
      Lanter
                                                                    c/o Qnective
AG
                                                                    Thurgauerstrasse
      54
                                                                    CH-8050 Zurich,
      Switzerland
                                                                  
                                                                  
                                                                  0
                                                                  
                                                                  
                                                                  0
                                                                  %Reto Largo
                                                                    c/o Qnective
AG
                                                                    Thurgauerstrasse
      54
                                                                    CH-8050 Zurich,
      Switzerland
                                                                  
                                                                  
                                                                  0
                                                                  
                                                                  
                                                                  0
                                                                  %Tan Siekmann
                                                                    c/o Burg
      Lichtenfels
                                                                    35104 Lichtenfels,
      Germany
                                                                  
                                                                  
                                                                  14,816,750
                                                                  (1)
                                                                  
                                                                  22.7
                                                                  %Directors and Executive Officers
      as a Group (3 persons)
                                                                  
                                                                  
                                                                  30,550,000
                                                                  (1)
                                                                  
                                                                  46.7
                                                                  %




(1)           Mr.
Ortiz beneficially owns (as defined by Rule 13d-3 under the Act) 30,550,000
shares, or 46.7% of the Qnective Stock outstanding as of March 13,
2009.  Mr. Siekmann beneficially owns (as defined by Rule 13d-3 under
the Act) 14,816,750 shares, or 22.7% of the Qnective Stock outstanding as of
March 13, 2009.  The 30,550,000 shares beneficially owned by Mr. Ortiz
includes the 14,816,750 shares owned by Mr. Siekmann and 916,500 shares, or 1.4%
of the Qnective Stock outstanding as of March 13, 2009 beneficially owned (as
defined by Rule 13d-3 of the Act) by Stefan Schraps. Mr. Ortiz has sole power to
vote or to direct the vote of 30,550,000 shares of Qnective Stock. Mr. Ortiz has
sole power to dispose or direct the disposition of 14,816,750 shares, and sole
power to direct the disposition of an additional 15,733,250 shares in connection
with a sale of the Company.  Mr. Siekmann has no power to vote or
direct the vote of any shares of Qnective Stock, and sole power to dispose or to
direct the disposition of 14,816,750 shares of Qnective Stock, except in
connection with a sale of his shares of Qnective Stock in connection with a sale
of the Company.  Mr. Schraps has no power to vote or direct the vote
of any shares of Qnective Stock, and sole power to dispose or direct the
disposition of 916,500 shares of Qnective Stock, except in connection with a
sale of the shares in connection with a sale of the Company. The Company has not
yet issued stock certificates representing the shares owned by Messrs. Ortiz,
Siekmann and Schraps, as well as to the purchasers of shares under private
placements effected by the Company after October 1, 2008 nor any shares issued
as part of the Share Exchange Transaction as a result of the lost certificate by
Capella IV LLC.




31




ITEM 13. Certain
Relationships and Related Transactions, and Director
Independence





Since January 1, 2008 there have not
been any relationships, transactions, or proposed transactions to which the
Company was or is a party, in which any of the directors, executive officers, or
5% or greater shareholders (or any immediate family member thereof) had or is to
have a direct or indirect material interest other than as set forth
below.




Amended Shareholders’ Agreement dated as
of October 1, 2008, among Mobil Media, the MMH Shareholders, Qnective,
Qporter,Capella IV
LLC,and Connwards Management,Inc., pursuant to which the MMH
Shareholdersexchanged the
1,250,000 shares of Qporter, owned by Mobil Media asnominee forthe MMH Shareholdersforan aggregate of 30,550,00 shares ofQnectiveStock.Oswald Ortiz and Tan Siekmann, an
officer and director and a former officer and director of the Company,
respectively, are shareholders of MobilMedia.





Voting Agreement, dated as of October 1,
2008, among the Company,OswaldOrtiz,TanSiekmann andStefanSchraps (the “Voting Agreement”),pursuant to whicheach ofthemagreed to hold all shares ofQnectiveStock registered in their respective
names or beneficially owned by them and to vote such shares in accordance with,
the provisions of the Voting Agreement.





During the term of the Voting Agreement,
each of Siekmann and
Schraps agreeto vote all
shares ofQnectiveStock held by each of them for the slate
of nominees for election to the Board of Directors of the Company as decided by
Ortiz in his sole and absolute discretion.  Any vote taken to remove
any director elected pursuant to the foregoing, or to fill any vacancy created
by the resignation, removal, or death of a director elected pursuant to the
foregoing, is also subject to the foregoing agreement.





The Voting Agreement also provides that
in the event that Ortiz agrees to a sale of the Company or all or substantially
all of the Company’s assets (an “Approved Sale”) whether by means of a merger,
consolidation, or sale of stock or assets, or otherwise, each of Siekmann and
Schraps have agreed that they shall each consent to, vote for, and raise no
objections to the Approved Sale, and (i) if the Approved Sale is structured as a
merger or consolidation of the Company, or a sale of all or substantially all of
the Company’s assets, each of Siekmann and Schraps have agreed to waive any
dissenters' rights, appraisal rights, or similar rights in connection with such
merger, consolidation, or asset sale, or (ii) if the Approved Sale is structured
as a sale of the shares ofQnectiveStock, each of Siekmann and Schraps
have agreed that they will sell their sharesof QnectiveStockon the terms and conditions approved by
Ortiz, provided such terms do not provide that Siekmann and Schraps would
receive less than the amount that would be distributed toeach of themin the event the proceeds of the sale
of the Company were distributed in accordance with the Company’s Certificate of
Incorporation.





In addition, during the term of the
Voting Agreement Siekmann and Schraps agree to vote all shares held by them in
accordance with the instructions of Ortiz.The Voting Agreement will continue in
full force and effect through the earliest of the following dates, on which date
it will terminate in its entirety:(a)the date of the closing of a firmly
underwritten public offering of shares of theQnectiveStock pursuant to a registration
statement filed with the Securities and Exchange Commission, and declared
effective under the Securities Act ;(b)ten (10) years from the date of the
Voting Agreement;(c)the date of the closing of
an Approved Sale; or(d)the date on which Ortiz, Siekmann and
Schraps agree, in writing, to terminate the Voting
Agreement.





The provisions of the Voting Agreement
are binding upon the successors in interest to any of the shares ofQnectiveStock owned by Ortiz, Siekmann and
Schraps.




MobilMedia
has an oral consulting agreement with Qporter dated May 1, 2007. MobilMedia
received $729,116 from Qporter during 2008 and $987,059 during 2007. Mr. Oswald
Ortiz, our Chief Executive Officer owns 47.5% of the outstanding securities of
MobilMedia.


SafeCom
GmbH & Co. KG (“SafeCom”) has a Software Development Agreement with Qporter
dated January 18, 2007. During 2008 and 2007, SafeCom invoiced Qporter the
amount of $110,204 and $465,295, respectively, under the Software Development
Agreement.  Mr. Tan Siekmann, a former director and a former Chief
Technology Officer of the Company is a shareholder of SafeCom.


32





ITEM 14.  Principal Accountant
Fees and Services





Audit Fees





The aggregate fees for professional
services rendered by BDO Visura for the audit of our financial statements for
the fiscal years ended December 31, 2008 and December 31, 2007 were $120,566 and
$124,437, respectively.




Audit–Related Fees




None.




Tax Fees




None.





All Other Fees




There were no other fees billed for
services rendered by BDO Visura not reportable as Audit Fees, Audit-Related Fees
or Tax Fees for the fiscal years ended December 31, 2008 and December 31,
2007.




33




Part IV





ITEM
15.  Exhibits





The exhibits below are required by Item
601 of Regulation K. Each management contract or compensatory plan or
arrangement required to be filed as an exhibit to this Form 10-K has been
identified.




Exhibit Number
                                            
                                            Description3.1
                                            
                                            Articles of Incorporation
      (incorporated herein by reference from our Form SB-2 filed on March 24,
      2006)3.1a
                                            
                                            Amendment to Articles of
      Incorporation changing name (incorporated herein by reference from our
      Form 10-KSB filed on May 16, 2008)3.2
                                            
                                            Bylaws (incorporated herein by
      reference from our Form SB-2 filed on March 24,
    2006)4.1
                                            
                                            Specimen ordinary share
      certificate (incorporated herein by reference from our Form SB-2 filed on
      March 24, 2006)9.1
                                            
                                            Voting Agreement dated as of
      October 1, 2008 among Qnective, Inc., and Oswald Ortiz, Tan Siekmann and
      Stefan Schraps  (incorporated herein by reference from our form
      8-K filed on November 18, 2008).10.1
                                            
                                            Shareholders’ Agreement dated
      February 12, 2007, among Qnective, MobileMedia Holdings AG, and Qporter
      (incorporated herein by reference from our Form 8-K filed on April 13,
      2007)10.2
                                            
                                            Distribution and License Agreement
      between Qporter, Inc. and BT inmo BV dated September 25, 2008
      (incorporated herein by reference from our Form 10-Q filed on November 11,
      2008)10.3
                                            
                                            Amended Shareholders’ Agreement
      dated as of October 1, 2008 among Mobil Media Holding AG, Oswald Ortiz,
      Tan Siekmann and Stefan Schraps, Qnective, Inc., Qporter, Inc., Capella IV
      LLC and Connwards Management, Inc. (incorporated herein by reference from
      our Form 8-K filed on November 12, 2008)10.4
                                            
                                            Modification Agreement dated as of
      October 1, 2008 among Qporter, Inc., Safe-Com Gmbh & Co., KG, Mobil
      Media Holdings AG and Qnective, Inc., including the following: Exhibit
      A Technology Transfer Agreement between Qnective, Inc. and Media Holding
      AG entered into January 3, 2007; Exhibit B - Software Development
      Agreement between Qporter, Inc. and Safe-com GmbH & Co. KG, dated
      January 18, 2007; and Exhibit C - Shareholders Agreement by and among
      Mobil Media Holdings AG, Qnective, Inc, and Qporter Inc. dated February 12, 2007
      (incorporated herein by reference from our Form 8-K filed on November 12,
      2008)10.5
                                            
                                            Subscription Agreement, dated July
      7, 2008, by and between Qnective, Inc. and Aquanil Advisors Inc.
      (incorporated herein by reference from our Form 8-K filed on July 11,
      200810.6
                                            
                                            Form of Convertible Loan Agreement
      dated September 4, 2008 between Qnective, Inc. and Mrs. Thea Kunz
      (incorporated herein by reference from our Form 8-K filed on September 19,
      2008)10.7
                                            
                                            Subscription Agreement, dated
      December 8, 2008, by and between Qnective, Inc. and Ms. Thea Kunz
      (incorporated herein by reference from our Form 8-K filed on December 15,
      2008)10.8
                                            
                                            Subscription Agreement dated
      December 8, 2008 by and between Qnective, Inc. and Ms. Thea
      Kunz  (incorporated herein by reference from our Form 8-K filed
      on December 15, 2008)10.9
                                            
                                            Termination Agreement dated
      December 8, 2008, by and between Qnective, Inc. and Ms. Thea Kunz
      (incorporated herein by reference from our Form 8-K filed on December 15,
      2008)10.10
                                            
                                            Marketing Consultant Agreement
      dated January 26, 2009 between Qporter, Inc. and ATT Management AG
      (incorporated herein by reference from our Form 8-K filed on January 30,
      2009)
  34
  10.11
                                    
                                    Marketing Consultant Agreement
      dated January 28, 2009 between Qporter, Inc. and Ediport Ltd AG
      (incorporated herein by reference from our Form 8-K filed on January 30,
      2009)10.12
                                    
                                    Marketing Consultant Agreement
      dated January 28, 2009 between Qporter, Inc. and Atlantique Caspian
      Holdings Ltd. (incorporated herein by reference from our Form 8-K filed on
      January 30, 2009)14
                                    
                                    Code of
      Ethics  (incorporated by reference from our Form 10-KSB filed on
      May 16, 2008)21*
                                    
                                    List of
      Subsidiaries24*
                                    
                                    Power of Attorney (included on
      signature page)31.1*
                                    
                                    Rule 13a-14(a)/15d-14(a)
      Certification31.2*
                                    
                                    Rule 13a-14(a)/15d-14(a)
      Certification32.1*
                                    
                                    Section 1350
      Certification32.2*
                                    
                                    Section 1350
      Certification








35






SIGNATURES





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





Qnective,
    Inc.(Registrant)Date: March 25,
      2009
                  By:
                  /s/
      Oswald
    OrtizOswald
  OrtizChief Executive
      Officer








POWER OF ATTORNEY




KNOW ALL PERSONS BY THESE PRESENTS, that
each person whose signature appears below constitutes and appoints Oswald Ortiz,
Chief Executive Officer, and Francoise Lanter, Chief Financial Officer, and each
of them, his or her true and lawful attorney-in-fact and agent, with the full
power of substitution and resubstitution, for him or her and in his or her name,
place, and stead, in any and all capacities therewith, to sign any and all
amendments to this report on Form 10-K, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto each said attorney-in-fact and agent full
power and authority to do and perform each and every act in person, hereby
ratifying and confirming all that each said attorney-in-fact and agent, or
either of them, or their or his or her substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.




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




NAME
                                                  
                                                  TITLE
                                                  
                                                  DATE/s/ Oswald
      OrtizOswald
Ortiz
                                                  
                                                  Chief Executive Officer and
      Director
                                                    (Principal Executive
      Officer)
                                                  
                                                  March 25,
    2009/s/
      Francoise
      LanterFrancoise
      Lanter
                                                  
                                                  Chief Financial Officer and
      Director
                                                    (Principal Accounting
      Officer)
                                                  
                                                  March 25,
    2009/s/
      Reto LargoReto Largo
                                                  
                                                  Chief Technology
      Officer
                                                    and
Director
                                                  
                                                  March 25,
    2009




36




QNECTIVE, INC.




(A DEVELOPMENT STAGE
COMPANY)




INDEX TO FINANCIAL
STATEMENTS




DECEMBER 31, 2008, AND
2007




Page:Report of Independent Registered
      Public Accounting Firm
                  
                  F-1Consolidated Financial
      Statements:Consolidated Balance Sheets as of
      December 31, 2008 and 2007
                  
                  F-2Consolidated Statements
      of  Operations and Comprehensive Loss for the year ended
      December 31, 2008, the period ended December 31, 2007 and the period from
      January 24, 2007 (inception) to December 31,
    2008
                  
                  F-3Consolidated Statements
      of  Changes in Stockholders’ Equity (Deficiency) for the period
      January 24, 2007 (inception) to December 31,
    2008
                  
                  F-4Consolidated Statements
      of  Cash Flows for the year ended December 31, 2008, the period
      ended December 31, 2007, and the period from January 24,
      2007 (inception) to December 31, 2008
                  
                  F-5Notes to the Consolidated
      Financial Statements
                  
                  F-6




37




REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM






Board of Directors and
Stockholders


Qnective, Inc.(A Development Stage
Company)




We have audited the accompanying
consolidated balance sheets of Qnective, Inc. (A Development Stage Company) as
of December 31, 2008 and 2007 and the related consolidated statements of
operations and comprehensive loss, statements of changes in stockholders’ equity
(deficiency), and statements of cash flowsforthe year ended December 31, 2008, the
periodended December 31, 2007 and the period
from January 24, 2007 (date of inception) to December 31, 2008. These financial
statements are the responsibility of the Company’s management.  Our
responsibility is to express an opinion on these financial statements based on
our audits.




We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United
States).  Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement.  An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.




In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects,
the financial position of Qnective, Inc. at December 31, 2008 and 2007, and the
results of its operations and its cash flows for the year ended December 31,
2008, the periodended December 31, 2007 and the period
from January 24, 2007 (date of inception) to December 31, 2008,in conformity with accounting
principles generally accepted in the United States of
America.




The accompanying financial statements
have been prepared assuming that the Company will continue as a going concern.
As discussed in Note 2 to the financial statements, the Company has suffered
recurring losses and negative cash flows from operations that raise substantial
doubt about its ability to continue as a going concern. Management’s plans in
regard to these matters are also described in Note 2. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.




We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Qnective, Inc.’s internal control over
financial reporting as of December 31, 2008, based on criteria established in
Internal Control – Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) and our report dated March 25, 2009 expressed an
adverse opinion thereon.









Zurich, March 25,
2009




BDO Visura




/s/
      Andreas Wyss
                
                /s/
      Christoph TschumiAndreas
      Wyss
                
                Christoph
      TschumiAuditor
      in ChargeSwiss
      Certified Accountant / CPA
                
                Swiss
      Certified Accountant




F-1




QNECTIVE, INC. (A Development Stage
Company)




CONSOLIDATED BALANCE
SHEETS


(in $, except per share
amounts)




December
                          31,2008
                        
                        
                        December
                          31,2007ASSETSCurrent
    Assets:Cash and cash
      equivalents
                        
                        
                        
                        
                        
                        1,497,536
                        
                        
                        122,345Accounts receivable, including
      related party
                        
                        
                        14
                        
                        
                        94,502
                        
                        
                        14,419Prepaid expenses and other current
      assets
                        
                        
                        
                        
                        
                        174,639
                        
                        
                        8,401Total
      current assets
                        
                        
                        
                        
                        
                        1,766,677
                        
                        
                        145,165Long-Term
      Assets:Property, plant and equipment,
      net
                        
                        
                        6
                        
                        
                        334,407
                        
                        
                        17,722Intangible assets,
      net
                        
                        
                        7
                        
                        
                        1,200,759
                        
                        
                        1,116,483Long-term loan due from MobilMedia
      Holding AG, a related party
                        
                        
                        14
                        
                        
                        302,426
                        
                        
                        70,924Total
Assets
                        
                        
                        
                        
                        
                        3,604,269
                        
                        
                        1,350,294LIABILITIES AND STOCKHOLDERS’
      EQUITY (DEFICIENCY)Current
      Liabilities:Accounts payable, including
      related party
                        
                        
                        14
                        
                        
                        402,427
                        
                        
                        129,329Short-term loans due to related
      parties
                        
                        
                        14
                        
                        
                        63,639
                        
                        
                        1,478Accrued expenses and other current
      liabilities
                        
                        
                        
                        
                        
                        336,226
                        
                        
                        23,682Other deferred
      revenue
                        
                        
                        
                        
                        
                        307,326
                        
                        
                        0Total current
      liabilities
                        
                        
                        
                        
                        
                        1,109,618
                        
                        
                        154,489Long-Term
      Liabilities:Pension
      liability
                        
                        
                        
                        
                        
                        402,602
                        
                        
                        0Loan payable due to
      Stockholder
                        
                        
                        14
                        
                        
                        0
                        
                        
                        1,499,980Total
      liabilities
                        
                        
                        
                        
                        
                        1,512,220
                        
                        
                        1,654,469Commitments &
      Contingencies
                        
                        
                        8Stockholders’ Equity
      (deficiency):
                        
                        
                        10Common stock, $0.001 par
      value;
                        
                        
                        
                        
                        
                        61,950
                        
                        
                        2,500Shares authorized; 75,000
      000Shares issued and outstanding;
      61,950,000 and 2,500,000 as at December 31, 2008 and
      2007,  respectively,Additional paid in
      Capital
                        
                        
                        
                        
                        
                        16,003,459
                        
                        
                        1,247,500Accumulated other comprehensive
      income:Foreign currency
      translation
                        
                        
                        
                        
                        
                        (64,868
                        )
                        
                        3,987Change in pension
      liability
                        
                        
                        12
                        
                        
                        (369,068
                        )
                        
                        0Accumulated deficit during
      development stage
                        
                        
                        
                        
                        
                        (13,539,424
                        )
                        
                        (1,558,162
                        )Total stockholders’ equity
      (deficiency)
                        
                        
                        
                        
                        
                        2,092,049
                        
                        
                        (304,175
                        )Total Liabilities and
      Stockholders’ Equity (deficiency)
                        
                        
                        
                        
                        
                        3,604,269
                        
                        
                        1,350,294




See accompanying
summary of accounting policies and the notes to the financial
statements.




F-2




QNECTIVE, INC. (A Development Stage
Company)




CONSOLIDATED
STATEMENTS OF OPERATIONSAND COMPREHENSIVE
LOSS




(in $, except per share
amounts)





Year Ended
                                                            December
                                                            31,
                                                            2008
                                                          
                                                          Period Ended
                                                            December
                                                            31,
                                                            2007
                                                          
                                                          For the Period
                                                            from
                                                            January 24, 2007
                                                            (Inception) to
                                                            December 31, 2008Operating
      expensesGeneral and Administrative
      expenses
                                                          
                                                          
                                                          4,552,053
                                                          
                                                          1,019,192
                                                          
                                                          5,571,245Marketing
      expense
                                                          
                                                          
                                                          832,577
                                                          
                                                          439,404
                                                          
                                                          1,271,981Research and development
      expense
                                                          
                                                          
                                                          2,851,411
                                                          
                                                          2,040
                                                          
                                                          2,853,451Total Operating
      expenses
                                                          
                                                          
                                                          8,236,041
                                                          
                                                          1,460,636
                                                          
                                                          9,696,677Other income
      (expense)Interest
    income
                                                          
                                                          
                                                          5,001
                                                          
                                                          0
                                                          
                                                          5,001Interest
      expense
                                                          
                                                          
                                                          (2,011,495
                                                          )
                                                          (677
                                                          )
                                                          (2,012,172
                                                          )Foreign exchange
      loss
                                                          
                                                          
                                                          (73,727
                                                          )
                                                          (96,849
                                                          )
                                                          (170,576
                                                          )Loss on early extinguishment of
      debt
                                                          
                                                          
                                                          (1,665,000
                                                          )
                                                          0
                                                          
                                                          (1,665,000
                                                          )Total other income
      (expense)
                                                          
                                                          
                                                          (3,745,221
                                                          )
                                                          (97,526
                                                          )
                                                          (3,842,747
                                                          )Net Loss
                                                          
                                                          
                                                          (11,981,262
                                                          )
                                                          (1,558,162
                                                          )
                                                          (13,539,424
                                                          )Other Comprehensive (Loss)
      Income:Foreign currency translation
      adjustment
                                                          
                                                          
                                                          (68,855
                                                          )
                                                          3,987
                                                          
                                                          (64,868
                                                          )Defined benefit pension
      plansUnrecognized
      net actuarial loss, net of tax
                                                          
                                                          
                                                          (369,068
                                                          )
                                                          0
                                                          
                                                          (369,068
                                                          )Total Other Comprehensive (Loss)
      Income
                                                          
                                                          
                                                          (437,923
                                                          )
                                                          0
                                                          
                                                          (433,936
                                                          )Comprehensive
      Loss
                                                          
                                                          
                                                          (12,419,185
                                                          )
                                                          (1,554,175
                                                          )
                                                          (13,973,360
                                                          )Basic and Diluted Weighted Average
      Shares
                                                          
                                                          
                                                          37,993,425
                                                          
                                                          30,550,000
                                                          
                                                          34,392,786Basic
      and Diluted Net Loss Per Share
                                                          
                                                          
                                                          (0.32
                                                          )
                                                          (0.05
                                                          )
                                                          (0.39
                                                          )




See accompanying summary of accounting
policies and the notes to the financial statements.




F-3




QNECTIVE, INC.




CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS’ EQUITY (DEFICIENCY)




FOR THE PERIOD FROM JANUARY 24, 2007
(INCEPTION) TO DECEMBER 31, 2008




(in $, except per share
amounts)


CommonStock
                                                            
                                                            
                                                            Additional
                                                            
                                                            
                                                            Accumulated
      other
                                                              comprehensive
                                                            
                                                            
                                                            Accumulated
                                                              Deficit During
                                                              Development
                                                            
                                                            
                                                            Total
                                                              Shareholders’Shares
                                                            
                                                            
                                                            Amount
                                                            
                                                            
                                                            Paid-in
                                                            
                                                            
                                                            Income
    (loss)
                                                            
                                                            
                                                            Stage
                                                            
                                                            
                                                            Equity
      (Deficiency)Common stock issued for cash at $1
      per share
                                                            
                                                            
                                                            1,250,000
                                                            
                                                            
                                                            
                                                            1,250
                                                            
                                                            
                                                            
                                                            1,248,750
                                                            
                                                            
                                                            
                                                            0
                                                            
                                                            
                                                            
                                                            0
                                                            
                                                            
                                                            
                                                            1,250,000Common stock issued for
      contribution of XMS Technology
                                                            
                                                            
                                                            1,250,000
                                                            
                                                            
                                                            
                                                            1,250
                                                            
                                                            
                                                            
                                                            (1,250
                                                            )
                                                            
                                                            
                                                            0
                                                            
                                                            
                                                            
                                                            0
                                                            
                                                            
                                                            
                                                            0Foreign currency translation
      adjustment
                                                            
                                                            
                                                            0
                                                            
                                                            
                                                            
                                                            0
                                                            
                                                            
                                                            
                                                            0
                                                            
                                                            
                                                            
                                                            3,987
                                                            
                                                            
                                                            
                                                            0
                                                            
                                                            
                                                            
                                                            3,987Net loss
                                                            
                                                            
                                                            0
                                                            
                                                            
                                                            
                                                            0
                                                            
                                                            
                                                            
                                                            0
                                                            
                                                            
                                                            
                                                            0
                                                            
                                                            
                                                            
                                                            (1,558,162
                                                            )
                                                            
                                                            
                                                            (1,558,162
                                                            )Balance at December 31,
      2007
                                                            
                                                            
                                                            2,500,000
                                                            
                                                            
                                                            
                                                            2,500
                                                            
                                                            
                                                            
                                                            1,247,500
                                                            
                                                            
                                                            
                                                            3,987
                                                            
                                                            
                                                            
                                                            (1,558,162
                                                            )
                                                            
                                                            
                                                            (304,175
                                                            )Stock based Compensation (Note
      11)
                                                            
                                                            
                                                            0
                                                            
                                                            
                                                            
                                                            0
                                                            
                                                            
                                                            
                                                            521,455
                                                            
                                                            
                                                            
                                                            0
                                                            
                                                            
                                                            
                                                            0
                                                            
                                                            
                                                            
                                                            521,455Recapitalization (Note
      5)
                                                            
                                                            
                                                            28,050,000
                                                            
                                                            
                                                            
                                                            28,050
                                                            
                                                            
                                                            
                                                            (28,050
                                                            )
                                                            
                                                            
                                                            0
                                                            
                                                            
                                                            
                                                            0
                                                            
                                                            
                                                            
                                                            0Acquisition of  Qnective
      (Note 5)
                                                            
                                                            
                                                            28,450,000
                                                            
                                                            
                                                            
                                                            28,450
                                                            
                                                            
                                                            
                                                            2,109,279
                                                            
                                                            
                                                            
                                                            0
                                                            
                                                            
                                                            
                                                            0
                                                            
                                                            
                                                            
                                                            2,137,729Common stock issued as converted
      loan at $3.85 (Note 5)
                                                            
                                                            
                                                            900,000
                                                            
                                                            
                                                            
                                                            900
                                                            
                                                            
                                                            
                                                            3,464,100
                                                            
                                                            
                                                            
                                                            0
                                                            
                                                            
                                                            
                                                            0
                                                            
                                                            
                                                            
                                                            3,465,000Incremental
      shares for CEO and CTO (Note 5)
                                                            
                                                            
                                                            0
                                                            
                                                            
                                                            
                                                            0
                                                            
                                                            
                                                            
                                                            4,546,850
                                                            
                                                            
                                                            
                                                            0
                                                            
                                                            
                                                            
                                                            0
                                                            
                                                            
                                                            
                                                            4,546,850Common stock issued for conversion
      of the convertible loan at $2.00 (Note 10)
                                                            
                                                            
                                                            1,000,000
                                                            
                                                            
                                                            
                                                            1,000
                                                            
                                                            
                                                            
                                                            1,999,000
                                                            
                                                            
                                                            
                                                            0
                                                            
                                                            
                                                            
                                                            0
                                                            
                                                            
                                                            
                                                            2,000,000Common stock issued for interest
      of convertible  loan at $3.85 (Note 10)
                                                            
                                                            
                                                            37,500
                                                            
                                                            
                                                            
                                                            38
                                                            
                                                            
                                                            
                                                            144,337
                                                            
                                                            
                                                            
                                                            0
                                                            
                                                            
                                                            
                                                            0
                                                            
                                                            
                                                            
                                                            144,375Issuance of common stock on
      interest of convertible loan accrued at October 1, 2008
      (Note10)
                                                            
                                                            
                                                            12,500
                                                            
                                                            
                                                            
                                                            12
                                                            
                                                            
                                                            
                                                            (12
                                                            )
                                                            
                                                            
                                                            0
                                                            
                                                            
                                                            
                                                            0
                                                            
                                                            
                                                            
                                                            0Common stock issued for cash at
      $2.00 (Note 10)
                                                            
                                                            
                                                            1,000,000
                                                            
                                                            
                                                            
                                                            1,000
                                                            
                                                            
                                                            
                                                            1,999,000
                                                            
                                                            
                                                            
                                                            0
                                                            
                                                            
                                                            
                                                            0
                                                            
                                                            
                                                            
                                                            2,000,000Net Loss
                                                            
                                                            
                                                            0
                                                            
                                                            
                                                            
                                                            0
                                                            
                                                            
                                                            
                                                            0
                                                            
                                                            
                                                            
                                                            0
                                                            
                                                            
                                                            
                                                            (11,981,262
                                                            )
                                                            
                                                            
                                                            (11,981,262
                                                            )Change in pension liability, net
      of tax $0 (Note 12)
                                                            
                                                            
                                                            0
                                                            
                                                            
                                                            
                                                            0
                                                            
                                                            
                                                            
                                                            0
                                                            
                                                            
                                                            
                                                            (369,068
                                                            )
                                                            
                                                            
                                                            0
                                                            
                                                            
                                                            
                                                            (369,068
                                                            )Foreign currency translation
      adjustment
                                                            
                                                            
                                                            0
                                                            
                                                            
                                                            
                                                            0
                                                            
                                                            
                                                            
                                                            0
                                                            
                                                            
                                                            
                                                            (68,855
                                                            )
                                                            
                                                            
                                                            0
                                                            
                                                            
                                                            
                                                            (68,855
                                                            )Balance at December 31,
      2008
                                                            
                                                            
                                                            61,950,000
                                                            
                                                            
                                                            
                                                            61,950
                                                            
                                                            
                                                            
                                                            16,003,459
                                                            
                                                            
                                                            
                                                            (433,936
                                                            )
                                                            
                                                            
                                                            (13,539,424
                                                            )
                                                            
                                                            
                                                            2,092,049




See accompanying summary of accounting
policies and the notes to the financial statements.




F-4




QNECTIVE, INC.  (A Development
Stage Company)




CONSOLIDATED STATEMENTS OF CASH
FLOWS


(in $, except per
share amounts)




Year Ended December
      31,
                                                                                                                                                2008
                                                                                                                                              
                                                                                                                                              Period Ended
                                                                                                                                                December
                                                                                                                                                31,
                                                                                                                                                2007
                                                                                                                                              
                                                                                                                                              For the Period from January 24,
      2007 (Inception) to December 31,
                                                                                                                                                2008Cash Flows from Operating
      Activities:Net loss
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              (11,981,262
                                                                                                                                              )
                                                                                                                                              
                                                                                                                                              (1,558,162
                                                                                                                                              )
                                                                                                                                              
                                                                                                                                              (13,539,424
                                                                                                                                              )Adjustments to reconcile net loss
      to cash used in operating activities:Depreciation and
      amortization
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              257,851
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              2,846
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              260,697Stock based
      compensation
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              521,455
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              0
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              521,455Interest
      expense
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              2,011,495
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              0
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              2,011,495Loss on extinguishment of
      debt
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              1,665,000
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              0
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              1,665,000Incremental shares for CEO and
      CTO
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              4,546,850
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              0
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              4,546,850Changes in operating assets and
      liabilities:Accounts
      receivable
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              (82,778
                                                                                                                                              )
                                                                                                                                              
                                                                                                                                              (12,366
                                                                                                                                              )
                                                                                                                                              
                                                                                                                                              (95,144
                                                                                                                                              )Prepaid expenses and other current
      assets
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              (193,777
                                                                                                                                              )
                                                                                                                                              
                                                                                                                                              (9,469
                                                                                                                                              )
                                                                                                                                              
                                                                                                                                              (203,246
                                                                                                                                              )Accounts
      payable,  including related parties
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              30,180
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              127,915
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              158,095Deferred
      revenue
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              307,326
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              0
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              307,326Accrued expenses and other
      liabilities
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              252,392
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              23,344
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              275,736Pension
      liability
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              30,619
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              0
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              30,619Net cash provided by (used in)
      operating activities
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              (2,634,649
                                                                                                                                              )
                                                                                                                                              
                                                                                                                                              (1,425,892
                                                                                                                                              )
                                                                                                                                              
                                                                                                                                              (4,060,541
                                                                                                                                              )Cash Flows from Investing
      Activities:Property, plant and
      equipment
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              (434,685
                                                                                                                                              )
                                                                                                                                              
                                                                                                                                              (19,366
                                                                                                                                              )
                                                                                                                                              
                                                                                                                                              (454,051
                                                                                                                                              )Intangible
      assets
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              (217,746
                                                                                                                                              )
                                                                                                                                              
                                                                                                                                              (1,117,203
                                                                                                                                              )
                                                                                                                                              
                                                                                                                                              (1,334,949
                                                                                                                                              )Short-term loan due from related
      party
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              (149,225
                                                                                                                                              )
                                                                                                                                              
                                                                                                                                              (69,536
                                                                                                                                              )
                                                                                                                                              
                                                                                                                                              (218,761
                                                                                                                                              )Reverse acquisition, net of cash
      acquired
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              1,157,473
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              0
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              1,157,473Net cash provided by (used in)
      investing activities
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              355,817
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              (1,206,105
                                                                                                                                              )
                                                                                                                                              
                                                                                                                                              (850,288
                                                                                                                                              )Cash Flows from Financing
      Activities:Loan from
      stockholders
                                                                                                                                              14
                                                                                                                                              
                                                                                                                                              1,785,523
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              1,499,980
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              3,285,503Proceeds from the issuance of
      common stock, net of finder’s fee
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              2,000,000
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              1,250,000
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              3,250,000Net cash provided by financing
      activities
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              3,785,523
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              2,749,980
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              6,535,503Increase (decrease) in cash and
      cash equivalents
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              1,506,691
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              117,983
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              1,624,674Effect of exchange rate changes on
      cash
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              (131,500
                                                                                                                                              )
                                                                                                                                              
                                                                                                                                              4,362
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              (127,138
                                                                                                                                              )Cash and cash equivalents,
      beginning of year
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              122,345
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              0
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              0Cash and cash equivalents, end of
      year
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              1,497,536
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              122,345
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              1,497,536Supplemental Cash Flow
      Information:Cash paid for
      interest
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              11,640
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              498
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              12,138Cash paid for
      taxes
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              11,717
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              0
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              11,717Capital increase through
      conversion of convertible debenture
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              2,000,000
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              0
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              2,000,000Capital increase through
      conversion of loan
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              3,465,000
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              0
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              3,465,000Shares issued for accrued
      interest
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              48,125
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              0
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              48,125




See accompanying
summary of accounting policies and the notes to the financial
statements.




F-5




QNECTIVE, INC. (A Development Stage
Company)






1.Organization and
Nature of Operations





Qnective, Inc. formerly known as
Sotech, Inc., (“Qnective” and together with its subsidiaries the
“Company”) was incorporated in Nevada on February 2, 2005, to operate an
internet website offering comparison shopping. In February 2007 our Board of
Directors determined that the comparison shopping business would not be
successful and sought other business opportunities,and transitioned from a comparison
shopping business to a new telecommunications business and services specializing
in the research, design, development, marketing and distribution of
telecommunications software and services.




As part of its transition strategy, the
Company entered into a letter agreement dated January 2, 2007, with MobilMedia
Holdings AG (“MobilMedia”), a Swiss company, to establish a joint venture to
develop and commercialize MobilMedia’s XMS (extended message service), a
wireless mobile technology.





On February 12, 2007,theCompany, MobilMedia, and a Nevada
corporation formed on January 24, 2007, Qporter, Inc. ("Qporter"), entered into
a shareholders' agreement (the “Shareholders' Agreement”). Pursuant to the terms
of the Shareholders' Agreement MobilMedia transferred to QPorter certain
technology for a converged communications platform that integrates messenger and
Voice-over Internet Protocol (“VoIP”) with a number of features allowing users
to use mobile devices or desktop computers to communicate. In exchange for the
transfer of technology, MobilMedia received a cash payment of $625,000 from
Qporter and 1,250,000 shares of common stock of Qporter, Inc. (the “Qporter
Stock”), representing 50% of the outstanding common shares of Qporter, as
nominee for Oswald Ortiz, our President and Chief Executive Officer, Tan
Siekmann and Stefan Schraps (the “MMH Shareholders”). Also pursuant to the terms
of the Shareholders’ Agreement,Qnectivereceived 50% of the outstanding common
shares of Qporter in exchange for an agreement to invest $2,500,000 in Qporter.
Qnective fulfilled its investment obligation by providing equity financing of
$1,250,000 and debt financing of $1,250,000.




Under the terms of the Shareholders '
Agreement, the Company had the sole and exclusive option to purchase, free of
all encumbrances, all of the shares of Qporter owned by MobilMedia, as nominee,
in exchange for 65% of the issued and outstanding shares of the Company subject
to adjustment to account for dilution as a result of the sale by the Company of
shares of Qnective common stock (the “Qnective Stock”) in order to raise funds
to be invested in the Company.




On October 1, 2008 the Company entered
into an Amended Shareholders’ Agreement (the “Amended Shareholders’ Agreement”)
by and among the Company, Mobil Media, the MMH Shareholders, Qporter, Capella IV
LLC and Conwards Management, Inc. which, among other things terminated the
Shareholders’ Agreement and the Company acquired the other 50% of the
outstanding shares of Qporter Stock which it did not yet own.  For
accounting purposes, the acquisition has been treated as a recapitalization of
Qporter with Qporter as the acquirer (reverse acquisition). The historical
financial statements prior to October 1, 2008 are those of Qporter consolidated,
as described further in Note 5.





The Company is in the development stage
and has devoted most of its efforts to creating its products and raising
capital. The planned principal operations have commenced, but there has been no
revenue therefrom.




2.Future
Operations




The Company has experienced losses from
operations and anticipates incurring losses in the near future. The accompanying
financial statements have been prepared assuming that the Company will continue
as a going concern. The Company incurred a net loss of $13,539,424 and a
negative cash flow from operations of $4,060,541 since its inception, and had a
working capital of $657,059 at December 31, 2008.  These matters raise
substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.




F-6




QNECTIVE, INC.  (A Development
Stage Company)






The Company has had negative cash flows
from operations to date and has been dependent on equity and debt
financing. Management believes that the Company currently does not have
adequate cash resources to fund anticipated cash requirements through December
31, 2009; and, therefore, the Company will have to raise addition funding
through loans, equity contributions or revenue.  The Company's ability
to continue its operations and market and sell its products and services will
depend on the Company's ability to raise additional funding. If the Company is
unable to obtain such funding, the Company will not be able to continue its
business. Any additional equity financing may be dilutive to shareholders, and
debt financing, if available, will increase expenses and may involve restrictive
covenants. The Company will be required to raise additional capital on terms
which are uncertain, especially under the current capital market conditions.
Under these circumstances, if the Company is unable to obtain capital or is
required to raise it on undesirable terms, it may have a material adverse effect
on the Company's financial condition.





Based on
the Company’s business plan it expects to
obtain $1,500,000 from internal sources andto need additional
funding from external sources of approximately $5,000,000.




3.Summary of
Significant Accounting Policies




Basis of
Presentation—The
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries Qporter, Inc., Qporter Schweiz AG  (now
Qnective AG) and Qporter Poland. All significant inter-company accounts and
transactions have been eliminated in the consolidation.





Development Stage
Company–The Company
complies with SFAS No. 7, “Accounting and Reporting by Development Stage
Enterprises” for its characterization of the Company as development
stage.




Use of
estimates-The preparation of financial statements
in conformity with United State generally accepted accounting principles
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying disclosures of the
Company. Although these estimates are based on management’s knowledge of current
events and actions that the Company may undertake in the future, actual results
may differ from such estimates.





Comprehensive
Loss- Comprehensive income
or loss encompasses net income or loss and “other comprehensive income or loss”,
which includes all other non-owner transactions and events that change
stockholder’s equity (deficiency).




Foreign Currency
Translation-The functional
currency of the Company and its subsidiaries is the local currency. The
financial statements of foreign subsidiaries are translated to U.S. dollar
equivalents under the current method in accordance with SFAS No. 52, “Foreign
Currency Translation”. Assets and liabilities are translated into U.S. dollar
equivalents at rates of exchanges in effect at the balance sheet date. Average
rates for the year are used to translate expenses. The cumulative translation
adjustment is reported as a component of accumulated other comprehensive income
(loss). Foreign currency differences from intercompany receivables and payables
are recorded as foreign exchange gains/losses in the Statement of
Operations.




F-7




QNECTIVE,
INC.  (A Development Stage Company)






Loss Per
Share— The Company computes
net earnings (loss) per common share in accordance with SFAS No. 128 “Earnings
per Share” (“SFAS 128”) and SAB No. 98 (“SAB 98”). Under the provisions of SFAS
128 and SAB 98, basic net earnings (loss) per common share is computed by
dividing the net earnings (loss) available to common stock outstanding during
the period. Net earnings (loss) per share on a diluted basis is computed by
dividing the net earnings (loss) for the period by the weighted average number
of common and dilutive common stock equivalent shares outstanding during the
period. The calculation as at December 31, 2008 and 2007 excludes options to
purchase common stock aggregating 150,000 as their effects would be
anti-dilutive.




Cash and Cash
Equivalents—The Company
considers all highly liquid securities purchased with an original maturity of
three months or less to be cash equivalents.




Property, Plant and
Equipment-Equipment is
recorded at cost and depreciated using the straight-line method over the
estimated useful lives of the related assets ranging from 3 to 4 years. The cost
of normal maintenance and repairs is charged to operations as incurred. Major
overhaul that extends the useful life of existing assets is capitalized. When
equipment is retired or disposed, the costs and related accumulated depreciation
are eliminated and the resulting profit or loss is recognized in
income.





Long-Lived
Assets-The Company accounts
for long-lived assets in accordance with the provisions of SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. The statement
requires the Company to evaluate its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may be not recoverable. When the sum of the undiscounted future net cash flows
expected to result from the use of the asset and its eventual disposition is
less than its carrying amount, impairment may exist. To determine the amount of
impairment, the Company compares the fair value of the asset to its carrying
value. If the carrying value of the asset exceeds its fair value, an impairment
loss equal to the difference is recognized.





Benefit Plan- The Company
maintains a pension plan covering all employees in Switzerland; it is considered
a defined benefit plan and accounted for under SFAS No. 158, “Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans”, an
amendment of SFAS Nos. 87, 88, 106 and 132R (“SFAS 158”). This model allocates
pension costs over the service period of employees in the plan. The underlying
principle is that employees render services ratably over this period, and
therefore, the income statement effects of pensions should follow a similar
pattern.  SFAS 158 requires recognition of the funded status, or
difference between the fair value of plan assets and the projected benefit
obligations of the pension plan on the balance sheet at December 31, 2008 and
December 31, 2007, respectively, with a corresponding adjustment to accumulated
other comprehensive income. If the projected benefit obligation exceeds the fair
value of plan assets, then that difference or unfunded status represents the
pension liability.





The
Company records a net periodic pension cost in the statement of operations. The
liabilities and annual income or expense of the pension plan is determined using
methodologies that involve several actuarial assumptions, the most significant
of which are the discount rate and the long-term rate of asset return (based on
the market-related value of assets). The fair values of plan assets are
determined based on prevailing market prices.





In
Poland, the Company maintains a government defined contribution plan
whereas the annual contributions of 19.52% of the gross pay are paid by the
employer and the employee.





Income
Taxes-In accordance with
SFAS No. 109, “Accounting for Income Taxes”, the Company uses the asset and
liability method to account for income taxes, including recognition of deferred
tax assets for the anticipated future tax consequences attributable to
differences between financial statement amounts and their respective tax bases.
The Company reviews its deferred tax assets for recovery and a valuation
allowance is established when the Company believes that it is more likely than
not that some portion of its deferred tax asset will not be realized. Changes in
valuation allowances from period to period are included in the Company’s tax
provision in the period of change.  The determination of the amount of
unrecognized deferred tax liability for temporary differences related to
investments in foreign subsidiaries is not practicable and as such, no amount
has been included in the financial instruments.





Fair Value of
Financial Instruments— The
Company’s financial instruments consist of cash and cash equivalents, accounts
receivables, accounts payables, long-term loan  due from MobilMedia
and short-term loan due to related parties. The fair value of these financial
instruments approximate their carrying value due to the short maturities of
these instruments, unless otherwise noted.




F-8




QNECTIVE, INC. (A
Development Stage Company)






Long-term loan due
from MobilMedia Holding AG- The long-term loan receivable is reported at outstanding principal adjusted
for any deferred costs, any allowances for loan losses and any unauthorized
premiums or discounts. At December 31, 2008, no deferred costs nor allowances
for losses or unauthorized premiums or discounts existed.




Intangible assets
(Trademarks)-The Company
accounts for intangible assets pursuant to SFAS No. 142, “Goodwill and other
Intangible Assets”. Under SFAS 142, intangibles with definite lives continue to
be amortized on a straight-line basis over the estimated useful lives, which is
between 5 and 10 years. The Company does not have any intangibles with
indefinite lives as of December 31, 2008.




Intangible assets
(Research and Development Cost)-The Company accounts for software
development costs in accordance with SFAS 86. Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed, under which certain
software development costs incurred subsequent to the establishment of
technological feasibility are capitalized and amortized based on the greater
amount computed using (a) the ratio of current gross sales to the anticipated
future gross sales or (b) on a straight-line basis over the remaining estimated
lives of the related products.  The Company amortizes its intangible
assets  on a straight-line basis over their estimated useful lives, as
it represents the greater amount of these two methods . Technological
feasibility is established upon completion of a working
model.





At each
balance sheet date, the unamortized capitalized software development costs of a
computer software product are compared to the net realizable value of that
product. The amount by which the unamortized capitalized costs of a computer
software product exceed the net realizable value of that asset will be written
off.





Revenue
Recognition– The Company recognizes revenue when persuasive evidence of
an arrangement exists, delivery has occurred or services have been rendered, the
seller’s price is fixed or determinable, and collectability is reasonably
assured.





The
Company derives revenue from the customization of its software to meet specific
needs of BT inmo BV (“BT”) so that BT’s subscribers can download the services.
This arrangement includes customer acceptance criteria. As the Company has not
previously met the defined customer acceptance criteria, revenues from this
arrangement will be recognized upon the earlier of receipt of written customer
acceptance or expiration of the contractual acceptance period, provided all
other recognition criteria have been met.





The costs
relating to the BT project are capitalized as incurred until the revenue
recognition criteria have been met and the related revenue can be recognized.
Once revenue can be recognized, these costs will be expensed.





Because
the criteria to recognize revenue were not met at December 31, 2008, the Company
deferred 100% ($307,326) of the BT related revenue. Costs of $154,242 required
to customize the compatible software as per the BT agreement were incurred in
the fourth quarter of 2008, and have been capitalized and presented as part of
prepaid expenses and other current assets.





Stock Based Compensation-The Company
accounts for options granted to persons other than employees and directors under
SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”) and EITF No.
96-18, Accounting for Equity
Investments That Are Issued to Other Than Employees for Acquiring or in
Conjunction with Selling Goods and Services.As such, the fair value of
such options is periodically re-measured during the vesting period using the
Black-Scholes option-pricing model and expense is recognized over the service /
vesting period.




F-9




QNECTIVE, INC. (A Development Stage
Company)








4.Impact of Recently
Issued Accounting Pronouncements




New
Accounting Pronouncement





In
September 2006, the Financial Accounting Standards Board (FASB) issued Statement
No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value for
financial accounting and reporting purposes, establishes a framework for
measuring fair value in accordance with generally accepted accounting principles
and expands disclosures about fair value instruments. This statement does not
require any new fair value measurements, rather, it applies under other
accounting pronouncements that require or permit fair value measurements. The
provisions of this statement are to be applied prospectively as of the beginning
of the fiscal year in which this statement is initially applied, with any
transition adjustment recognized as a cumulative effect adjustment to the
opening balance of retained earnings. SFAS 157 was effective and adopted by the
Company as of January 1, 2008. In order to determine the implications of
adopting SFAS 157, the Company reviewed all the assets and liabilities recorded
on its balance sheet. Based on the results of its review, the Company determined
that a majority of its assets and liabilities are either not required to be
measured at fair value in its financial statements, or are outside the scope of
SFAS 157. The adoption of SFAS 157 did not have a material impact on the
Company’s results of operations, cash flows or financial positions.





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities - Including an Amendment of FASB
Statement No. 115” (“SFAS 159”). SFAS 159 allows an entity to irrevocably elect
fair value for the initial and subsequent measurement of certain financial
instruments and other items that are not currently required to be measured at
fair value. When the fair value option is elected and a company chooses to
record eligible items at fair value, the company must report unrealized gains
and losses on those items in results of operations at each subsequent reporting
date. Additionally, the transition provisions of SFAS 159 permit a one-time
election for existing positions at the adoption date, with a cumulative effect
adjustment included in opening retained earnings. All future changes in fair
value will be reported in results of operations. Prior to this election, only
the unrealized losses were recorded in results of operations. The Company
adopted SFAS 159 effective for the fiscal year beginning January 1, 2008, and
the adoption had no impact on the Company’s financial position and results of
operations.




On
October 10, 2008, the Financial Accounting Standards Board issued FASB Staff
Position (FSP) No. FAS 157-3. This FSP applies to financial assets within the
scope of accounting pronouncements that require or permit fair value
measurements in accordance with Statement 157 and clarifies the application of
Statement 157 in a market that is not active and provides an example to
illustrate key considerations in determining the fair value of a financial asset
when the market for that financial asset is not active. The FSP is effective
upon issuance. The adoption of FSP FAS 157-3 did not  have a material
impact on the Company’s results of operations, cash flows or financial
positions.





Recent
Accounting Pronouncements Not Yet Effective





In
December 2007, the FASB issued SFAS No. 141(R),“Business Combinations.” SFAS
141(R) requires all business combinations completed after the effective date to
be accounted for by applying the acquisition method (previously referred to as
the purchase method). Companies applying this method will have to identify the
acquirer, determine the acquisition date and purchase price and recognize at
their acquisition date fair values of the identifiable assets acquired,
liabilities assumed, and any non-controlling interests in the acquirer. In the
case of a bargain purchase the acquirer is required to reevaluate the
measurements of the recognized assets and liabilities at the acquisition date
and recognize a gain on that date if an excess remains. SFAS 141(R) becomes
effective for fiscal periods beginning after December 15, 2008. This statement
is not expected to have a significant effect on the Company's financial
statements.




F-10




QNECTIVE, INC. (A Development Stage
Company)







In
February 2008, the FASB issued Staff Position (FSP) FAS 157-2, Effective Date of
FASB Statement No. 157, which defers the implementation for the non-recurring
financial assets and liabilities from fiscal years beginning after November 15,
2007 to fiscal years beginning after November 15, 2008. The provisions of SFAS
157 will be applied prospectively. The statement provisions effective as of
January 1, 2008, do not have a material effect on the Company’s financial
position and results of operations. Management does not believe that the
remaining provisions will have a material effect on the Company’s financial
position and results of operations when they become effective on January 1,
2009.





In
December 2007, the FASB issued Financial Accounting Standard No. 160,
Non-controlling Interests in Financial Statements—an amendment of ARB No. 51
(“SFAS 160”). SFAS 160 requires that a non-controlling interest in a subsidiary
be reported as equity and the amount of net income specifically attributable to
the non-controlling interest be identified in the financial statements. It also
calls for consistency in the manner of reporting changes in the parent’s
ownership interest and requires fair value measurement of any non-controlling
equity investment retained in a deconsolidation. SFAS 160 is effective for
fiscal years beginning after December 15, 2008, with early adoption prohibited.
This statement is not expected to have a significant effect on the Company’s
financial statements.





In March
2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments
and Hedging Activities, an amendment of FASB Statement No. 133" (“SFAS 161”).
SFAS 161 amends and expands the disclosure requirements of SFAS 133, "Accounting
for Derivative Instruments and Hedging Activities" (“SFAS 133”), by requiring
enhanced disclosures about how and why an entity uses derivative instruments,
how derivative instruments and related hedged items are accounted for under SFAS
133 and its related interpretations, and how derivative instruments and related
hedged items affect an entity's financial position, financial performance, and
cash flows. SFAS 161 requires qualitative disclosures about objectives and
strategies for using derivatives, quantitative disclosures about fair value
amounts of, and gains and losses on, derivative instruments, and disclosures
about credit-risk-related contingent features in derivative agreements. SFAS 161
will be effective for the Company as of January 1, 2009. As SFAS 161 provides
only disclosure requirements, the adoption of this standard will not have a
material impact on the Company’s results of operations, cash flows or financial
positions.




F-11




QNECTIVE, INC. (A Development Stage
Company)





5. Reverse
acquisition





On October 1, 2008 Qnective entered into
the Amended Shareholders' Agreement among the Company, MobilMedia, the MMH
Shareholders, Qporter, Capella, and Connwards to acquire the remaining 50% of
the Qporter’s Shares.  The Shareholders' Agreement terminated the
original Shareholders' Agreement dated February 12, 2007, among Mobil Media,
Qnective, and Qporter.  Pursuant to the Amended Shareholders’
Agreement:





1.
            Capella agreed to make a capital
      contribution to the Company of 30,550,000 shares (the “Capella Shares”) of
      Qnective Stock, for aggregate consideration of $1.00, and the Company
      agreed to hold the Capella Shares as treasury
    shares;





2.
            The MMH Shareholders, in their
      capacity as the beneficial owners pursuant to a nominee agreement between
      MobilMedia, as nominee and the MMH Shareholders of 1,250,000 shares of the
      Qporter Stock, representing 50% of the issued and outstanding shares of
      the Qporter Stock, agreed to exchange their Qporter Stock, for 30,550,000
      shares of Qnective Stock (the “Share Exchange Transaction”) representing
      approximately 51% of the outstanding shares of Qnective Stock as of
      October 1, 2008. Under the terms of the Share Exchange Transaction, Mr.
      Ortiz, the Company’s President, Chief Executive Officer, and a director of
      the Company received 14,816,750 shares of Qnective Stock representing
      24.74% of the issued and outstanding shares of Qnective Stock after giving
      effect to the transactions contemplated by the Shareholders’ Agreement;
      Mr. Siekmann also received 14,816,750 shares of Qnective Stock;
      and Mr. Schraps received 916,500 shares of Qnective
      Stock;





3.
            Connwards acknowledged the
      previous issuance of 1,250,000 shares of Qnective Stock on March 31 and
      July 7, 2007 to evidence its prior $2,500,000 equity investment in the
      Company at a price of $2.00 per share;
  and





4.
            Connwards’ prior loan to the
      Company of $1,800,000 was settled through the conversion into 900,000
      shares of Qnective Stock at a conversion price of $2.00 per
      share.





The Amended Shareholders’ Exchange
Agreement provides for Qnective acquiring 50% of the Qporter Stock in exchange
for the issuance of 30,550,000 shares of the Qnective Stock.





The transaction was accounted for as a
reverse acquisition in accordance with Statements of Financial Accounting
Standards (“SFAS”) No. 141. “Business Combinations”becausethe former 50% shareholders of Qporterincreased their stake in Qnective from 0% to51% through the transactionand hence became the controlling
shareholders. The historical financial statements prior to October 1, 2008,
refer to the consolidated financial statements of Qporter.





The net assets acquired were accounted
for as the issuance of stock by Qporterfor the net monetary assets of
Qnective, accompanied by a recapitalization, as there were no operations in
Qnective beyond those of Qporter.





The
related incremental 590,500 shares issued to the CEO in the amount of $2,273,425
is recorded under general and administration expense and the
incremental 590,500 shares issued to the formerly CTO in theamount
of  $2,273,425 is recorded under research and development
expense. The fair value per share of the incremental issuance was $3.85,
based on the stock price of the Company’s common stock at October 1,
2008.





The carrying value of net assets
acquired comprise of the following:





Assets
      acquired:Cash
              
              $
              1,157,473Long-term loan
      due from affiliated company
              
              
              3,283,482Liabilities
      assumed:Short-term loan
      due to stockholders
              
              
              (1,810,564
              )Short-term loan
      due to related party
              
              
              (5,640
              )Accounts
      payable
              
              
              (139,833
              )Accounts payable
      due to related party
              
              
              (106,757
              )Accrued
      expense
              
              
              (88,849
              )Long-term
      convertible debenture
              
              
              (151,583
              )Net assets
      acquired
              
              $
              2,137,729





Thesettlementof the $1,800,000 loanthrough conversioninto 900,000 shares ofQnectiveStock was accounted for underAPB 26 “Early Extinguishment of Debt.” Accordingly, the transaction was
recorded at the fair value of QnectiveStock, resulting in a loss
on early extinguishment of debt of $1,665,000.




F-12




QNECTIVE, INC. (A Development Stage
Company)





6. Property, Plant &
Equipment








Property, plant & equipment
consisted of the following at December 31,





2008
              
              
              2007Equipment
              
              $
              188,407
              
              
              $
              16,991IT
Equipment
              
              
              272,522
              
              
              
              2,871Less accumulated
      depreciation
              
              
              (126,522
              )
              
              
              (2,140
              )$
              344,407
              
              
              $
              17,722





Depreciation expense for the years ended
December 31, 2008 and 2007 was $124,382 and $2,140,
respectively.




F-13





QNECTIVE, INC. (A Development Stage
Company)







7. Intangible Assets





Intangible Assets consisted of the
following at December 31,





2008
              
              
              2007XMS Software
      Platform
              
              $
              1,306,137
              
              
              $
              1,088,391Trademarks
              
              
              28,812
              
              
              
              28,812Less accumulated
      amortization
              
              
              (134,190
              )
              
              
              (720
              )$
              1,200,759
              
              
              $
              1,116,483





The XMS Software Platform payments
constitute development costs that were paid to MobilMedia and SafeCom GmbH &
Co. KG, both related parties. The XMS software was valued at $625,000based on the amount of cash contributed by Qnective and paid by the joint
venture (Qporter) to MobilMedia for the software.


The Company determined that
technological feasibility of the XMS software platform was reached upon release
of the beta version which was on October 17, 2006, and therefore capitalized
development costs incurred between that date and the launch of the product in
July 2008.


From April until June 2008 the Company
evaluated an internal test versionof the QtalkSMin order to market Windows Mobile,
Symbian-based and Windows Desktop versions.  The development
department changed some display issues on different mobile phone types, as well
as registering and user management procedures. The cost for these services was
$217,746 for the year ended December 31, 2008 and $463,391 for the year ended
December 31, 2007, provided in both cases by MobilMedia Holding and SafeCom GmbH
& Co. KG, both related parties.





The amortization of the XMS Software
Platform commenced upon launch of the product in July 2008 and is based on the
greater of (a) the ratio of current gross sales to the anticipated future gross
sales or (b) on a straight-line basis over the remaining estimated lives of the
related products. The Company amortizes its intangible assets on a straight line
basis over their estimated useful lives of 5 years as it represents the greater
amount of the two methods. Amortization expense of the XMS Software Platform for
the years ended December 31, 2008 and 2007, was $130,592 and $0, respectively,
and is included in research and development expense.





The amortization expense for Trademarks
is included in marketing expense. The amortization is calculated using the
straight-line method over an estimated useful life of 10 years.Amortization expense of the Trademarks
for the years ended December 31, 2008 and 2007 was $3,598 and $720,
respectively.





The estimated future amortization expense as ofDecember 31, 2008 is as
follows:





Fiscal
years2009
              
              $
              264,1132010
              
              
              264,1132011
              
              
              264,1132012
              
              
              264,1132013 - 2017
              
              
              144,307Total amortization
      expense
              
              $
              1,200,759




F-14





QNECTIVE, INC.  (A Development
Stage Company)






8. Commitments &
Contingencies




Operating
Lease-Rent expense for the
year ended December 31, 2008 and 2007 was $179,990 and $41,632, respectively.
The property is approximately 455 square meters and the rental amount will
remain approximately the same until November 30, 2011.





Other lease expense for the years ended
December 31, 2008 and 2007 was $520 and $0, respectively.





The following table presents future
minimum lease commitments under operating leases at December 31,
2008:





Year ending December
      31,
                    
                    2008$2009
                    
                    
                    184,2962010
                    
                    
                    184,2962011
                    
                    
                    184,2962012
                    
                    
                    183,5752013
                    
                    
                    0Total
                    
                    
                    736,463





On January 1, 2008, the Company’s
subsidiary, Qporter, signed a contract with ZMG, Zurich Management Group for
business development support of the Company. ZMG will assist in developing and
improving the Company’s business model, developing and implementing the
Company’s business strategy, including marketing, portfolio and pricing
strategies, and developing the business plan, particularly with respect to cash
requirements for the next year. ZMG received a monthly consultancy fee of $8,044
during a minimum period of 12 months and a one-time payment of $20,110 for the
business plan development. These costs are recorded as general and
administrative expenses. Additionally ZMG would receive 350,000 Qnective stock
options on terms to be agreed.




On June 20, 2008, the contract dated
January 1, 2008, between Qporter and ZMG was amended with respect to the grant
of options to purchase shares of Qnective common stock as
follows:




1.
            An option to purchase 150,000
      shares of Qnective Stock at the then fair market value of the stock was
      granted to Mr. Zoran Trifkovic, the President of ZMG, (i) upon the
      Company’s acceptance of the business plan, organizational structure, and
      operational processes created by ZMG and (ii) if Mr. Zoran Trifkovic has
      remained President of Qporter Schweiz AG, (now Qnective Switzerland)
      Qporter's wholly owned subsidiary until December 31,
      2010.2.
            An option to purchase 50,000
      shares of Qnective Stock at the then fair market value of the stock will
      be granted to Mr. Zoran Trifkovic for each introduction he or ZMG makes to
      the Company which results in a signed contract between the Company and a
      customer, international distributor, telecom operator, or internet service
      provider.3.
            An option to purchase 50,000
      shares of Qnective Stock at the then fair market value will be granted to
      Mr. Zoran Trifkovic for each introduction he or ZMG makes to the Company
      which results in an investment in the Company of at least
      $500,000.




F-15




QNECTIVE, INC. (A
Development Stage Company)








On January 23, 2008, the Company signed
a contract with D-Age Management BV for assistance in strategic direction and
financing. D-Age received $22,467 per month for a period of nine months, and a
one-time payment for expenses of $14,978. These costs are recorded in general
and administrative expense. Additionally, D-Age would receive a success fee of 4
percent of the gross proceeds raised by D-Age, payable in cash upon the closing
of the investment, and 2 percent of gross proceeds in the form of Qnective stock
options on terms to be agreed.





On February 19, 2008, the Company signed
a contract with Remaco Merger AG for assistance in financing. Remaco Merger AG
received a one-time payment of $50,000, which is recorded in general and
administrative expense and would receive a success fee of 3 percent of the gross
proceeds raised by Remaco, but not less than $200,000.





On September 25, 2008, Qporter, entered
into a Distribution and License Agreement with BT inmo BV (“BT”), a 100%
subsidiary of British Telecom (BT) Group Plc, whereby BTwas appointed as the Company’snon-exclusive distributor
to distribute its voice-over-internet protocol (“VoIP”) services to mobile
telephone users.





Qporter granted to BT a worldwide,
non-exclusive license to use Qporter’s software (“Software”) and services
(“Services”), and to permit BT to install the software on the mobile telephones
of BT’s subscribers.





Pursuant to the Agreement, Qporter
agreed tocustomize itssoftwareto meet specific needs ofBT so that BT’s subscribers can download
the Services. Qporter has also agreed to provide maintenance services and
support to BT.





BT will pay a license fee to Qporter
based on the numberofsubscriptions for the
Services sold by BT to its subscribers. BT will also pay an annual fee to
Qporter for the support services provided by Qporter, that will be equal to ten
percent of the annual license fee paid by BT.Furthermore, in considerationofthedevelopment of Softwareby Qporter,necessary to permit use of the
ServicesbyBT’s subscribers, BT will pay to Qporter
a one-time customization feein the total amount of
two-hundred-and-thirty-four-thousand Euros (approximately $350,000),that will be payablein monthly
installmentsfor five
months(see Revenue
Recognition Accounting Policy in Note 3).





The Agreement has a term of three years,
and will be automatically renewed on an annual basis, unless terminated pursuant
to the Agreement.





If the license fees payable by BT to
Qporter exceed ten million Euros (approximately $12.7million), then BT will have the option
to convert ten percent of the license fees paid by BT, into an equity investment
in shares (the “BT Shares”) of common stock of the Company (the “Common Stock”),
based on the fair market value of the Common Stock at the time of the
conversion. The maximum amount of license fees that can be converted into Common
Stock is €7.5 million (approximately $9.5million).








Litigation—The Company is not aware of any
litigation or threatened litigation pending as of the date of these financial
statements.








9. Product, Segment and Geographic
Information





The
Company has one operating segment, as defined in SFAS No. 131, “Disclosures About Segments of an
Enterprise and Related Information”. The Company’s operating segment is
design, development, licensing,
sale and distribution of telecommunications software and services, in particular
high-quality Voice-over-the-Internet-Protocol (“VOIP”) services to mobile
telephone users.





The following table summarizes the
long-lived assets attributed to countries:





At December
    31,
              
              2008
              
              
              2007$
              
              
              
              $United
    States
              
              
              1,206,907
              
              
              
              1,126,289Switzerland
              
              
              328,259
              
              
              
              7,916Poland
              
              
              0
              
              
              
              0Total
              
              
              1,535,166
              
              
              
              1,134,205




F-16




QNECTIVE, INC. (A Development Stage
Company)








10.Stockholders’
Equity:




Common
Stock— Common stock as of
December 31, 2008, and December 31, 2007, consisted of the following: $0.001 par
value, 75,000,000 shares authorized, 61,950,000 and 2,500,000 shares issued and
outstanding, respectively.




On January 24, 2007, Qnective Inc., a
Nevada corporation and MobilMedia Holding AG, formed Qporter, Inc.
("Qporter").  Qnective Inc. received 50% of the outstanding common shares
of our Company in exchange for an agreement to invest $1,250,000 in
Qporter.  MobilMedia Holding AG transferred to Qporter certain
technology for a converged communication platform that integrates messenger and
VoIP with a number of features allowing users to use mobile devices or desktop
computers to communicate.The technology fulfilled the
criteria for capitalization under  SFAS No. 86, before being
contributed to Qporter.





The Company initially recorded the
contributed XMS Platform as a dividend distribution in the consolidated
financial statements of Qporter for the year ended December 31, 2007, which were
included in the form 8K/A filed with the SEC on December 24, 2008. During the
preparation of the financial statements for the year-ended December 31, 2008,
the Company determined that the capital contribution of the technology brought
in should have been recorded as an intangible asset in the amount of $625,000
(see Note 7).  As discussed in Note 5, the Company entered into a
shareholder agreement on October 1, 2008 to acquire 50%
of  Qporter.





On September 4, 2008,Qnectiveentered into an agreement for the
saleof a 15% convertible
debenture(the “Debenture”) withMs. Thea Kunz (“Kunz”). Pursuant to the Debenture,Kunzloaned the principal amount of
$2,000,000 to the Company. TheDebenture boreinterest at the rate of fifteen percent
(15%) per annum, payable quarterly, commencing on December 1,2008, and payable on each March 1,
June1, September 1, and
December 1until September
3, 2011.





On the maturity date the principal
amount due under the Debenturecouldbe converted into Conversion Shares at
the option of the Investor; provided, however, that if the average of the bid
and ask prices for shares of the common stock of the Company for the thirty (30)
trading days prior to the Maturity Date is equal to or greater than $2.00 a
share then the conversion of the principal amount due under the Debenture shall
be mandatory. The number of Conversion Shares issuable upon the Maturity Datewouldbe computed using a conversion price of
$2.00 per share.





On the date of issuance the conversion
price was lower than the stock price, and hence considered a beneficial
conversion feature. The resulting discount of $1,850,000 was calculated based on
the intrinsic value of the conversion feature on the date of issuance andwas tobe amortized over the term of the loan
using the effective interest method. The term of the loanwasthree years because it was not
considered probable that the Company would repay the Debenture before the
maturity date.





On December 8, 2008, the Company and
Kunz entered into a Termination Agreement pursuant to which the parties
terminated the Debenture.  In lieu of repayment of the outstanding
principal of, and accrued but unpaid interest on the Debenture, the Company
issued one million shares of the Company’s common stock, par value $0.001 per
share,for a purchase price of $2.00 per share
or $2,000,000 to Kunz.  The purchase price was paid by the surrender
to the Company of the Debenture. The related unamortized discount of $1,848,417
was immediately recognized upon conversion and recorded as interest
expense.





The number of Conversion Shares issuable
upon each Conversion was determined by computing interest on the principal
amount from the issue date until the Interest Payment Date at the rate of 30%
percent per annum and using a conversion price of $4.00 per share. As the
investor terminated the agreement on December 08, 2008 and gave notice to
receive the interest due on December 31, 2008 in shares, the interest of
$144,375 for the three month period ended December 31, 2008 was paid as 37,500
shares of the Company’s common stock. The interest was calculated based on
37,500 shares of the common stock of the Company, multiplied by the stock price
of the shares at December 31, 2008.In addition, the Company also issued
12,500 shares of the common stock of the Company concerningthe interest
of $48,125 on the convertible loan
for the period from September 4 to September 30, 2008 which was part of the
Qnective net assets acquired on October 1, 2008 as discussed in Note 5. The
Company issued the shares in reliance upon Regulation S and Section 4(2) of the
Securities Act of 1933 in an offshore transaction to a non-U.S. person (as that
term is defined in Regulation S of the Securities Act of
1933).





On December 8, 2008, the Company entered
into a second subscription agreement with Kunz to purchase one million shares of
the Company’s common stock for a purchase price of $2.00 a share or $2,000,000
in the aggregate. The Company issued the shares in reliance upon Regulation
S and Section 4(2) of the Securities Act of 1933 in an offshore transaction to a
non-U.S. person (as that term is defined in Regulation S of the Securities Act
of 1933).




F-17




QNECTIVE, INC. (A Development Stage
Company)





11. Stock-Based
Compensation





The following table summarizes
stock-based compensation expense for all share-based payment awards made to
consultants:




Year ended December
      31,
                2008
              
              
              Year ended December
      31,
                2007
              
              
              For the
                period from
                January 24, 2007 (Inception)
      to
                December 31,
                2008$
              
              
              $
              
              
              $General and Administrative
      Expense
              
              521,455
              
              
              0
              
              
              521,455Total
              
              521,455
              
              
              0
              
              
              521,455





The stock options have not been granted
yet, however, the Company entered into the Agreement during the three-month
period ended March 31, 2008, for the issuance of the stock options, which was
amended on June 20, 2008. As a result, the Company has made the assumptions set
forth in this Note.





The fair value of each option award is
estimated on the estimated date of grant using the Black-Scholes valuation model
and the assumptions noted in the following table. The expected term of options
granted was calculated using the expected total life. The risk-free rate is
based on the U.S Treasury rates in effect during the corresponding period of
grant. The expected volatility is based on a peer group of companies in a
similar or the same industry. The dividend yield reflects that the Company has
not paid any cash dividends since inception and does not intend to pay any cash
dividends in the foreseeable future.





The amendment on June 20, 2008 as
discussed in Note 8 was accounted for in accordance with Staff Accounting
Bulletin Topic 14A,Share-Based
payment, which suggests
that the methodology prescribed in Statement 123R generally would be appropriate
to account for modifications to nonemployee awards. As such, 150,000 options
were treated as a type I modification which does not change the fact that the
award will ultimately vest and accordingly, continued to recognize stock-based
compensation expense. The remaining 200,000 options were treated as a type II
modification which does change the expectation that the award will ultimately
vest and therefore, reversed the stock-based compensation expense recorded in
the three-month period ended March 31, 2008 of $181,000.  Stock-option
expense will be recognized on these options when it is deemed that the
performance based conditions will be met. The Company followed the bifurcated
approach to account for the modification to the service life of the 150,000
options and as such continued to amortize the stock-option expense over the
one-year service period.








Year ended
                December 31,
                2008
              
              Year ended
                December 31,
                2007
              
              For the
                period from
                January 24,
      2007
                (Inception) to
                December 31,
                2008Expected
    life
              
              10 years
              
              
              —
              
              
              10 yearsVolatility
              
              100
              %
              
              —
              
              
              100
              %Risk free interest
      rate
              
              3.71
              %
              
              —
              
              
              3.71
              %Dividends
              
              —
              
              
              —
              
              
              —





The weighted average fair values per
share of the stock options awarded in the period ended December 31, 2008, was
$3.48, based on the fair market value of the Company’s common stock at December
31, 2008.




F-18




QNECTIVE, INC. (A Development Stage
Company)








12. Defined Benefit Pension
Plan





The Company’s Swissemployees are enrolled intwomandatory group pension
planswith NEST Sammelstiftung Assurances.The Company started hiring people in
early 2008 and did not have any employees as of December 31, 2007.The pension plansaredefinedbenefitplansand payments to theemployeesplan are made in equal parts by the
employee (throughwithholding) and the employer and in the executives’ plan are made
by  employees (through withholding) (40%) and the  employer
(60%).Contributions are based on the age of
the employee and vary between8% and19%. Total amounts paid by the employer
for 2008 and 2007 were $80,700and $0, respectively.







The Company accounts for this plan in
accordance withthe
recognition and disclosure requirements of Statement of Financial
AccountingStandards (“SFAS”) No. 158, “Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans”,
anamendment of SFAS Nos. 87, 88, 106 and
132R (“SFAS 158”)







Net
      periodic benefit cost and amounts recognized in operating
      expense:
                                    
                                    2008
                                    
                                    
                                    2007Service
      costs
                                    
                                    $
                                    120,025
                                    
                                    
                                    $
                                    0Interest
      costs
                                    
                                    
                                    16,711
                                    
                                    
                                    
                                    0Expected
      return on assets
                                    
                                    
                                    (17,265
                                    )
                                    
                                    
                                    0Actuarial
      loss recognised
                                    
                                    
                                    0
                                    
                                    
                                    
                                    0Net
      periodic pension cost
                                    
                                    
                                    119,471
                                    
                                    
                                    
                                    0Employee
      Contribution
                                    
                                    
                                    (74,508
                                    )Net
      periodic pension cost employer
                                    
                                    $
                                    44,963
                                    
                                    
                                    $
                                    0




F-19




QNECTIVE, INC. (A Development Stage
Company)





All of
the Company’s plans have a benefit obligation in excess of plan assets. Using
the actuarial valuations as of December 31, 2008, the following table sets forth
the change in the Company’s benefit obligation and pension plan assets at market
value for the years ended December 31, 2008 and 2007. The Company uses the
fair value of its pension assets in the calculation of pension expense for all
of its pension plans.




2008
                                                                                                                                  
                                                                                                                                  2007Change
      in benefit obligation:Benefit
      obligation at January 1, 08
                                                                                                                                  
                                                                                                                                  0
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  0Service
      cost
                                                                                                                                  
                                                                                                                                  120,025
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  0Interest
      cost
                                                                                                                                  
                                                                                                                                  16,711
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  0Benefits
      brought in
                                                                                                                                  
                                                                                                                                  1,236,716
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  0Actuarial
      loss on obligation
                                                                                                                                  
                                                                                                                                  306,894
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  0Foreign
      exchange loss
                                                                                                                                  
                                                                                                                                  43,740
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  0Benefit
      obligation at end of year
                                                                                                                                  
                                                                                                                                  1,724,086
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  0Change
      in plan assets:Plan
      assets at market value at January 1, 08
                                                                                                                                  
                                                                                                                                  0
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  0Actual
      return on plan assets
                                                                                                                                  
                                                                                                                                  17,265
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  0Contributions
      paid
                                                                                                                                  
                                                                                                                                  181,884
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  0Benefits
      brought in
                                                                                                                                  
                                                                                                                                  1,141,620
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  0Actuarial
      loss on plan assets
                                                                                                                                  
                                                                                                                                  (52,811)
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  0Foreign
      exchange gain
                                                                                                                                  
                                                                                                                                  33,526
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  0Plan
      assets at market value at end of year
                                                                                                                                  
                                                                                                                                  1,321,484
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  0Unfunded
      status
                                                                                                                                  
                                                                                                                                  402,602
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  0Amounts
      recognized in the statement of financial position consist
    of:Current
      liabilities
                                                                                                                                  
                                                                                                                                  0
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  0Non-current
      liabilities
                                                                                                                                  
                                                                                                                                  402,602
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  0Total
                                                                                                                                  
                                                                                                                                  402,602
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  0Amounts
      recognized in accumulated other comprehensive income
    (loss):Unrecognized
      prior service cost
                                                                                                                                  
                                                                                                                                  0
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  0Unrecognized
      net actuarial loss
                                                                                                                                  
                                                                                                                                  (369,068)
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  0Total
                                                                                                                                  
                                                                                                                                  (369,068)
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  0





The
amount in accumulated other comprehensive income as of December 31, 2008 that is
expected to be recognized as a component of the net periodic pension costs in
the subsequent year is $11,417.




F-20




QNECTIVE, INC. (A Development Stage
Company)








The
following table presents significant assumptions used to determine benefit
obligations at December 31:




2008Discount
      rate
              
              
              3.5
              %Rate
      of compensation increase:
              
              
              2.0
              %Expected
      return on assets
              
              
              4.5
              %Expected
      average remaining working lives in years
              
              
              13.9





The
discount rate of 3.5% is based on an assumed pension benefit maturity of 10 to
15 years. The rate was estimated using the rate of return for high quality Swiss
corporate bonds.





The
salary increase rate of 2% was based on the long-term inflation rate for
Switzerland of 1.5% plus an estimated 0.5% salary increase.





The
expected long-term rate of return on plan assets is based on the expected asset
allocation and assumptions concerning long-term interest rates, inflation rates,
and risk premiums for equities above the risk-free rates of return. These
assumptions take into consideration historical long-term rates of return for
relevant asset categories.




The plan assets are comprised of the
following:




2008Bonds
                
                
                45
                %Equity
      securities
                
                
                15
                %Emerging
      Markets
                
                
                1
                %Private
    Equity
                
                
                2
                %Loans
                
                
                1
                %Real Estate (including real estate
      funds)
                
                
                22
                %Liquids
                
                
                14
                %100
                %




The Company has contracted with NEST to
manage the defined benefit plan pension plan. The investment strategy is
determined by NEST and applies to all members of the collective
foundation.




Expected future benefit payments are as
follows:




Year ending December
      31,
                    
                    2008$2009
                    
                    
                    37,8922010
                    
                    
                    37,8922011
                    
                    
                    42,6292012
                    
                    
                    42,6292013
                    
                    
                    47,3652014 - 2018
                    
                    
                    255,771







The
Company expects to make cash contributions totalling approximately $131,675 to
the Swiss pension plan in 2009.




F-21




QNECTIVE, INC. (A Development Stage
Company)








13.Income
Taxes:




In June 2006, the Financial Accounting
Standards Board issued interpretation No. 48 (“FIN 48”), “Accounting for
Uncertainty in Income Taxes”. FIN 48 establishes the minimum threshold for
recognizing, and a system for measuring, the benefits of tax-return positions in
financial statements. The provisions of FIN 48 were effective for the Company as
of January 1, 2007, and required application of FIN 48 to all existing tax
positions upon initial adoption. The adoption of the standard had no effect on
the Company’s financial condition or results of operation.




F-22




QNECTIVE, INC. (A Development Stage
Company)







The following tax years remain subject
to examination:




Jurisdiction
              
              Open yearsUSA
              
              
              2005-2008Switzerland
              
              
              2007-2008Poland
              
              
              2007-2008





At December 31, 2008, the Company had
available federal net operating loss (NOL) carry forwards of approximately
$13,523,281. Under Section 382 of the Internal Revenue Code of 1986, as amended,
the use of prior losses including NOLs is limited if a corporation undergoes an
“ownership change”. Future issuances of equity interests by the Company may
result in an ownership change that is large enough for this limitation to apply.
If the limitation applies, the Company may be unable to use a material portion
of its available NOL carry forwards to reduce future taxable income. The income
tax effect of temporary differences between financial and tax reporting gives
rise to the deferred tax asset at December 31, 2008, and December 31, 2007, as
follows:




December 31,
                                2008
                              
                              December 31,
                                2007$
                              
                              $Deferred tax
      assets:Net operating loss
      carry-forward
                              
                              
                              4,464,218
                              
                              
                              542,640Pension
      liability
                              
                              
                              7,096
                              
                              
                              0Less: valuation
      allowance
                              
                              
                              (4,471,314
                              )
                              
                              (542,640
                              )Net deferred tax
      assets
                              
                              
                              0
                              
                              
                              0








The Company has net losses for financial
reporting purposes. Recognition of deferred tax assets will require generation
of future taxable income. The Company believes that it is more likely than not
that the deferred tax assets cannot be realized. Therefore, we established a
valuation allowance on net deferred tax assets of $4,471,314 as of December 31,
2008, and $542,640 as of December 31, 2007.




The components of loss before income tax
benefit are as follows:





Year Ended December
      31,2008
              
              
              2007
              
              
              For the period
                from January
                24, 2007
                (inception)
      to
                December 31,
                2008United
    States
              
              
              (10,045,352
              )
              
              
              (1,534,833
              )
              
              
              (11,580,145
              )Switzerland
              
              
              (1,956,055
              )
              
              
              (20,615
              )
              
              
              (1,976,670
              )Poland
              
              
              20,105
              
              
              
              (2,714
              )
              
              
              17,391(11,981,262
              )
              
              
              (1,558,162
              )
              
              
              (13,539,424
              )




F-23




QNECTIVE, INC. (A Development Stage
Company)











As of December 31, 2008, the Company has
net operating loss carry forwards in various jurisdictions of $13,523,281
expiring at various times from years ending 2012 to 2024 as
follows:




2008
                              
                              
                              2007$
                              
                              
                              
                              $2012
                              
                              
                              0
                              
                              
                              
                              (2,714
                              )2014
                              
                              
                              (20,615
                              )
                              
                              
                              (20,615
                              )2015
                              
                              
                              (1,922,521
                              )
                              
                              
                              02023
                              
                              
                              (1,534,833
                              )
                              
                              
                              (1,534,833
                              )2024
                              
                              
                              (10,045,312
                              )
                              
                              
                              0Total tax-deductible loss carry
      forward
                              
                              
                              (13,523,281
                              )
                              
                              
                              (1,558,162
                              )







The tax provisions differ from the
amount computed using the federal statutory income tax rate (35% for the year
ended December 31, 2008 and 2007) as follows:




Year Ended December 31,2008
                            
                            2007
                            
                            For the period
                              from January
                              24, 2007 (inception) to December
      31, 2008$
                            
                            $
                            
                            $Income tax benefit at federal
      statutory rate
                            
                            
                            4,193,441
                            
                            545,357
                            
                            4,738,798Foreign tax rate
      differential
                            
                            
                            (271,724
                            )
                            (2,717
                            )
                            (274,441
                            )Valuation
      allowance
                            
                            
                            (3,928,674
                            )
                            (542,640
                            )
                            (4,471,314
                            )Other
                            
                            
                            6,957
                            
                            0
                            
                            6,9570
                            
                            0
                            
                            0




F-24




QNECTIVE, INC. (A Development Stage
Company)




14.Related Party
Transactions




During 2008Oswald Ortiz, the Chief Executive
Officer and a director of Qporter and Qnective invoiced $138,000 to the Company
as a consultant, of which $42,291 was outstanding at year-end.  During
2007, Oswald Ortiz invoiced $159,060 to Qporter as a consultant, of which
$14,729 was outstanding at year-end. The amounts outstanding are presented in
accounts payable.





During 2008, Tan Siekmann, the Chief
Technology Officer of Qnective invoiced $50,954 to the Company as a
consultant, of which $14,097 was outstanding at year-end.  During
2007, Tan Siekmann invoiced $159,060 to Qporter as a consultant, of which
$14,729 was outstanding at year-end. The amounts outstanding are presented in
accounts payable.





During 2008, Françoise Lanter, the Chief
Financial Officer invoiced through her wholly owned Company, Miraculix Treuhand
GmbH, $82,800 to the Company as a consultant, of which $50,749 was outstanding
at year end. During 2007, Françoise Lanter invoiced $95,436 to Qporter as a
consultant, of which $8,837 was outstanding at year end.  The amounts
outstanding are presented in accounts payable.





MobilMedia Holding AG has an
oral consulting agreement with Qporter dated May 1, 2007. MobilMedia
Holding AG received $729,116 from Qporter during 2008 and $987,059 during 2007.
The amount of $514,561 was distributed as consultancy fee, and the amount of
$214,555 is presented in property, plant and equipment as it was capitalized as
equipment and IT-equipment, see note 6.





At December 31, 2008 and 2007, the
amount due from MobilMedia Holding AG was $302,426 and $70,924, respectively and
is presented as a long-term loan due from MobilMedia Holding AG. The loan is
interest free and due on demand with no fixed terms of
repayment.





At December 31, 2008 and 2007, the
amount due to MobilMedia Holding AG is $0 and $1,478, respectively. The amounts
are presented in short-term loans due to related parties.





SafeCom GmbH & Co. KG has a Software
Development Agreement with Qporter dated January 18, 2007. During 2008 and 2007,
SafeCom GmbH & Co. KG invoiced Qporter the amount of $110,204 and $465,295,
respectively, under the Software Development Agreement of which $61,285 and
$360,723, respectively, is presented in Intangible Assets which was capitalized
as software development costs under FAS 86 as further discussed in note 7. The
invoiced amount in 2008, which is represented in Research and Development
expense, was $48,919. The amount of $40,599 and $31,477 was outstanding at
December 31, 2008 and December 31, 2007, respectively, and is presented in
accounts payables.





At
December 31, 2008 and 2007, the amount due to the Company’s shareholder is $0
and $1,499,980, respectively.  On July 6, 2007, Qporter received a
loan from Qnective, its shareholder, in the principal amount of $1,499,980 and
during the year ended December 31, 2008, Qporter received an additional
principal amount of $1,785,523. The loan was unsecured and interest free with no
right to demand repayment as long as Qnective remained a shareholder of
Qporter.  After the reverse acquisition as of October 1, 2008, the
balance of $3,285,503 outstanding was eliminated in the consolidation as Qporter
became a wholly owned subsidiary of Qnective.  See Note 5 for further
information on the reverse acquisition.




At December 31, 2008 the amount due to
FirstMedia AG, which is owned by Oswald Ortiz, Chief Executive Officer, and Tan
Siekmann, a former Chief Technical Officer of Qnective, is $63,639. The amount
is presented in the short-term loans due to relatedparties. The loan is interest free and
due on demand with no fixed terms of repayment.





At December 31, 2007 the amount due from
FirstMedia AG of $12,636, which was paid back on January 31, 2008, is presented
in the account receivables, including related party.





During
2008, Zoran Trifkovic, supervisory
board member of Qporter Schweiz AG, invoiced for supervisory board charges
$13,755, of which $0 was outstanding.




F-25




QNECTIVE, INC. (A Development Stage
Company)











15.Subsequent
Events




Qporter, a subsidiary of
the  Company entered into a Marketing Consultant Agreement dated
January 26, 2009 with ATT Management AG, a Swiss corporation (“ATT”), whereby
Qporter appointed ATT as a non-exclusive consultant to locate resellers and
customers on a world-wide basis for Qporter’s VOIP services to mobile telephone
users and messenger services (collectively, the “Services”).





Qporter has established an initial sales
quota of  $30,000,000 of license fees to be received by Qporter from
resellers located by ATT from December 1, 2008 through November 30, 2009 and
$10,000,000 of license fees received by Qporter from resellers located by ATT on
an annual basis thereafter.  The sales quota will be adjusted for
renewal terms, if any.  If ATT fails to exceed its sales quota,
Qporter can adjust the sales quota for subsequent years or terminate
the Agreement.





The Agreement has a term of three years,
and will be automatically renewed for successive three year terms, unless
terminated pursuant to the Agreement.





Qporter will pay ATT the following
amounts:  twenty-five (25%) percent of all fees received from
resellers or customers located by ATT, an additional ten (10%) percent of all
fees received from resellers or customers located by ATT if during the initial
term of the Agreement the fees exceed $60 million; and for each renewal term, if
any, ten (10%) percent of all fees received from resellers or customers located
by ATT if the amount received during such renewal term exceeds an amount equal
to two times the sales quota for such renewal term and 600,000 shares of the
common stock, $.001 par value of the Company (the “ATT Shares”) within ten (10)
days of executing the Agreement.





On January 28, 2009 Qporter entered also
into a Marketing Consultant Agreement with Ediport Ltd, a Hungarian corporation
(“Ediport”), whereby Qporter appointed Ediport as a non-exclusive consultant to
locate resellers and customers on a world-wide basis for the
Services.





Qporter has established an initial sales
quota of  $30,000,000 of license fees to be received by Qporter from
resellers located by Ediport from January 20, 2009 through January 30, 2011 and
$10,000,000 of license fees received by Qporter from resellers located by
Ediport on an annual basis thereafter.  The sales quota will be
adjusted for renewal terms, if any.  If Ediport fails to exceed its
sales quota, Qporter can adjust the sales quota for subsequent years
or terminate the Ediport Agreement.





The Ediport Agreement has a term of
three years, and will be automatically renewed for successive three year terms,
unless terminated pursuant to the Ediport Agreement.





Qporter will pay Ediport the following
amounts:  twenty-five (25%) percent of all fees received from
resellers or customers located by Ediport, an additional ten (10%) percent of
all fees received from resellers or customers located by Ediport if during the
initial term of the Ediport Agreement the fees exceed $60 million; and for each
renewal term, if any, ten (10%) percent of all fees received from resellers or
customers located by Ediport if the amount received during such renewal term
exceeds an amount equal to two times the sales quota for such renewal term and
1,200,000 shares of the common stock, $.001 par value, of the Company (the
“Ediport Shares”) within ten (10) days of executing the Ediport
Agreement.




F-26




QNECTIVE, INC. (A Development Stage
Company)








Also on January 28, 2009, Qporter
entered into a Marketing Consultant Agreement with Atlantique Caspian Holdings
Ltd., a Seychelles corporation (“Atlantique”), whereby Qporter appointed
Atlantique as a non-exclusive consultant to locate resellers and customers on a
world-wide basis for the Services.





Qporter has established an initial sales
quota of $30,000,000 of license fees to be received by Qporter from resellers
located by Atlantique from January 20, 2009 through January 30, 2011 and
$10,000,000 of license fees received by Qporter from resellers located by
Atlantique on an annual basis thereafter.  The sales quota will be
adjusted for renewal terms, if any.  If Atlantique fails to exceed its
sales quota, Qporter can adjust the sales quota for subsequent years or
terminate the Atlantique Agreement.





The Atlantique Agreement has a term of
three years, and will be automatically renewed for successive three year terms,
unless terminated pursuant to the Atlantique Agreement.





Qporter will pay Atlantique the
following amounts:  twenty-five (25%) percent of all fees received
from resellers or customers located by Atlantique, an additional ten (10%)
percent of all fees received from resellers or customers located by Atlantique
if during the initial term of the Atlantique Agreement the fees exceed $60
million; and for each renewal term, if any, ten (10%) percent of all fees
received from resellers or customers located by Atlantique if the amount
received during such renewal term exceeds an amount equal to two times the sales
quota for such renewal term and 1,200,000 shares of the common stock, $.001 par
value, of the Company (the “Atlantique Shares”) within ten (10) days of
executing the Atlantique Agreement.





On February 1, 2009, the Company entered
into a Marketing consultant Agreement with RVS Networks BV, a Netherlands
corporation (“RVS”), whereby the Company as a non-exclusive consultant to locate
and acquire resellers and customers on a territory basis for the Services. The
Company shall pay an amount to twenty-five (25%) percent of all fees received
from RVS on basic software for Qtalk secureServer and Licenses for Qtalk
secureServer and an amount equal to twenty-five (25%) percent of all sales
provisions paid to reseller, payable quarterly in arrears within (10) business
days, after the last day of each quarter, starting on May 30, 2009.





The Company shall pay an
amount equal to ten (10%) percent of all fees received from customers or
sales provisions paid to reseller if during the initial term the fees exceed 1
million CHF; and for each renewal term, if any, an amount equal ten (10%)
percent of all fees received from customer or sales provisions paid to reseller
if the amount received during such renewal term exceeds an amount equal to two
times the sale quota for such renewal term, payable within fifteen (15) days
after the end of the initial term and renewal term.





On February 7, 2009, the Company entered
into a subscription agreement with Albin Dosch to purchasefourhundredfiftythousand(450,000) shares of the Company’s
common stock for a purchase price of $2.00 a share or $900,000 in the
aggregate. The Company issued the shares in reliance upon Regulation S and
Section 4(2) of the Securities Act of 1933 in an offshore transaction to a
non-U.S. person (as that term is defined in Regulation S of the Securities Act
of 1933).





Subsequent
to the execution by Capella IV of the Amended Shareholders' Agreement on October
1, 2008, and its agreement to deliver certificate no. 502, representing
31,000,000 shares of Qnective Stock to the Company, Capella reported to the
Company that the certificate has been lost. The Company issued Qnective Stock in
reliance on the fact that the share certificate would be tendered to the Company
and cancelled.  If the Company is required to issue the shares to a
third party, then shareholders who purchased shares of Qnective Stock since
October 1, 2008, might have a right to seek rescission of their purchases,
because the Company did not disclose that the share certificate was lost and
that it might be required to issue to a third party the shares represented by
the lost certificate. There can be no assurance that the Company would have
sufficient funds to satisfy these claims.
 
 If a
bona fide purchaser
presents the lost share certificate for transfer, the number of issued and
outstanding shares could increase by up to 31,000,000 resulting in significant
dilution to the existing shareholders.  If the Company is required to
issue additional shares and there are not sufficient authorized shares, then it
may be required to use its best efforts to increase the number of authorized
shares, or pay damages for the failure to issue the additional
shares.
 
 Management
has determined in its reasonable business judgment that it is in the Company's
and its shareholders' best interest to indemnify the transfer agent in
connection with the transfer agent's issuance of a replacement certificate for
the lost certificate. The costs and expenses of indemnifying the transfer agent
could be significant.  The Company is currently negotiating with
certain beneficial owners of Qnective Stock to indemnify the Company for any
losses it incurs in connection with the indemnification of the transfer agent,
and these beneficial owners may pledge to the Company additional shares of
Qnective Stock as collateral security for their obligation to indemnify the
Company, however, there can be no assurance that the Company will enter into any
agreement on such terms, or at all.


F-27