Xcel Brands
NETFABRIC HOLDINGS, INC (Form: 10-K, Received: 02/18/2010 10:37:13)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 
WASHINGTON, DC 20549
 

 
FORM 10-K
 (Mark One)
 
x ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 
for the fiscal year ended December 31, 2007
 
OR
 
¨ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
 
Commission File Number: 0-21419
 
NETFABRIC HOLDINGS, INC.
 (Name of Small Business Issuer in Its Charter)

Delaware
76-0307819
(State or Other Jurisdiction of
(I.R.S. Employer
Incorporation or Organization)
Identification No.)
   
299 Cherry Hill Road, Parsippany, New Jersey
07054
  (Address of Principal Executive Offices)
(Zip Code)
   
(973) 537-0077
(Issuer's Telephone Number, Including Area Code)
 
Securities registered under Section 12(b) of the Exchange Act: None
 
Securities registered under Section 12(g) of the Exchange Act:

Title of Each Class
 
Name of Each Exchange on Which Registered
     
Common Stock, $.001 Par Value
 
Over-the-Counter Pink Sheets
 
Check whether the issuer is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act. ¨

Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes ¨ No x
 
Indicate by check mark whether the registrant has submitted electronically and posted on its Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T ( 232.405 of this chapter) during the preceding 12 months ( or for such shorter period that the registrant was required to submit and post such files) Yes ¨ No x .
 
Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K contained in this form, and no disclosure will be contained, to the best of the 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. x
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small r5eporting company.

Large accelerated filer ¨
Accelerated filer ¨
   
Non- accelerated filer ¨
Small reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
 
State issuer's revenues for its most recent fiscal year. $16,223,871
 
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked prices of such common equity, as of a specified date within the past 60 days. $40,565 as of January 8, 2010.
 
APPLICABLE ONLY TO CORPORATE REGISTRANTS
 
State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date.97,053,044 shares of Common Stock, $0.001 par value, outstanding as of  January  8, 2010.
 
Transitional Small Business Disclosure Format (Check One): Yes ¨ No x

 
 

 
 
PART I
 
From time to time, including in this annual report on Form 10-K, NetFabric Holdings, Inc. (the "Company", "NetFabric", "our" or "we") may publish forward-looking statements relating to such matters as anticipated financial performance, business prospects, future operations, new products, research and development activities and similar matters. A variety of factors could cause our actual results to differ materially from the anticipated results or other expectations expressed in our forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of our business include, without limitation, the following: general economic and business conditions, both nationally and in our markets; our expectations and estimates concerning future financial performance, financing plans, acquisitions or mergers, and the impact of competition; our ability to implement our acquisition and growth strategy; anticipated trends in our business; advances in technologies; and, other risk factors set forth under "Risk Factors" beginning on page 16 in this report.

RECENT DEVELOPMENT

On August 24, 2009, the “Company” along with its wholly-owned subsidiary, NetFabric Technologies, Inc., d/b/a UCA Services, Inc. (“UCA”) and Fortify Infrastructure Services, Inc. (“Fortify) entered into Amendment No. 1 (“Amendment”) to the Option and Purchase Agreement  (“Option Agreement”) in connection with the closing of Fortify’s  purchase of all of the outstanding capital stock of UCA upon exercise of its option granted under the Option Agreement. Pursuant to the Amendment, among other things,   the Secured Convertible Promissory Note in the principal amount of $5 million issued by UCA to Fortify was cancelled, releases of certain obligations of the parties were granted as specified in the Amendment , and the commencement date and measurement period for the earn-out and bonuses provided for in the Option Agreement were modified.

After the divesture of UCA, the Company does not have any operations.

On March 13, 2009, the Company along with its wholly-owned subsidiary, UCA entered into a Convertible Note Purchase Agreement dated March 12, 2009 with Fortify. Pursuant to the Convertible Note Purchase Agreement, Fortify purchased a Secured Convertible Promissory Note (the “Note”) from UCA in the principal amount of $5 million with the Company being a guarantor for UCA’s borrowings. Fortify, UCA and the Company also entered into the Option Agreement. Pursuant to the Option Agreement, Fortify has an option to acquire all of the outstanding shares of common stock of UCA.
     
The   holders of a majority of the Company’s outstanding common stock had previously approved the terms of the Option Agreement by a written consent as detailed in the Company’s Definitive Schedule 14 C Information Statement filed with the Securities and Exchange Commission (the “SEC”) on July 9, 2009.
 
ITEM 1. DESCRIPTION OF BUSINESS
 
We were incorporated in the State of Delaware on August 31, 1989 as Houston Operating Company. On December 9, 2004, we acquired NetFabric Corporation ("NetFabric Corp.") and on April 19, 2005, we changed our name to NetFabric Holdings, Inc. On May 20, 2005, we acquired UCA.
 
We are now organized into two distinct divisions. NetFabric Holdings, Inc. is the holding company that houses the finance and administrative functions and is responsible for financing transactions and regulatory compliance activities. UCA provides IT services and solutions to a wide range of clients in the financial industry as well as the pharmaceutical, healthcare and hospitality sectors.
 
NetFabric Corp. Acquisition
 
On December 9, 2004, we entered into an acquisition agreement (the "Acquisition Agreement") with all of the stockholders of NetFabric Corp. At the closing, which occurred simultaneously with the execution of the Acquisition Agreement, we acquired all of the issued and outstanding capital stock of NetFabric Corp. from the stockholders in exchange for an aggregate of 32,137,032 newly-issued shares of our common stock. The acquisition was accounted for as a reverse merger whereby NetFabric Corp. was treated as the acquirer. NetFabric Corp. was incorporated in the State of Delaware on December 17, 2002, as a new corporation and not as a result of a material reclassification, merger, consolidation, purchase or divesture.
 
Prior to our acquisition of NetFabric Corp., we did not have any operations, and we were a shell company whose primary business objective was to merge and become public. Immediately prior to the NetFabric Corp. acquisition, our directors were Wesley F. Whiting and Redgie Green. Our officers were, Wesley F. Whiting - President and Redgie Green - Secretary. The directors of NetFabric Corp. were Jeff Robinson (Chairman), Richard Howard and Charlotte Denenberg. The officers of NetFabric Corp. were, Jeff Robinson - Chief Executive Officer, Walter Carozza - Chief Financial Officer, Philip Barak - Vice President of Finance, and Victoria Desidero - Vice President of Marketing.
 
UCA Acquisition
 
On May 20, 2005, we entered into and closed on a share exchange agreement, whereby we purchased all of the issued and outstanding shares of UCA from its shareholders in exchange for the issuance of 24,096,154 shares of our common stock.
 
On February 13, 2006, we entered into an agreement with UCA to amend the terms of the share exchange agreement between the Company and the UCA shareholders, dated May 20, 2005. Pursuant to the amendment, we issued an aggregate of nine million shares of our common stock to the former shareholders of UCA. In return, the former shareholders of UCA released the Company from the capital raising covenant of the share exchange agreement. To facilitate the transaction, Mr. Jeff Robinson, our Chief Executive Officer, surrendered nine million shares of our common stock owned by him.

 
-1-

 

Discontinued Operations
 
NetFabric Corp. provided hardware and services to small to mid-sized businesses ("SMBs") that utilized the Internet for telephone communications or Voice over Internet Protocol ("VoIP"). NetFabric Corp. developed and marketed appliances, or Customer Premises Equipment ("CPE") that simplified the integration of standard telephone systems with an IP infrastructure. With minimal revenues from VoIP operations, we concluded that we could not implement our original business for VoIP operations within our resources or with the additional capital we could raise in the near term. On May 5, 2006, our Board of Directors decided that the Company should exit from the hardware-based VoIP communications product line (including resale of transport services) targeted at SMBs. In accordance with Statement of Financial Accounting Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets", ("SFAS No. 144"), the results of operations from the VoIP business segment have been reclassified as discontinued operations for all periods presented. After the discontinuation of VoIP operations, our only operations are that of UCA, which are discussed in more detail in Item 6 below.
 
Our Services
 
We served  the information and communications needs of a wide range of Fortune 500 and SMB clients in the financial markets industry, as well as the pharmaceutical, health care and hospitality sectors. Our broad range of services included  (i) Managed Services (ii) Professional Services (iii) IT Infrastructure & Communications Services and Maintenance, and (iv) Application Development and Maintenance.
 
Managed Services
 
In Managed Services, we served clients seeking to outsource management of some or all of their IT applications. As a result, their internal management and staff are able to focus on projects that create and foster initiatives leading to a competitive advantage for their company. Our services in this area included  data center services, help desk and facilities management. We also provided  a fully managed suite for storage management, information protection (backup and recovery) and information optimization (archival services) from the data center to the desktop.
 
Professional Services
 
We provided a wide range of IT staffing services to clients in diversified vertical markets, including financial services, telecommunications, manufacturing, information technology, pharmaceutical, transportation and health care. Consultative and staffing resources may be used to undertake a role on a long-term strategic project or fill a short-term need for a technology skill set. We delivered qualified consultants and project managers for contract assignments and full-time employment across many technology disciplines. Areas of expertise included  project management, business analysis, systems architecture and design, database architecture and design, application code development, network engineering, quality assurance and testing.
 
IT Infrastructure & Communications Services
 
We provided customers with IT infrastructure (such as personal computers, printers, phone systems, networks, servers and switches) design, development, deployment services from project planning and implementation to full-scale network, server and workstation installations. We also provided an end-to-end solution for automating the deployment/version upgrades of desktop and server operating systems, including the associated packaging required to migrate a client's enterprise applications to computers across an organization quickly and reliably.

 
-2-

 

Application Development and Maintenance
 
We helped organizations plan, develop, integrate and manage custom applications software, packaged software and industry-specific software solutions. We offered applications development and maintenance-support solutions for our customers, including shared risk engagements and fully outsourced projects, managed quality assurance and testing services, including functional testing, compatibility tests, performance testing, regression testing and benchmarking. Benefits to clients using these services  included reduced costs, extended value of technology investments, information sharing and enhanced ability to adapt to market changes.
 
Sales and Marketing
 
We sold our IT services through a direct sales force located principally in the New York area. These sales associates, also known as client executives, were supported by sales support personnel.. We had approximately 10 sales associates and sales support personnel selling our IT services. We also had independent sales agents (non-employees), who sell our services on a commission basis. In addition, three large providers of software and solutions services marketed our services as a part of their sales effort to their customers where our services are part of an overall package. Our marketing strategy was to develop long-term partnership relationships with existing and new clients that will lead to us becoming a preferred provider of information technology services. We sought to employ a cross-selling approach, where appropriate, to expand the number of services utilized by a single client.
 
Competition
 
The information technology services industry is highly competitive and served by numerous international, national, regional and local firms, all of which are our existing or potential competitors. Our primary competitors were software consulting and implementation firms, applications software firms, service groups of computer equipment companies, general management consulting firms, programming companies, offshore firms and temporary staffing firms, as well as the internal information technology staff of our clients. We believed that the principal competitive factors in the information technology services industry include the range of services offered, cost, technical expertise, responsiveness to client needs, speed in delivering information technology solutions, quality of service and perceived value. A critical component of our ability to compete in the marketplace was our ability to attract, develop, motivate and retain skilled professionals. We believed  that we can compete favorably in hiring such personnel by offering competitive compensation packages and attractive assignment opportunities. Many of our competitors had stronger brand recognition and significantly greater financial, technical, marketing and other resources than we did Our share of the market compared to theirs was too small to quantify.
 
Seasonality
 
Our business was affected by the seasonal fluctuations in corporate IT expenditures. Generally, expenditures were lowest during the first quarter of the year when our clients are finalizing their IT budgets. In addition, our quarterly results fluctuated depending on, among other things, the number of billing days in a quarter and the seasonality of our clients' businesses. Our business was also affected by the timing of holidays and seasonal vacation patterns, generally resulting in lower revenues and gross margins in the fourth quarter of each year. In addition, we experienced an increase in our cost of sales and a corresponding decrease in gross profit and gross margin in the first quarter of each year as a result of resetting certain state and federal employment tax salary limitations.
 
Major Customers/ Clients
 
We derived a significant portion of our service revenue from a limited number of corporate clients. Our two largest clients for the year ended December 31, 2007 accounted for 39% and 10%, respectively, of our revenues. The volume of work we performed for specific clients may vary from year to year, particularly since we typically were not the only outside service provider for our clients. Thus, a major client in one year may not provide the same level of revenue in a subsequent year. In certain cases, clients have reduced their spending on IT services due to economic conditions and consequently have reduced the volume of business from us.

 
-3-

 
 
Employees
 
As of December 31 2007, we had 75 employees, including 24 employees and 51 billable consultants. We have 10 employees in sales, 8 in service/products delivery management, and 6 in executive and administrative positions. In addition to the 51 billable consultants who are employees, we utilize the services of approximately 100 to 125 billable independent contractors.
 
As of April 1, 2008, we have not filed annual, quarterly or periodic with the Securities and Exchange Commission (the "SEC"). Prior to April 1, 2008, we filed annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission (the "SEC").The public may read and copy any materials that we have filed with the SEC at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains the reports, proxy and information statements and other information regarding the Company that we have filed electronically with the SEC. The address of the SEC's Internet site is http://www.sec.gov.

 
-4-

 
 
ITEM 2. DESCRIPTION OF PROPERTY
 
Description of Property
We do not own any real property. We lease our office space. The office space is located at 299 Cherry Hill Road, Parsippany, New Jersey.  The total office space is 6,500 square feet for a 64 month term through September of 2012, with an annual rent of approximately $130,000.
 
We also have another leased office space in St. Louis, Missouri through March 2010. This office space is for approximately 1,000 square feet with an annual rent of approximately $16,000. The Company believes that the leased office spaces are adequate and in good condition.
 
ITEM 3. LEGAL PROCEEDINGS
 
We are not a party to, nor is any of our property the subject of, any pending legal proceedings other than routine litigation that is incidental to our business.
 
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
 
None.

 
-5-

 

PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
 
Our common stock was quoted on the NASD's Over-the-Counter Bulletin Board ("OTCBB") under the trading symbol "NFBH". Our common stock has been quoted on the NASD's OTCBB since March of 2001. On April 19, 2005, our name was changed from Houston Operating Company to NetFabric Holdings, Inc. and our stock symbol was changed from "HOOC" to "NFBH".  Our common stock has been quoted on the Pink Sheets under the ticker symbol “NFBH” since May 7, 2008.

The following table sets forth the high and low bid prices for our common stock for the periods indicated as reported by the NASDAQ OTCBB. The source of this data is Bloomberg Profession Services.  The data does not reflect inter-dealer prices and the quotations are without retail mark-ups, mark-downs or commissions, may not represent actual transactions, and have not been adjusted for stock dividends or splits.

   
High
   
Low
 
             
YEAR ENDING DECEMBER 31, 2007
           
First Quarter
  $ 0.14     $ 0.12  
Second Quarter
  $ 0.10     $ 0.10  
Third Quarter
  $ 0.11     $ 0.11  
Fourth Quarter
  $ 0.08     $ 0.07  
                 
YEAR ENDED DECEMBER 31, 2006
               
First Quarter
  $ 0.95     $ 0.68  
Second Quarter
  $ 0.90     $ 0.35  
Third Quarter
  $ 0.33     $ 0.09  
Fourth Quarter
  $ 0.12     $ 0.10  
 
As of January 8, 2010, the number of stockholders of record was approximately 467 (excluding beneficial owners and any shares held in street name or by nominees).
 
In the past three years, we have not paid any dividends upon our common stock. The payment of common stock dividends, if any, in the future rests within the discretion of our Board of Directors and will depend upon, among other things, our earnings, capital requirements and financial condition, as well as other relevant factors. Recent Sales of Unregistered Securities; Use of Proceeds From Registered Securities
 
During the three months ended December 31, 2007:
 
We issued two individuals warrants to acquire 390,000 shares of our common stock at an exercise price of $0.01 per share as additional consideration for borrowings from them pursuant to promissory notes issued by the Company.
 
The foregoing shares were issued pursuant to exemptions from registration under Sections 3(a)(9) and 4(2) of the Securities Act of 1933.

 
-6-

 

Equity Plan Compensation Information
 
The following table sets forth information as of December 31, 2007 regarding compensation plans under which our equity securities are authorized for issuance.

               
Number of Securities
 
               
Remaining Available for
 
   
Number of Securities
         
Future Issuance Under
 
   
to be Issued Upon
   
Weighted Average
   
Equity Compensation
 
   
Exercise of
   
Exercise Price of
   
Plans (Excluding
 
   
Outstanding Options,
   
Outstanding Options,
   
Securities Reflected in
 
   
Warrants and Rights
   
Warrants and Rights
   
Column (a))
 
Plan Category
 
(a)
   
(b)
   
(c)
 
Equity Compensation Plans(1)
    6,225,085     $ 0.41       2,774,915  
Equity compensation plans not approved by
                       
equity holders(2)
    6,320,419       0.44       0  
Total
    12,545,504               2,774, 915  
 
(1) Pursuant to our 2005 Stock Option Plan.
 
(2) Outstanding warrants to acquire shares of common stock. The warrants expire at various times through 2011.
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and accompanying notes and the other financial information appearing elsewhere in this report and reports included herein by reference. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements.
 
Our independent registered public accounting firm has indicated in their report, dated  May 11, 2009, on our December 31, 2007 financial statements since we have experienced net losses since inception and have a working capital deficiency their report indicates that these matters raise substantial doubt about our ability to continue as a going concern. Our plan with regard to this matter is discussed elsewhere in this document. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
CORPORATE HISTORY
 
We were formerly known as Houston Operating Company and were incorporated in Delaware on August 31, 1989. On December 9, 2004, we entered into an Acquisition Agreement with all of the stockholders of NetFabric Corp., a Delaware corporation. NetFabric Corp. was incorporated in Delaware on December 17, 2002 and began operations in July 2003. At the closing, which occurred simultaneously with the execution of the Acquisition Agreement, we acquired all of the issued and outstanding capital stock of NetFabric Corp. from the stockholders in exchange for an aggregate of 32,137,032 newly-issued shares of our common stock. The acquisition was accounted for as a reverse merger whereby NetFabric Corp. was treated as the acquirer. On April 19, 2005, our name was changed from Houston Operating Company to NetFabric Holdings, Inc. and our stock symbol was changed from "HOOC" to "NFBH."
 
UCA SERVICES, INC. ACQUISITION
 
On May 20, 2005, we entered into and closed on a share exchange agreement, whereby we purchased all of the issued and outstanding shares of UCA Services, Inc., a New Jersey company (“UCA Services”) from its shareholders in exchange for the issuance of 24,096,154 shares of our common stock. UCA Services is an IT services and solutions company that serves the information needs of a wide range of Fortune 500 clients in the financial markets industry and the pharmaceutical, health care and hospitality sectors. UCA Services delivers a broad range of IT services in managed services, professional services, infrastructure building and maintenance, application development and maintenance areas. The acquisition was accounted for using the purchase method of accounting with UCA Service’s results of operations included in our consolidated financial statements from the date of acquisition.
 
DISCONTINUED OPERATIONS
 
Prior to acquiring NetFabric Corp., Houston Operating Company did not have any operations, and we were a shell company whose primary business objective was to merge and become public. NetFabric Corp. was a provider of hardware and services to small to mid-sized businesses ("SMBs") that utilized the Internet for telephone communications or Voice over Internet Protocol ("VoIP"). It developed and marketed appliances or Customer Premises Equipment ("CPE") that simplified the integration of standard telephone systems with an IP infrastructure. In addition, NetFabric Corp resold transport services of a third party VoIP transport provider.
 
Our operations, prior to the UCA Services acquisition, consisted of developing VoIP appliances, including research and product development activities. We also hired additional personnel for sales and marketing and developed our sales and marketing programs.

 
-7-

 

With minimal revenues from VoIP operations, we concluded that we could not implement our original business plan for VoIP operations within our resources or with the additional capital we could raise in the near term. On May 5, 2006, our Board of Directors decided that the Company should exit the hardware-based VoIP communications product line (including resale of transport services) that is targeted to SMBs. In accordance with Statement of Financial Accounting Standards (‘SFAS’) No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets", ("SFAS No. 144"), the results of operations from the VoIP business segment has been reclassified as discontinued operations for all periods presented. After the discontinuation of VoIP operations, our only operations are that of UCA Services.
 
OVERVIEW OF UCA SERVICES BUSINESS
 
UCA Services derived revenues primarily from managed IT services, professional services, application development services and business process management services. Service arrangements with customers were generally on a time and material basis or fixed-price, fixed-timeframe revenue basis. UCA Services principal operating expenses were direct employee costs, consultant expenses and selling, general and administrative expenses. The principal components of selling, general and administrative expenses were salaries of sales and support personnel, and office rent. Direct employee costs and consultant expenses were comprised primarily of the costs of consultant labor, including employees, subcontractors and independent contractors, and related employee benefits. Approximately 50% of our consultants were employees and the remainder are subcontractors and independent contractors.
 
We compensated  most of our consultants only for the hours that we bill to our clients for projects undertaken, which allowed us to better match our labor costs with our revenue generation. With respect to our consultant employees, we were responsible for employment-related taxes, medical and health care costs and workers' compensation. Labor costs are sensitive to shifts in the supply and demand of IT professionals, as well as increases in the costs of benefits and taxes.
 
As previously noted, the December 9, 2004 acquisition of NetFabric Corp. was accounted for as a reverse merger whereby NetFabric Corp. was treated as the acquirer. Accordingly, the historical financial statements of NetFabric Corp. have been presented for all periods required. NetFabric Corp. began operations in January 2003 and was a development stage company until the UCA acquisition. The UCA acquisition was accounted for using the purchase method of accounting with the results of the operations included in the Company's consolidated financial statements from the date of acquisition.
 
Comparison of Years Ended December 31, 2007 and 2006:
 
Revenues.
 
Revenues for the year ended December 31, 2007, decreased by $1,375,432 or 7.8% over the prior year. The decreases in revenues were due to non replacement or non renewal of certain projects undertaken in 2006.
 
Direct employee compensation and consultant expenses.
 
Excluding non-cash share based compensation, for the year ended December 31, 2007, our direct employee compensation and consultant expenses decreased by $847,147 or 6.40% to $12,482,919. The decrease was due to decreased revenues in 2007. Excluding non-cash share based compensation as a percentage of revenues our direct employee compensation and consultant expenses was 76.9%, compared to 75.7% in 2006. The increase in employee compensation and consultant expenses as a percentage of revenues was due to the nature projects performed in 2007.

Selling, general and administrative expenses.
 
Excluding non-cash share based compensation, our selling, general and administrative expenses decreased for the year ended December 31, 2007 by $1,003,302, or 17.7%, to $4,662,684. The decreases in our selling, general and administrative expenses in  2007 compared to 2006 was due expense reductions implemented in the latter half of 2006 and the third quarter of 2007.
 
Amortization of debt discount.
 
Amortization of debt discount for the year ended December 31, 2007 decreased by $2,061,278, or 73.1%, to $758,011. A significant amount of amortization of debt discount resulting from the allocation of value to certain equity instruments issued in connection with debt were amortized in 2006 and due to repayment of certain underlying debt, amortization of debt discount decreased in 2007. At December 31, 2007, the aggregate unamortized debt discount was $855,162, which will be amortized and charged to operations over the term of the respective debt.
 
Depreciation and amortization.
 
For the year ended December 31, 2007, depreciation and amortization decreased by $27,908, or 8.1%, to $316,938.

Debt issuance costs.
 
The Company paid approximately $282,005 fees in connection with its short term fees during the year ended December 31, 2007 and were charged to operation. In 2006, the Company did not have any material amounts paid as fees for short term borrowings.

 
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Interest expense.
 
For the year ended December 31, 2007, interest expense decreased by $1,304, or 0.4 %, to $315,135.Since the borrowings and interest levels were generally at the same levels in 2007, interest expense did not vary significantly.
 
Derivative Financial Instruments.
 
In July 2005, we entered into an agreement pursuant to which we sold Cornell Capital Partners ("Cornell") secured convertible debentures (the "Cornell Debentures") in the aggregate principal amount of $1,000,000. In October 2005, we entered into a securities purchase agreement with Cornell whereby both parties agreed to amend and consolidate all of the convertible debentures issued to Cornell into one new secured convertible debenture in the principal amount of $1,658,160 ("October Convertible Debenture"). As a result of the change in the conversion terms of the October Convertible Debentures, on October 27, 2005, we determined that the embedded conversion feature of the October Cornell Debentures became subject to the provisions of SFAS No. 133. Therefore, we accounted for the embedded conversion feature as a liability in accordance with the guidance of EITF 00-19, "Accounting for Derivative Financial Instruments.
Indexed to, and Potentially Settled in, a Company's Own Stock" ("EITF 00-19"). Accordingly, we recorded the fair value of the embedded conversion feature of $784,784 as a non-current liability on the balance sheet as of October 27, 2005 and a portion of the amounts previously recorded to additional paid-in capital as part of the Original Cornell Debentures were reclassified from equity to liabilities. For the year ended December 31, 2006, we recorded a gain in value for derivative financial instruments of $336,352 related to the change in fair value of the embedded conversion feature, which is recorded in the accompanying consolidated statement of operations. For the year ended December 31, 2005, we recorded a charge in value for derivative financial instruments of $2,131,109 related to the change in fair value of the embedded conversion feature which is recorded in the accompanying consolidated statement of operations. In February 2006, we paid the October Convertible Debenture (the "Cornell Repayment") and accordingly, the value of the embedded conversion future was reclassified to additional paid-in capital.

Debt extinguishment costs.
 
In August 2007, we entered into an Agreement to Convert (“ Agreement”) with Fred Nazem, a stockholder. Pursuant to this Agreement, the stockholder agreed to convert $218,882 due to him in outstanding convertible debentures and accrued interest ($18,882) into 5,472,050 shares of common stock, including 4,900,394 shares as an inducement for conversion. The fair value of the inducement to convert approximated $539,000 and was charged to operations in the three months ended September 30, 2007 as debt extinguishment costs.
 
As part of the Cornell Repayment, we paid an early redemption charge of 15% of the principal amount redeemed or $248,724, which charge is included on the accompanying consolidated statement for operations for the year ended December 31, 2006. In connection with the Cornell Repayment, we also agreed to reduce the exercise price of the 560,000 warrants from $0.50 to $0.40. The change in exercise price of the warrants was treated as a new issuance of warrants and was valued using the Black Scholes option-pricing model. The reduction in exercise price resulted in a fair value of $372,353 for the warrants, which was charged to operations for the year ended December 31, 2006.
 
On May 24, 2006, we entered into a Waiver and Agreement to Convert (the "Waiver Agreement") with Macrocom Investors LLC ("Macrocom"). Pursuant to the Waiver Agreement, Macrocom agreed immediately to convert a note issued by us due on October 10, 2006 in the principal amount of $500,000 (the "Note"), including all interest accrued thereon, into 1,000,000 shares of restricted common stock of the Company. In addition, Macrocom and we agreed to waive and release each other from any claims in connection with the Note and all other agreements executed to date between Macrocom and us. In exchange for the waiver and the early conversion, we agreed to issue an additional 1,500,000 shares of restricted common stock to Macrocom. The fair value of the additional consideration was $1,125,000 and the amount was charged to operations during the year ended December 31, 2006 as debt extinguishment costs.
 
Non-cash charge for dispute settlement.
 
In January 2006, we entered into a termination agreement with a consultant. In connection with the termination, an officer, director and stockholder of the Company transferred 1,000,000 shares of our common stock owned by him to the consultant. We accounted for the settlement as an expense in our consolidated financial statements as a non-cash charge for dispute settlements, based on the value of the option of $0.94 per share on the date of settlement, with a corresponding credit to contributed (paid-in) capital from the officer, director and stockholder during the year ended December 31, 2006. In February 2006, we entered into an amendment agreement with the former UCA shareholders. Pursuant to the amendment agreement, an officer, director and stockholder of the Company transferred 9,000,000 shares of our common stock owned by him to the former UCA shareholders. Since the settlement was not a contingency associated with the acquisition of UCA Services, we accounted for the shares transferred by the individual as an expense, based on the value of the shares on the settlement date, February 13, 2006.
 
In process research and development.
 
In August 2006, the Company entered into an agreement with Utek Corporation ("Utek"), an unaffiliated specialty finance company focused on technology transfers, to acquire a technology license for intrusion detection software developed by a university. We anticipate further development and testing of the technology. Because of the uncertainties surrounding the ultimate commercial deployment of the technology and due to the technology not having alternative use, we charged the cost of the license agreement of $160,000 as in process research and development costs during the year ended December 31, 2006.

 
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Goodwill impairment
 
Pursuant to SFAS No. 142 “Goodwill and Other Intangibles Assets,” (“SFAS No. 142”), the Company performed its annual testing of goodwill impairment in the second quarter of 2007. As a part of goodwill impairment testing, management reviewed various factors, such as the market price of the Company’s common stock, discounted cash flows from projected earnings and values of comparable companies to determine whether impairment exists. Based on this evaluation it was determined that the goodwill was impaired.   The impairment was due to a continued decline in our market capitalization during the past year, and due to lower future cash flows expected to be generated by the business due to working capital constraints. The implied value of the goodwill was $10,585,000 compared to a carrying value of $13,982,451, indicating an impairment of $3,397,451. The impairment loss was charged to operations during the three months ended June 30, 2007.
 
We evaluated our business conditions and future strategic direction including the delisting of its common shares from trading on the Bulletin Board (“OTCBB”) and concluded that an interim testing of goodwill is warranted at December 31, 2007. As a part of the interim goodwill impairment testing, management reviewed various factors and used a market approach (comparison of financial data for publicly traded companies engaged in similar lines of business) to determine whether impairment exists. Based on this evaluation, it was determined that the goodwill was impaired. The impairment was, in part, due to decreased values of comparable companies. The implied value of goodwill was $5,704,000 compared to carrying value of $10,585,000, indicating an impairment of $4,881,000. The additional impairment loss was charged to operations during the three months ended December 31, 2007. In total an impairment loss of $8,278,451 was charged to operations during the year ended December 31, 2007.

Discontinued Operations.
 
On May 5, 2006, our Board of Directors decided to exit from the hardware-based VoIP communications product line (including resale of transport services) that is targeted to SMBs. In accordance with Statement of Financial Accounting Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets", ("SFAS No. 144"), the results of operations from the VoIP business segment has been reclassified as discontinued operations for all periods presented. For the year ended December 31, 2006, loss from discontinued operations decreased by $421,013, or 88.7%, from$474,411 in the prior year. The decreases were due to our scaling back of VoIP operations in 2006 and eventual exit from the business during 2006. Revenues from VoIP operations have been nominal in all periods presented and operating expenses are the losses reported.
 
Net loss.
 
As a result of the foregoing, for the year ended December 31, 2007, net loss decreased by $5,259,399, or 30.8%, to a loss of $11,810,610, compared to a net loss of $17,070,009 in the year ended December 31, 2006.
 
LIQUIDITY AND CAPITAL RESOURCES
 
On December 31, 2007, our working capital deficiency was $4,937,149, compared to a working capital deficiency of $3,767,282 on December 31, 2006. The increase in the working capital deficiency was principally due to operating losses. During the year ended December 31, 2007, our operating activities from continuing operations used approximately $266,000  of cash, compared to approximately $1,019,000 used during the year ended December 31, 2006.
 
During the year ended December 31, 2006, our operating losses, after adjusting for non-cash items, utilized approximately $1,237,000 of cash, and working capital items provided approximately $970,000 of cash. The principal component of these working capital changes was an increase in our accounts payable and decrease in accounts receivable. During the year ended December 31, 2006, our operating losses, after adjusting for non-cash items, utilized approximately $1,715,000 of cash, and working capital items used approximately $690,000 of cash.

In July 2007, we sold an aggregate of 11,250,000 shares of our common stock, par value $0.01 (the “Common Stock”) to four investors, for an aggregate purchase price of $450,000, including $100,000 from Fred Nazem, a stockholder of the Company.

During the year ended December 31, 2007, we borrowed an aggregate of $1,170,00 from five individuals, including $50,000 from a officer and director and repaid $200,000 of that prior to December 31, 2007. The amount outstanding as of December 31, 2007 is $970,000 and is due at various dates between January and February 2008. In January and February 2008, we repaid an aggregate amount of $620,000. The borrowings are unsecured and bear nominal interest. The Company paid financing costs of $282,005 to third parties and lenders and this amount is being amortized over the term of the borrowings. In 2007, $282,005 was charged to operations as amortization of debt issuance costs. With respect to the borrowings from the officer and director the Company did not pay any financing costs.

In connection with the borrowings, we issued the lenders warrants to acquire an aggregate of 890,000 shares of our common stock. The warrants expire in three years from the date of issuance. The relative fair value of the warrants approximated $68,668 and was recorded as additional discount and is being amortized over the borrowings. For the year ended December 31, 2007, $68,668, of debt discount was accreted and recorded as amortization of debt discounts. With respect to the borrowings from the officer and director, the Company did not issue any warrants.

 
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In February 2006, we along with our subsidiaries, entered into a Security Agreement, dated February 10, 2006 ( the "Security Agreement") with Laurus Master Fund, Ltd., a Cayman Islands company ("Laurus"). Under the Security Agreement, Laurus purchased from the Company a Secured Convertible Note (the "Laurus Convertible Note"), with a maturity date of February 10, 2009, in the aggregate principal amount of $1,500,000, and a Secured Non-Convertible Revolving Note (the "Laurus Revolving Note") in the aggregate principal amount of $1,500,000. The Laurus Convertible Note and Laurus Revolving Note are collectively referred to as the "Laurus Notes". Availability under the Laurus Notes is based on an advance rate equal to 90% of eligible accounts receivable, and Laurus has agreed to provide us an over advance for a specified period. The Laurus Convertible Note has a three-year term, and bears interest at 1% above the prime rate, with a minimum interest rate of 8%. Laurus has the option, but not the obligation, at any time until the maturity date, to convert all or any portion of the Laurus Convertible Note and accrued interest thereon into shares of our common stock at an exercise price of $0.91 per share. If converted in full, we would be obligated to issue an aggregate of 1,648,352 shares of our common stock to Laurus. We have the option to prepay the Laurus Convertible Note by paying Laurus the applicable redemption premium. The Laurus Revolving Note has a three-year term, and bears interest at 1% above the prime rate, with a minimum interest rate of 8%.
 
In connection with the borrowing, we issued to Laurus a common stock purchase option (the "Option") to purchase up to 4,256,550 shares of our common stock for nominal consideration. Additionally, we entered into a registration rights agreement with Laurus (the "Registration Rights Agreement"), covering the registration of common stock underlying the Laurus Convertible Note and the Option. Our obligations under the Laurus Notes are secured by first liens on all of our assets, and Laurus may accelerate all obligations under the Laurus Notes upon an event of default.
 
Our initial borrowing was approximately $2,300,000 and we utilized approximately $1,900,000 of the initial borrowing to repay all amounts owed to Cornell pursuant to the October Convertible Debenture, including a redemption premium. At December 31, 2007, borrowing with Laurus was approximately $2,777,000 (face amount).
 
In October 2007, we entered into an extensions agreement with Laurus (the “Extension Agreement’). The Extension Agreement provides for the extension of the over advance feature until February 2009 .However, the over advance amount will reduce by $5,000 each month from November 2007 to February 2008 and by $50,000 each month from March of 2008.  
 
In 2006, we sold eight Convertible Debentures (the " 2006 Convertible Debentures") in the face amount of $800,000 to six individuals (the "Debenture Holders" or a "Debenture Holder") including $150,000 face value to an officer and director, and $50,000 face value to a stockholder of the Company. The 2006 Convertible Debentures bear interest at 8% and were for a term of three months. At the option of the Debenture Holders, the 2006 Convertible Debentures can be converted into shares of the Company's common stock at a conversion price of $.50 per share. In connection with the sale, we issued warrants to three Debenture Holders to acquire an aggregate of 750,000 shares of its common stock with a nominal exercise price. The warrants expire in three years from the date of issuance. The remaining three Debenture Holders received an aggregate of 225,000 shares of our common stock as additional consideration.

The Company used part of the proceeds from the sale of the 2006 Debentures to repay $500,000 due to the Macrocom Investors, LLC ("Macrocom") pursuant to a debenture issued in July of 2005.
 
In 2006, we repaid one 2006 Convertible Debenture in the face amount of $100,000. The Company and the Debenture holders agreed to extension of the term of duration by months on two occasions in 2006. In exchange for the extension we issued the holders an aggregate of 350,000 shares of our common stock and warrants to acquire an aggregate of 600,000 shares of our common stock with a nominal exercise price.  The warrants expire in three years from the date of issuance. No consideration was issued for the extension with respect to the 2006 Convertible Debentures issued to the officer and director and to the stockholder. In January and February of 2007, we repaid five of the seven 2006 Convertible Debentures in the aggregate face amount of $500,000.
 
In December 2006, we agreed with the officer and director and the stockholders to extend the term of two of 2006 Convertible Debentures in the face amount of $200,000 to April 30, 2007. The term of the Convertible Debenture due to the officer and director was extended to December 31, 2007 was repaid in 2008. In August 2007, we and the stockholder entered into an agreement to convert $50,000 face amount of 2006 Convertible Debentures into shares of the Company’s common stock as described below.
 
On June 8, 2006, we sold a Convertible Debenture in the face amount of $150,000 to a stockholder (the "Stockholder Convertible Debenture"). The Stockholder Convertible Debenture bears interest at 8% and was due on August 4, 2006. At the option of the holder, the Stockholder Convertible Debenture can be converted into shares of our common stock at a conversion price of $.50 per share. In connection with the sale, we issued 300,000 shares of our common stock as additional consideration.

In August 2007, we entered into an Agreement to Convert (the “Agreement”) with Fred Nazem, a stockholder. Pursuant to this Agreement, the stockholder agreed to convert $218,882 due to him in outstanding convertible debentures and accrued interest of $18,882 into 5,472,050 shares of common stock, which includes 4,900,394 shares as an inducement for conversion.  The principal amount of $200,000 consisted of $150,000 of Stockholder Convertible Debenture and $50,000 of 2006 Convertible Debenture. The fair value of the inducement to convert approximated $539,000 and was charged to operations during the year ended December 31, 2007 as debt extinguishment costs.

 
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We evaluated several options for obtaining financing to fund our working capital requirements and to retire our debt upon maturity. We had approximately $3.8 million debt that was due in the first quarter of 2009. After several discussions and negotiations, we concluded that the most viable option would be to sell the operations of UCA Services. This would not only provide us financing but also enable UCA Services to grow to its optimal potential with appropriate financial backing.
 
On March 12, 2009, we along with our wholly-owned subsidiary, NetFabric Technologies, Inc., d/b/a UCA Services, Inc. (“UCA”) entered into a Convertible Note Purchase Agreement with Fortify Infrastructure Services, Inc. (“Fortify). Pursuant to the Convertible Note Purchase Agreement, Fortify purchased a Secured Convertible Promissory Note (the “Note”) from UCA in the principal amount of $5 million with the Company being a guarantor for UCA’s borrowings.
 
The Note has a six-month term, and bears interest at 8% per annum, compounded annually. The Note is secured by   (i)   all of the assets of UCA and the Company, and (ii) all of the equity securities of UCA currently owned or hereafter acquired by the Company. At the exclusive option of Fortify, Fortify may convert the entire principal amount of, and accrued and unpaid interest on, the Note into shares of Series A Preferred Stock of UCA.  The conversion price shall be at a price equal to the price per share reflecting a valuation of UCA equal to $5 million, on an as-converted basis.
 
Fortify, UCA and the Company also entered into a Credit Agreement whereby Fortify agreed to provide UCA a revolving line of credit of up to $1 million for working capital purposes. Amounts borrowed under the line of credit are secured by   (i)   all of the assets of UCA and the Company and (ii) all of the equity securities of UCA currently owned or hereafter acquired by the Company.
 
 Fortify, UCA and the Company also entered into an Option and Purchase Agreement (“Option Agreement’). Pursuant to the Option Agreement, Fortify has an option to acquire all of the outstanding shares of common stock of UCA upon effectiveness of this Information Statement.  Upon exercise of the Option by Fortify, we will (a) receive an aggregate purchase price of $500,000, less the amount of accrued and unpaid interest, if any, on the Note, and (b) be released from the guaranty obligations of the Note. The Company and certain employees of UCA will also be eligible to receive earn-out payments in connection with the closing of the Option based upon achievement of certain financial thresholds during a 24-month period following the closing.
 
We used approximately $3 million from the proceeds of the Note to repay all amounts owed to Laurus Master Fund. The balance of the proceeds was used for repayment of debt, other payables and for working capital purposes.
 
On August 24, 2009, we along with our wholly-owned subsidiary, UCA and Fortify entered into Amendment No. 1 (“Amendment”) to the Option and Purchase Agreement (“Option Agreement”) in connection with the closing of Fortify’s  purchase of all of the outstanding capital stock of UCA upon exercise of its option granted under the Option Agreement. Pursuant to the Amendment, among other things,   the Secured Convertible Promissory Note in the principal amount of $5 million issued by UCA to Fortify was cancelled, releases of certain obligations of the parties were granted as specified in the Amendment , and the commencement date and measurement period for the earn-out and bonuses provided for in the Option Agreement were modified.
 
After the divesture of UCA, we will have no operations. However, the Company will be debt free. We will explore strategic alternatives, including merging with another entity. Currently, we do not have any agreement or understanding with any entity and there is no assurance that such a transaction will ever be consummated.

 
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
 
The discussion and analysis and plan of operation is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, accounts receivable and long-lived assets. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the current circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
 
We believe the following critical accounting policies affect the judgment and estimates used in preparation of our consolidated financial statements:
 
Revenue Recognition
 
We derive revenue as a provider of IT services.
 
In accordance with the Securities and Exchange Commission ("SEC") Staff Accounting Bulletin No. 104, "Revenue Recognition," revenue is recognized when persuasive evidence of an arrangement exists, delivery of the product or services has occurred, the fee is fixed and determinable, collectibility is reasonably assured, contractual obligations have been satisfied, and title and risk of loss have been transferred to the customer.
 
Arrangements with customers for services are generally on a time and material basis or fixed-price, fixed-timeframe basis. Revenue on time-and-material contracts is recognized as the related services are performed. Revenue for fixed-price, fixed-timeframe services is recognized as the service is performed. Revenue from fixed-price, fixed-timeframe service contracts is recognized ratably over the term of the contract, as per the proportional performance method. When we receive cash advances from customers in advance of the service period, amounts are reported as advances from customers until the commencement of the service period. Billings and collections in excess of revenue recognized are classified as deferred revenue.
 
Allowance for Doubtful Accounts
 
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. These estimated losses are based upon historical bad debts, specific customer creditworthiness and current economic trends. If the financial condition of a customer deteriorates, resulting in the customer's inability to make payments within approved credit terms, additional allowances may be required. We perform credit evaluations of our customers' financial condition on a regular basis.
 
Fair Value of Financial Instruments
 
The fair value of the Company's assets and liabilities that qualify as financial instruments under Statement of Financial Accounting Standards ("SFAS") No. 107 "Disclosure about Fair Value of Financial Instruments", presented in the consolidated balance sheet as of December 31, 2007 approximate their carrying amounts.
 
We account for derivative instruments in accordance with SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities," as amended, ("SFAS No. 133") which establishes accounting and reporting standards for derivative instruments and hedging activities, including certain derivative instruments imbedded in other financial instruments or contracts and requires recognition of all derivatives on the balance sheet at fair value. Accounting for the changes in the fair value of the derivative instruments depends on whether the derivatives qualify as hedge relationships and the types of the relationships designated are based on the exposures hedged. Changes in the fair value of derivative instruments which are not designated as hedges are recognized in earnings as other income (loss).
 
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We have issued financial instruments which have required a determination of the fair value of certain related derivatives, where quoted market prices were not published or readily available at the date of issuance. We base its fair value determinations on an evaluation of the facts and circumstances and valuation techniques that require judgments and estimates.
 
Goodwill and Other Intangibles
 
Goodwill and other intangibles represent the allocation, pursuant to an independent appraisal of the cost to acquire UCA Services, in excess of the fair value of assets acquired. Under SFAS No. 142, "Goodwill and Other Intangible Assets", goodwill is not amortized but is reviewed for impairment annually, as well as when a triggering event indicates impairment may have occurred. The goodwill test for impairment consists of a two-step process that begins with an estimation of the fair value of the reporting unit. The first step of the process is a screen for potential impairment and the second step measures the amount of impairment, if any. We will perform a goodwill impairment test annually, as well as when a triggering event indicates impairment may have occurred. Application of the goodwill impairment test requires significant judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth, the useful life over which cash flows will occur, and determination of cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value and/or conclusions on goodwill impairment.
 
Intangible assets are accounted for under the provisions of SFAS No. 142. Intangible assets arise from business combinations and consist of customer relationships and restricted covenants related to employment agreements that are amortized, on a straight-line basis, over periods of up to six years. The Company follows the impairment provisions and disclosure requirements of SFAS No. 142. Accordingly intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
 
Stock-Based Compensation
 
Beginning January 1, 2006, we account for stock-based compensation in accordance with the fair value recognition provisions of SFAS 123R. Under the fair value recognition provisions of SFAS 123R, share-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the vesting period. Stock-based compensation expense is calculated using the Black Scholes option pricing model on the date of grant. This option valuation model requires input of highly subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them (the "expected term"), the estimated volatility of our common stock price over the expected term, and the number of options that will ultimately not complete their vesting requirements ("forfeitures"). Changes in these assumptions can materially affect the estimate of the fair value of employee stock options, and consequently, the related amount of stock-based compensation expense recognized in the consolidated statements of operations.

 
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RISK FACTORS
 
We Are Subject To Various Risks That May Materially Harm Our Business, Financial Condition And Results Of Operations
 
You should carefully consider the risks and uncertainties described below and the other information in this filing before deciding to purchase our common stock. If any of these risks or uncertainties actually occurs, our business, financial condition or operating results could be materially harmed. In that case, the trading price of our common stock could decline and you could lose all or part of your entire investment.

WHILE ATTEMPTING TO IDENTIFY A SUITABLE CANDIDATE, WE WILL INCUR FURTHER EXPENSES THAT CURRENTLY CANNOT BE SPECIFIED.
 
Our Board assumes that we will be able to identify as merger candidates privately held companies with attractive business prospects that have the potential to increase stockholder value to a greater extent than our current business. At this time, the Board has not identified a definitive candidate. Following the sale of UCA, the Company will no longer have any full-time employees. However, the Board of Directors will continue to serve and, along with the present Chief Executive Officer, is charged with identifying a target company to acquire. Without full-time employees, it may take a significant amount of time to identify a suitable candidate for a business combination with us. During such time, we will have further expenses such as general legal and accounting/auditing fees, none of which can be specified at this time, but will deplete our financial resources and thereby make it more difficult for the Company to identify a suitable candidate for a business combination on satisfactory terms, if at all.
 
WE MAY NOT BE ABLE TO ACQUIRE A COMPANY WITH ONGOING BUSINESS OPERATIONS.
 
Our Board believes that privately held companies will be interested in a merger with our Company that, after the sale of UCA, would allow the private company to "go public," i.e., have publicly traded securities without an initial public offering. However, many private companies seeking to "go public" may prefer an initial public offering to a merger with a public shell (a public traded company with no operating business). Moreover, the Securities and Exchange Commission typically evaluates the merger of a public shell with a private company. This can be a time-consuming and cost-intensive review process for the parties involved in the merger that could discourage privately held companies from any transaction with a public shell. If, subsequent to the sale of UCA, we are not able to merge with an operating company, whether a privately held company or a company subject to the reporting obligations of the Securities Exchange Act from 1934, our financial reserves will most likely not be sufficient for us to start any kind of operating business on our own. Therefore, there can be no guarantee that we will operate any business after the sale of UCA.

 
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WE DO NOT KNOW WHICH BUSINESS WE WILL OPERATE IN THE FUTURE, IF ANY.
 
As described above, we do not know which business, if any, we will be operating in the future, subsequent to a sale of UCA. Even if we are able to commence new business operations, there can be no guarantee that we will be successful.
 
"GOING CONCERN" QUALIFICATION IN AUDIT OPINION.
 
The Company received a report from its independent registered public accounting firm for the year ended December 31, 2007, containing an explanatory paragraph stating that the Company's recurring losses from continuing operations and the Company's intention to sell its sole operating business raise substantial doubt about the Company's ability to continue as a going concern during the twelve months ending December 31, 2008.
 
LIQUIDITY RISK: THERE MAY NOT BE ADEQUATE RESOURCES TO FUND THE OPERATIONS OF THE COMPANY.
 
There is no assurance that the future expenses of the Company (including the expenses of maintaining the Company as a public company under SEC regulations) will not be greater than anticipated, and that, as a result, a liquidity problem may arise as we may have insufficient funds to operate any business.

 
OUR PRINCIPAL STOCKHOLDERS CAN CONTROL OUR BOARD OF DIRECTORS
 
Five of our principal stockholders, including directors and officers, own approximately 63.2% of our outstanding common stock. They can effectively elect a majority of our directors and thereby control our management.
 
IF WE DO NOT MAKE FUTURE FILINGS WITH THE SEC IN A TIMELY MANNER, OUR STOCKHOLDERS MAY BE NEGATIVELY AFFECTED.
 
As of April 1, 2008 , we have not filed any annual, quarterly or periodic reports with the SEC and received notice from the OTC that we were not in compliance with its rules, which require timely filing of periodic reports in order to maintain our continued quotation on the bulletin boa r d. As a result, the Company’s common stock is currently quoted on the Pink Sheets. Future delays in the filing of timely periodic reports may negatively affect the quotation of our common stock. As a consequence, an investor could find it more difficult t o dispose of, or to obtain quotations as to the price of, our common stock, and the liquidity of the Company ’ s common stock will be greatly reduced.  In addition, the lack of regular current filings may affect the value of the share price since it may be difficult for a shareholder to evaluate properly the Company’s performance and future prospects. Furthermore, the Company could be subject to enforcement action by the SEC if it does not file its periodic reports.
 
 
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ITEM 8. FINANCIAL STATEMENTS
 
Reference is made to page F-1 herein for the Index to the Financial Statements.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
As previously reported in the Company's Form 8-K filed on January 26, 2007, the Board of Directors of the Company dismissed  J.H. Cohn LLP (‘JHC”) as the Independent Registered Public Accounting Firm of the Company on January 24, 2007.
 
On January 24, 2007, the Company hired Goldstein Golub Kessler LLP ("GGK") to serve as the Company's Independent Registered Public Accounting Firm. During the period that JHC had acted as the Company's independent accountants, the Company did not consult with GGK on any matter that (i) involved the application of accounting principles to a specific completed or contemplated transaction, or the type of audit opinion that might be rendered on the Company's financial statements, in each case where written or oral advice was provided, that was an important factor considered by the Company in reaching a decision as to the accounting, auditing or financial reporting issue; or (ii) was either the subject of a disagreement or event, as that term is described in Item 304(a)(1)(iv)(A) of Regulation S-B.
 
During the Company's December 31,2005 fiscal year and through January 24, 2007, there were no disagreements with JHC on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of JHC, would have caused them to make reference to the subject matter of the disagreements in connection with their reports. During our two most recent fiscal years, and the subsequent interim period through the date JHC was dismissed, JHC did not advise the Company as to any reportable events of the type described in Item 304(a)(1)(iv)(B) of Regulation S-B.

On December 4, 2007, the Company was notified that certain of the partners of Goldstein Golub Kessler LLP (GGK), became partners of McGladrey & Pullen, LLP in a limited asset purchase agreement and that GGK resigned as independent registered public accounting firm for the Company.  McGladrey & Pullen, LLP was appointed as the Company’s new independent registered public accounting firm.

The audit report of GGK on the consolidated financial statements of NetFabric Holdings, Inc. and subsidiaries as of and for the year ended December 31, 2006 did not contain an adverse opinion or a disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principles. GGK's December 31, 2006 audit report relating to GGK's audit of Company's financial statements for the fiscal year ended December 31, 2006 included an emphasis paragraph relating to an uncertainty as to the Company's ability to continue as a going concern.

The decision to engage McGladrey & Pullen, LLP was approved by the board of directors, effective December 4, 2007.

During the Company’s most recent fiscal year ended December 31, 2006 and through December 4, 2007, the Company did not consult with McGladrey & Pullen, LLP on (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that may be rendered on the Company’s financial statements, and McGladrey & Pullen, LLP did not provide either a written report or oral advice to the Company that McGladrey & Pullen, LLP concluded was an important factor considered by the Company in reaching a decision as to any accounting, auditing, or financial reporting issue; or (ii) the subject of any disagreement, as defined in Item 304 (a)(1)(iv) of Regulation S-K and the related instructions, or a reportable event within the meaning set forth in Item 304(a)(1)(v) of Regulation S-K.

In connection with the audit of the Company's consolidated financial statements for the fiscal year ended December 31, 2006 and through December 4, 2007, there were: (i) no disagreements between the Company and GGK on any matters of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements, if not resolved to the satisfaction of GGK, would have caused GGK to make reference to the subject matter of the disagreement in their report on the Company's financial statements for such year, and (ii) no reportable events within the meaning set forth in Item 304(a)(1)(v) of Regulation S-K.

 
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ITEM 9A. CONTROLS AND PROCEDURES
 
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Such controls and procedures, by their nature, can provide only reasonable assurance regarding management’s control objectives.
 
The Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Principal Financial Officer, on the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15 as of December 31, 2007. However, disclosure controls were not effective because the Company did not file this report on a timely basis.
 
There was no change in the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the quarter ended December 31, 2007 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
Management’s Annual Report on Internal Control over Financial Reporting
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, the chief executive officer and principal financial officer and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
 
Our evaluation of internal control over financial reporting includes using the COSO framework, an integrated framework for the evaluation of internal controls issued by the Committee of Sponsoring Organizations of the Treadway Commission, to identify the risks and control objectives related to the evaluation of our control environment.
 
Based on our evaluation under the frameworks described above, our management has concluded that our internal control over financial reporting was effective as of December 31, 2007.
 
This annual report does not include an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation requirements by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
 
ITEM 9B. OTHER INFORMATION
 
None.

 
-18-

 

PART III
 
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
 
The following table sets forth the names and positions of our executive officers and directors. Our directors serve for one year or until successors are elected and qualify. Our Board of Directors elect our officers, and their terms of office are at the discretion of the Board, except to the extent governed by an employment contract.
 
As of  January  8, 2010, our directors and executive officers, their age, positions, the dates of their initial election or appointment as directors or executive officers, and the expiration of their terms are as follows:

Name
 
Age
 
Position
 
With Company Since
 
Fahad Syed
 
41
 
Chairman and Chief Executive Officer
 
May 2005
 
               
Vasan Thatham
 
51
 
Chief Financial Officer
 
June 2005
 
               
Charlotte G. Denenberg
 
61
 
Director
 
November 2004
 
               
Joseph Perno
 
66
 
Director
 
April 2006
 
 
Below are the biographies of each of our officers and directors as of  January 8, 2010.
 
FAHAD SYED. Mr. Syed has been the Chairman and Chief Executive Officer of the Company since May 2006. Mr. Syed has been a Director of the Company since May 2005. Mr. Syed is an entrepreneur and co-founder of UCA Services, Inc. and has more than 14 years of experience in Global Services. Mr. Syed is an expert in the development of best practices in IT, channel and direct sales strategies and effective service delivery models. Mr. Syed was the Managing Director of UCA Services, Inc, from June 2003 to May 2005 and he is currently the Chief Executive Officer of UCA Services, Inc. Prior to that, Mr. Syed was Vice President of IT services with UCA Computer Systems, Inc., a system integrator, from December 1998 to May 2003. Previously, Mr. Syed held prominent positions in development and management of financial products at the Housing Development Finance Corporation (HDFC), a pioneer private sector housing finance institution in India. Mr. Syed holds a Masters Degree in Development Sciences from Tata Institute of Social Sciences, Mumbai, India, a Bachelors degree in Sociology from Aligarh University, India and a Diploma in Systems from National Institute of Information Technology, Mumbai, India.
 
VASAN THATHAM. Vasan Thatham has been Vice President and Chief Financial Officer of the Company since June 2005. Prior to joining the Company, from February 1999 through June 2005, Mr. Thatham was Vice President and Chief Financial Officer of Provo International, Inc., a company engaged in providing Internet and telecommunications services. Prior to that, Mr. Thatham held various positions with Esquire Communications, Ltd., Strings Ltd., Ernst & Young in Kuwait and KMPG Peat Marwick in India. Mr. Thatham is a chartered accountant under the laws of India.
 
CHARLOTTE G. DENENBERG. Ms. Denenberg has been a Director of the Company since November 2004. She received a BA in Psychology and Mathematics with Highest Distinction, Phi Beta Kappa, from Northwestern University, and an MS and a PhD in Mathematics from the Illinois Institute of Technology. For the past two years she has consulted for a variety of companies in the telecommunications industry. From 1998 to 2002, she worked for Metromedia Fiber Network Services, Inc. (MFN) as Vice President, Optical Infrastructure (December 1998 to June 2000) and as Vice President and Chief Technology Officer (July 2000 to June 2002). MFN was engaged in the design, installation and maintenance of inter-city and intra-city optical fiber networks.

 
-19-

 

JOSEPH PERNO. Mr. Perno has been a Director of the Company since April 2006. Since his retirement in March 2003, he has been a consultant to emerging technology companies. From March 1994 to March 2003, he was Senior Vice President of Technology at Chubb Corporation, a provider of property and casualty insurance to businesses and individuals worldwide. Prior to that, he was associated for 18 years with Chubb Corporation and Crum and Foster Insurance Organizations in various capacities. Mr. Perno has been a member of the LOMA Property and Casualty Systems Committee for twenty three years, serving as Chairman of that organization from 1991 to 1992. He also served on the Boards of Directors of ACORD, IVANS, the North River Insurance Company, US Fire Insurance Company, The Westchester Insurance Company and the agency systems vendor, Redshaw, Inc.
 
Family Relationships
 
There are no family relationships among the directors or executive officers of the Company.
 
Involvement In Certain Legal Proceedings
 
None of our officers, directors, promoters or control persons have been involved in the past five years in any of the following:
 
(1) Any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
 
(2) Any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
 
(3) Being subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, or any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or
 
(4) Being found by a court of competent jurisdiction (in a civil action), the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.
 
Code of Ethics
 
On March 3, 2005, we adopted a Code of Ethics (the "Code") that applies to the Company, our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. The text of the Code will be provided, without charge, upon request sent to our Secretary at 299 Cherry Hill Road, Parsippany, NJ 07054.
 
Audit Committee
 
The Audit Committee is responsible for making recommendations to the Board of Directors as to the selection and independence of our independent registered public accounting firm (the "Independent Auditor"), maintaining communication with the Independent Auditor, reviewing the annual audit report submitted by the Independent Auditor and determining the nature and extent of problems, if any, presented by such audit warranting consideration by our Board of Directors. Currently, the Company does not have an audit committee and in accordance with ss.3(a)(58)(B) of the Securities Exchange Act of 1934, the entire Board of Directors is acting as the Company's Audit Committee.

 
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Compensation Committee
 
The Compensation Committee is a standing committee of the Board of Directors and is authorized to review and make recommendations to the Board of Directors on all matters regarding the remuneration of our executive officers, including the administration of our compensation plans. The Compensation Committee is intended to be comprised of at least three members. Currently, the Compensation Committee is comprised of only Ms. Charlotte G. Denenberg.
 
Section 16(a) Beneficial Ownership Reporting Compliance
 
Section 16(a) of the Exchange Act requires a company's directors, officers and stockholders who beneficially own more than 10% of any class of equity securities of the Company registered pursuant to Section 12 of the Exchange Act, collectively referred to herein as the Reporting Persons, to file initial statements of beneficial ownership of securities and statements of changes in beneficial ownership of securities with respect to the company's equity securities with the SEC. All Reporting Persons are required by SEC regulation to furnish us with copies of all reports that such Reporting Persons file with the SEC pursuant to Section 16(a). Based solely on our review of the copies of such reports and upon written representations of the Reporting Persons received by us, we believe that all Section 16(a) filing requirements applicable to such Reporting Persons have been met for 2007.
 
ITEM 11. EXECUTIVE COMPENSATION
 
 The following table sets forth information regarding all cash and non-cash compensation earned by or paid to all of the executive officers of the Company who served during the fiscal year ended December 31, 2007 and 2006, for services in all capacities to the Company:
 
Summary Compensation Table

                                     
Nonqualified
             
                               
Non-Equity
   
Deferred
             
                   
Stock
   
Option
   
Incentive Plan
   
Compensation
   
All Other
       
       
Salary
   
Bonus
   
Awards
   
Awards(3)
   
Compensation
   
Earnings
   
Compensation
   
Total
 
Name and Principal Positlion
 
Year
 
($)
   
($)
   
($)
   
($)
   
($)
   
($)
   
($)
   
($)
 
                                                     
Fahad Syed
 
2007
    335,000                                                       335,000  
Chief Executive Officer (1)  
 
2006
    195,336                                                       195,336  
   
 
                                                               
Jeff Robinson
 
2006
    96,756                                                       96,756  
Chief Executive Officer (2)
                                                                   
                                                                     
Vasan Thatham
 
2007
    150,000                       80,124                               230,124  
Chief Financial Officer (3) 
 
2006
    147,053                       80,124                               227,177  
 
(1) Effective May 5, 2006, Fahad Syed was appointed CEO and elected Chairman.
(2) Effective May 5, 2006, Jeff Robinson resigned as Chairman and CEO of the Company.
(3) Value of option awards is the dollar amount recognized for financial statements reporting purposes with respect for fiscal year 2007 and 2006 . See Note 11 to Consolidated Financial Statements.

 
-21-

 
 
Employment Agreements
 
UCA entered into an employment agreement with Fahad Syed in June of 2003 which will expire in May 2008, subject to automatic successive one year renewals unless either the Company or Mr. Syed give notice of intention not to renew the agreement. The agreement provides for an annual base salary of $150,000, with specified annual increases to the base salary. Pursuant to the employment agreement, if we terminate Fahad Syed's employment without cause or good reason, as defined in the employment agreement, we are obligated to pay a termination benefit equal to the remaining annual base salary during the initial term of the employment agreement. In June of 2008, UCA and Mr. Syed entered into a new employment agreement for a term of three years. The new agreement provided for an annual base salary of $250,000 with specified increases and bonus based on the Company’s financial performance. . Pursuant to the new employment agreement, if the Company terminates the officer's employment without cause or good reason, as defined in the new employment agreement, the Company will be obligated to pay a termination benefit equal to the remaining annual base salary during term of the new employment agreement.
 
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

   
Option Awards
   
Stock Awards
 
                                                   
Equity
 
                                             
Equity
   
Incentive
 
                                             
Incentive
   
Plan
 
                                             
Plan
   
Awards:
 
                                             
Awards:
   
Market or
 
               
Equity
                           
Number of
   
Payout
 
               
Incentive
                           
Unearned
   
Value of
 
   
Number of
         
Plan Awards:
                     
Market
   
Shares,
   
Unearned
 
   
Securities
   
Number of
   
Number of
               
Number of
   
Value of
   
Units or
   
Shares,
 
   
Underlying
   
Securities
   
Securities
               
Shares or
   
Shares or
   
Other
   
Units or
 
   
Unexercised
   
Underlying
   
Underlying
               
Units of
   
Units of
   
Rights
   
Other
 
   
Options
   
Unexercised
   
Unexercised
   
Option
   
Option
   
Stock That
   
Stock That
   
That Have
   
Rights That
 
   
(#)
   
Options (#)
   
Unearned
   
Exercise
   
Expiration
   
Have Not
   
Have Not
   
Not Vested
   
Have Not
 
Name
 
Exercisable
   
Unexercisable
   
Options (#)
   
Plan ($)
   
Date
   
Vested (#)
   
Vested ($)
   
(#)
   
Vested ($)
 
Fahad Syed
    -       -       -       -       -       -       -       -       -  
(CEO)
                                                                       
Vasan Thatham
    150,000       150,000       -     $ 1.40    
06/22/15
      -       -       -       -  
(CFO)
                                                                       

Compensation Of Directors
 
The following table sets forth information with respect to director's compensation for the fiscal year ended December 31, 2007.

 
-22-

 

DIRECTORS COMPENSATION

   
Fees
                                     
   
Earned
                                     
   
or
               
Non-Equity
   
Nonqualified
             
   
Paid
               
Incentive
   
Deferred
             
   
in
   
Stock
   
Option
   
Plan
   
Compensation
   
All Other
       
   
Cash
   
Awards
   
Awards
   
Compensation
   
Earnings
   
Compensation
   
Total
 
Name
 
($)
   
($)
   
($)
   
($)
         
($)
   
($)
 
                                           
Charlotte G. Denenberg (1)
  $ 12,000             $ -                             $ 12,000  
                                                         
Joseph Perno (1 & 2)
  $ 12,000             $ 34,874                             $ 46,874  
 
(1) Cash payments made in fiscal year 2007.
 
(2) Value of option awards is the dollar amount recognized for financial statements reporting purposes with respect for fiscal year 2007. See Note 11 to Consolidated Financial Statements.
 
Our non executive directors will receive an initial grant of stock options to purchase 125,000 shares of common stock with an exercise price equal to the fair market value. The options shall vest into 15,625 shares of common stock on the date of grant and thereafter into 15,625 shares every three months for as long as the board member is a member of our Board of Directors as of such date. The option shall have a term of ten years from the date of grant. Every member of the Board of Directors who is not an employee shall be entitled to a bi-annual grant of Stock Options to purchase 125,000 shares of common stock on the two year anniversary of the initial grant date and for every two year anniversary of such date thereafter for as long as the member is a member of the Board of Directors. The options shall vest into 15,625 shares of common stock on the date of grant and into 15,625 shares of common stock every three months thereafter. The options shall have a term of ten years. The exercise price shall be the fair market value on the date of grant. Independent directors are also reimbursed for out-of-pocket expenses in connection with attendance at board meetings and committee meetings. In April 2006, we granted Joseph Perno stock options to purchase 125,000 shares of our common stock. In March 2005, we granted each of our then three non executive directors, Charlotte G. Denenberg, Richard R. Howard and Madelyn M. DeMatteo, stock options to purchase 125,000 shares of common stock. Each of our non-employee directors are entitled to receive 12,000 in 2006 for attending board Meetings
 
2005 Stock Option Plan
 
In March 2005, our Board of Directors and stockholders adopted our 2005 Stock Option Plan, pursuant to which 9,000,000 shares of common stock were reserved for issuance upon exercise of options. Our stock option plan is designed to serve as an incentive for retaining qualified and competent employees, directors and consultants. Our Board of Directors or a committee of our Board of Directors administers our stock option plan and is authorized, in its discretion, to grant options under our stock option plan to all eligible employees, including our officers, directors (whether or not employees) and consultants. Our stock option plan provides for the granting of both "incentive stock options" (as defined in Section 422 of the Internal Revenue Code of 1986, as amended) and non-qualified stock options. Options can be granted under our stock option plan on such terms and at such prices as determined by the Board of Directors or its committee, except that the per share exercise price of options will not be less than the fair market value of the common stock on the date of grant. In the case of an incentive stock option granted to a stockholder who owns stock possessing more than 10% of the total combined voting power of all of our classes of stock, the per share exercise price will not be less than 110% of the fair market value on the date of grant. The aggregate fair market value (determined on the date of grant) of the shares covered by incentive stock options granted under our stock option plan that become exercisable by a grantee for the first time in any calendar year is subject to a $100,000 limit. Options granted under our stock option plan will be exercisable during the period or periods specified in each option agreement. Options granted under our stock option plan are not exercisable after the expiration of 10 years from the date of grant (five years in the case of incentive stock options granted to a stockholder owning stock possessing more than 10% of the total combined voting power of all of our classes of stock) and are not transferable other than by will or by the laws of descent and distribution.

 
-23-

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
PRINCIPAL STOCKHOLDERS
 
The table below sets forth information with respect to the beneficial ownership of our common stock as of January 8, 2010 for (i) persons who own more than 5% of our outstanding common stock; (ii) each of our directors or those nominated to be directors, and executive officers; and (iii) all of our directors and executive officers as a group.

Name and Address
 
Amount and Nature of
   
Percentage
 
of Beneficial Owner
 
Beneficial Ownership
   
of Class(1)
 
Fred Nazem
    23,279,527 (2)     24.0 %
44 East 73rd Street
               
New York, NY 10021
               
                 
Faisal Syed
    13,238,462       13.6 %
12 Kings Brook Court
               
Mendham, NJ 07945
               
                 
Mohamed Asif
    13,238,462       13.6 %
53 Burnet Hill Road
               
Livingston, NJ 07039
               
                 
Fahad Syed
    6,731,731       9.6 %
c/o NetFabric Holdings, Inc
               
299 Cherry Hill Road
               
Parsippany, NJ 07054
               
                 
Jeff Robinson
    4,832,476       5.0 %
Five Tomaselli Court
               
Ballston Spa, NY 12020
               
                 
Vasan Thatham
    300,000 (3)     *  
c/o NetFabric Holdings, Inc.
               
299 Cherry Hill Road
               
Parsippany, NJ 07054
               
                 
Charlotte G. Denenberg
    125,000 (4)     *  
c/o NetFabric Holdings, Inc.
               
299 Cherry Hill Road
               
Parsippany, NJ 07054
               
                 
Joseph Perno
    125,000 (4)     *  
c/o NetFabric Holdings, Inc.
               
299 Cherry Hill Road
               
Parsippany, NJ 07054
               
                 
Laurus Master Fund, Ltd.
    5,221,393 (5)     5.3 %
c/o Laurus Capital Management, LLC
               
335 Madison Avenue
               
New York, NY 10017
               
                 
All Directors and Executive
               
Officers as a Group (4 persons)
    7,281,731 (6)     7.5 %
 
* Less than 1%.
(1) Applicable percentage of ownership is based on 97,053,044 shares of common stock outstanding as of January  8, 2010 for each stockholder. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting of investment power with respect to securities. Shares of common stock subject to securities exercisable or convertible into shares of common stock that are currently exercisable or exercisable within 60 days of January 8,, 2010 are deemed to be beneficially owned by the person holding such options for the purpose of computing the percentage of ownership of such persons, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.
 
(2) Includes 6,592,212 shares held by the Fred F. Nazem Children's Trust, whose trustees are Alexander Nazem, Farhad Nazem and Sohelya Gharib. Fred Nazem disclaims beneficial ownership of these securities.
 
(3) Includes 300,000 shares issuable upon exercise of options.
 
(4) Includes 125,000 shares issuable upon exercise of options.
 
 (5) Includes  554,282 shares issuable upon exercise of warrants.  Laurus Capital Management, LLC manages Laurus Master Fund Ltd. Eugene Grin and David Grin, through other entities, are the controlling principals of Laurus Capital Management, LLC and share sole voting and investment power over the securities owned by Laurus Master Fund Ltd.

 
-24-

 
 
(6) Includes 550,000 shares issuable upon exercise of options.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 
In April 2006, we sold the 2006 Convertible Debentures in the face amount of $150,000 to Fahad Syed, an officer and director and in the face amount of $50,000 to Fred Nazem, a stockholder (For the purposes of this paragraph, Mr. Syed and Mr. Nazem are collectively referred to as the "Debenture Holders"). The 2006 Convertible Debentures bear interest at 8% and were due originally on June 17, 2006. At the option of the Debenture Holders, the 2006 Convertible Debentures can be converted into shares of the Company's common stock at a conversion price of $.50 per share. In connection with the sale, we issued warrants to the two Debenture Holders for an aggregate amount of 150,000 shares of the Company's common stock as additional consideration. In December 2006, the Debenture Holders extended the maturity of the 2006 Convertible Debentures to April 2007. In April 2007, the maturity of Convertible Debenture due to Fahad Syed was extended to December 2007 and repaid in 2008.
 
In June 2006, we sold a Stockholder Convertible Debenture in the face amount of $150,000 to Fred Nazem. The Stockholder Convertible Debenture bears interest at 8% and was due on August 4, 2006. At the option of the holder, the Stockholder Convertible Debenture can be converted into shares of the Company's common stock at a conversion price of $.50 per share. In connection with the sale, we issued 300,000 shares of its common stock as additional consideration. In December 2006, Fred Nazem extended the maturity of the Stockholder Convertible Debenture to April 2007.   In August 2007, the Company entered into an Agreement to Convert (the “Agreement”) with Fred Nazem, a stockholder. Pursuant to this Agreement, the stockholder agreed to convert $218,882 due to him in outstanding convertible debentures and accrued interest of $18,882 into 5,472,050 shares of common stock, which includes 4,900,394 shares as an inducement for conversion.
 
We had a sublease with UCA Global, Inc., an entity affiliated with Faisal Syed, a stockholder . The lease is for an office of 13,000 square feet for a three year term through July 2008 with an annual rent of $144,000. The sublease rent was determined by the landlord based on the area of usage and we pay our share of rent directly to the landlord.   Pursuant to entering into a lease for a new office premises, the Company has terminated the sublease arrangement effective June 2007.
 
Prior to our acquisition of UCA, UCA issued a promissory note to Faisal Syed, a stockholder, in the principal amount of $100,000. The note bears interest at the rate of 6%. The promissory note, together with accrued but unpaid interest, was due on June 16, 2005. We repaid the promissory note in February 2006.
 
In June 2005, Fred Nazem, a stockholder, advanced $70,000 to the Company for working capital. The loan was interest free and not subject to any written agreement and did not have any formal due date. We paid the note in February 2006.
 
In June 2005, Fahad Syed, an officer and director, advanced $200,000 to the Company for working capital. Initially, the loan was interest free and not subject to any written agreement. In December 2005, we issued a promissory note to formalize our borrowing. The note bore interest at 5% and it was due in January 2006. We paid the note in February 2006. In December 2005, we also issued a warrant to acquire 300,000 shares of our common stock at $1.00 per share to Fahad Syed as additional consideration. The warrant expires in January 2009.

 
-25-

 

In July 2005, we sold convertible debentures to a stockholder, Fred Nazem, and to CCS Group, LLC. ("CCS"), an entity affiliated with Walter Carozza, our former officer, in the face amounts of $50,000 each, repayable in April 2006. The convertible debentures can be converted into 100,000 shares of our common stock at a conversion price of $.50 per share. In connection with the sale, we issued each of them warrants to acquire 100,000 shares of our common stock at an exercise price of $1.50 per share. The warrants expire three years from the date of issuance. We also issued to Mr. Nazem and CCS 37,500 shares each of our common stock as additional consideration. Fred Nazem converted the debenture into 100,000 shares of common stock in April 2006. The maturity date of the convertible debenture held by CCS was extended to September 2006. In September, CCS converted the convertible debenture into 100,000 shares of common stock. As consideration for the conversion, we issued CCS 300,000 shares of our common stock.
 
In the normal course of business, the Company performed services for and billed Clear to Close, Inc., an entity affiliated with the Company's stockholders, in the amounts of $ 0 and $68,000, respectively, during the years ended December 31, 2007 and 2006. As of December 31, 2007, approximately $235,000 was owed to the Company by Clear to Close, Inc. including amounts owed to UCA prior to the acquisition and a full allowance is provided due to uncertainty over the recovery of the amount.
 
Charlotte G. Denenberg is not considered an independent director.
 
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
Through September 30, 2005, Goldstein Golub Kessler LLP ( "GGK") had a continuing relationship with American Express Tax and Business Services Inc. ("TBS") from which it leased auditing staff who were full time, permanent employees of TBS and through which its partners provided non-audit services. Subsequent to September 30, 2005 this relationship ceased and GGK established a similar relationship with RSM McGladrey, Inc. GGK has no full time employees, and, therefore, none of the audit services performed were provided by permanent, full-time employees of the GGK. GGK manages and supervises the audit and audit staff and is exclusively responsible for the opinion rendered in connection with its examination. GGK performed an audit of our annual financial statements for the year ended December 31, 2006.
 
Certain of the partners of GGK became partners of McGladrey & Pullen, LLP in a limited asset purchase agreement effective October 3, 2007. As a result, GGK resigned as our auditors effective December 4, 2007 and McGladrey & Pullen, LLP was appointed as the auditors of our annual financial statements for the year ended December 31, 2007.
 
Audit Fees
 
The aggregate fees billed or to be billed for professional services rendered by our independent registered public accounting firm for the audit of our annual financial statements, review of financial statements included in our quarterly reports and other fees that are normally provided by the accounting firm in connection with statutory and regulatory filings or engagements for the fiscal years ended December 31, 2007 and 2006 were $170,000 and $160,000, respectively. For 2007, 125,000 of fees was billed by McGladrey & Pullen, LLP and $45,000 was billed by GGK. For 2006, $100,000 of fees were billed or to be billed by our  independent registered public accounting firm GGK and $60,000 were billed by JHC, our former independent registered public accounting firm.
 
Audit Related Fees
 
The aggregate fees billed or to be billed for audit related services by our independent registered public accounting firm that are reasonably related to the performance of the audit or review of our financial statements, other than those previously reported in this Item 14, for the fiscal years ended December 31, 2007 and 2006 were $0 and $0, respectively.

 
-26-

 

Tax Fees
 
The aggregate fees billed for professional services rendered by our independent registered public accounting firm for tax compliance, tax advice and tax planning for the fiscal years ended December 31, 2007 and 2006 were $0 and $0, respectively.
 
All Other Fees
 
There were no other fees billed for services by our independent registered public accounting firm for either audit related or non audit services for the fiscal years ended December 31, 2007 and 2006.
 
The Audit Committee considered and determined that the services performed are compatible with maintaining the independence of the independent registered public accounting firm.
 
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditor
 
The Audit Committee is responsible for pre-approving all audit and permitted non-audit services to be performed for us by our Independent Registered Public Accounting Firm as outlined in its Audit Committee charter. Prior to engagement of the Independent Registered Public Accounting Firm for each year's audit, management or the Independent Registered Public Accounting Firm submits to the Audit Committee for approval an aggregate request of services expected to be rendered during the year, which the Audit Committee pre-approves. During the year, circumstances may arise when it may become necessary to engage the Independent Registered Public Accounting Firm for additional services not contemplated in the original pre-approval. In those circumstances, the Audit Committee requires specific pre-approval before engaging the Independent Registered Public Accounting Firm. Currently, the Company does not have an audit committee and in accordance with ss.3(a)(58)(B) of the Securities Exchange Act of 1934, the entire Board of Directors is acting as the Company's Audit Committee. The entire Board of Directors does not delegate to management its responsibility to pre-approve services performed by the Independent Registered Public Accounting Firm.

 
-27-

 
 
ITEM 15. EXHIBITS.

A.
 
Exhibits
     
Exhibit 2.1
 
Share Exchange Agreement between the Company, NetFabric, NetFabric’s shareholders and Littlehampton LLC, dated December 9, 2004. (1)
     
Exhibit 2.2
 
Share Exchange Agreement between the Company, UCA Services, Inc. and all of the Shareholders of UCA Services, Inc. dated 20, 2005. (4)
     
Exhibit 3.1
 
Articles of Incorporation (12)
     
Exhibit 3.2
 
By-Laws. (7)
     
Exhibit 10.1
 
Letter Agreement between Houston Operating Company, NetFabric Corporation, Macrocom Investors, LLC and Littlehampton Investments, LLC, dated March 25, 2005. (3)
     
Exhibit 10.2
 
Financing Agreement between NetFabric and Macrocom, dated July 22, 2004. (1)
     
Exhibit 10.3
 
Loan Agreement between NetFabric and Macrocom, dated October 14, 2004. (1)
     
Exhibit 10.4
 
Amendment to Financing and Loan Agreement between NetFabric and Macrocom, dated December 2, 2004. (1)
     
Exhibit 10.5
 
Distribution Agreement between NetFabric and Williams, dated November 29, 2004. (1)
     
Exhibit 10.6
 
Lease Agreement between NetFabric and Silvermine, dated January 1, 2004. (1)
     
Exhibit 10.7
 
2005 Stock Option Plan. (2)
     
Exhibit 10.8
 
Agreement with Macrocom Investors, LLC for Convertible Debentures dated July 19, 2005. (5)
     
Exhibit 10.9
 
Warrant, dated as October 27, 2005, issued by the Company to Cornell Capital Partners, LP. (6)
     
Exhibit 10.10
 
Securities Purchase Agreement, dated as of October 27, 2005, by and between the Company and Cornell Capital Partners, LP. (6)
     
Exhibit 10.11
 
Investor Registration Rights Agreement, dated as of October 27, 2005, by and between the Company and Cornell Capital Partners, LP. (6)

 
-28-

 
 
Exhibit 10.12
 
Escrow Agreement, dated as of October 27, 2005, by and among the Company, Cornell Capital Partners, LP and David Gonzalez, Esq., as escrow agent pursuant to the Securities Purchase Agreement. (6)
     
Exhibit 10.13
 
Amended and Restated Security Agreement, dated as of October 27, 2005, by and between the Company and Cornell Capital Partners, LP. (6)
     
Exhibit 10.14
 
Amended and Restated Security Agreement, dated as of October 27, 2005, by and between the Company and Cornell Capital Partners, LP. (6)
     
Exhibit 10.15
 
Amended and Restated Security Agreement, dated as of October 27, 2005, by and between UCA Services, Inc. and Cornell Capital Partners, LP. (6)
     
Exhibit 10.16
 
Officer Pledge and Escrow Agreement, dated as of October 27, 2005, by and among the Company, Cornell Capital Partners, LP and David Gonzalez, Esq., as escrow agent. (6)
     
Exhibit 10.17
 
Form of Secured Convertible Debenture issued to Cornell Capital Partners, LP dated October 27, 2005. (6)
     
Exhibit 10.18
 
Employment Agreements with Fahad Syed. (7)
     
Exhibit 10.19
 
Amendment of The Share Exchange Agreement dated February 13, 2006 by and among NetFabric, Holdings, Inc. UCA Services, Inc. and UCA Shareholders. (8)
     
Exhibit 10.20
 
Security Agreement, dated February 10, 2006, by and between the Company and Laurus Master Fund, Ltd.
     
Exhibit 10.21
 
Secured Convertible Note, dated February 10, 2006, by and between the Company and Laurus Master Fund, Ltd. (9)
     
Exhibit 10.22
 
Secured Non-Convertible Note, dated February 10, 2006, by and between the Company and Laurus Master Fund, Ltd. (9)
     
Exhibit 10.22
 
Option, dated February 10, 2006, by the Company. (9)
     
Exhibit 10.23
 
Registration Rights Agreement, dated February 10, 2006, by and between the Company and Laurus Master Fund, Ltd. (9)
     
Exhibit 10.24
 
Subsidiary Guaranty, dated February 10, 2006 from NetFabric Corporation and UCA Services, Inc. (9)
     
Exhibit 10.25
 
Letter agreement, dated February 10, 2006 between the Company and Laurus Master Fund. (9)
     
Exhibit 10.27
 
Form of Convertible Debenture dated April 19, 2006 issued by the Company. (10)
     
Exhibit 10.28
 
Form of Warrant, dated April 19, 2006 issued by the Company. (10)
     
Exhibit 10.28
 
Agreement and Plan of Acquisition by and between Intrusion Detection Technologies, Inc., UTEK Corporation and NetFabric Holdings, Inc. (11)
     
Exhibit 14.1
 
Code of Business Conduct and Ethics. (3)
     
Exhibit 21.1
 
Subsidiaries of the Registrant*
     
Exhibit 31.1
 
Rule 13a-14(a)/15d-14(a) Certification (CEO)*
     
Exhibit 31.2
 
Rule 13a-14(a)/15d-14(a) Certification (CFO)*
     
Exhibit 32.1
 
Section 1350 Certification (CEO)*
     
Exhibit 32.2
 
Section 1350 Certification (CFO)*

 
-29-

 

* Filed herewith.
 
(1) Filed as an Exhibit to the Company's 8-K filed on December 15, 2004.
 
(2) Filed with Schedule 14C Information on March 21, 2005.
 
(3) Filed as an Exhibit to the Company's 10K/A filed on December 19, 2005.
 
(4) Filed as an Exhibit to the Company's Form 8-K on May 26, 2005
 
(5) Filed as an Exhibit on the Company's 8-K filed on July 25, 2006.
 
(6) Filed as an Exhibit on the Company's SB-2 on November 2, 2005
 
(7) Filed as an Exhibit on the Company's 10KSB filed on April 15, 2006
 
(8) Filed as an Exhibit to the Company's Form 8_8K filed on February 15, 2006
 
(9) Filed as an Exhibit to the Company's Form 8-K filed on February 15, 2006
 
(10) Filed as an Exhibit to the Company's Form 8-K filed on April 19, 2006
 
(11) Filed as an Exhibit to the Company's Form 8-K filed on August 16, 2006
 
(12) Filed with Schedule 14C Information on October 24, 2006


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

Date: February 18, 2010
/s/ FAHAD SYED
 
Fahad Syed, Chairman and
 
Chief Executive Officer
 
(principal executive officer)

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

Date: February 18, 2010
/s/ FAHAD SYED
 
Fahad Syed, Chairman
 
and Chief Executive Officer
 
(principal executive officer)
   
Date: February 18, 2010
/s/ VASAN THATHAM
 
Vasan Thatham, Chief Financial
 
Officer (principal accounting officer)
   
Date: February 18, 2010
/s/ JOSEPH PERNO
 
Joseph Perno, Director
   
Date: February  18, 2010
/s/ CHARLOTTE G. DENENBERG
 
Charlotte G. Denenberg, Director

 
-31-

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
NetFabric Holdings, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheet of NetFabric Holdings, Inc. and Subsidiaries as of December 31, 2006, and the related consolidated statements of operations, stockholders' equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of NetFabric Holdings, Inc. and Subsidiaries as of December 31, 2006 and their consolidated results of operations and their cash flows for the year then ended, in conformity with United States generally accepted accounting principles.

As discussed in Note 11 to the consolidated financial statements, the Company changed the manner in which it accounts for stock-based compensation in 2006.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has had net losses from inception and has a working capital deficiency. These matters 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 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

GOLDSTEIN GOLUB KESSLER LLP
New York, New York
April 13, 2007

 
-32-

 
To the Board of Directors and Stockholders
NetFabric Holdings, Inc.

We have audited the consolidated balance sheet of NetFabric Holdings, Inc. and Subsidiaries (hereafter referred to as “NetFabric”) as of December 31, 2007, and the related statements of operations, stockholders' equity, and cash flows for the year then ended.  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 audit.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of NetFabric as of December 31, 2007, and the results of their operations and their cash flows for the year then ended in conformity with U.S. generally accepted accounting principles.

We were not engaged to examine management's assertion about the effectiveness of NetFabric’s internal control over financial reporting as of December 31, 2007 included in the “Management’s Report on Internal Control Over Financial Reporting” and, accordingly, we do not express an opinion thereon.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has had net losses from inception and has a working capital deficiency. These matters 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 1.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

McGLADREY & PULLEN, LLP
New York, New York

May 11, 2009

 
-33-

 

 
NETFABRIC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

   
December 31, 2007
   
December 31, 2006
 
ASSETS
           
             
CURRENT ASSETS:
           
Cash
  $ 15,224     $ 13,437  
Trade accounts receivable, net
    1,758,821       2,149,680  
Prepaid expenses and other current assets
    34,012       5,110  
Total current assets
    1,808,057       2,168,227  
Property and equipment, net
    206,329       197,215  
Goodwill
    5,704,000       13,982,451  
Other intangibles, net
    659,687       879,702  
Other assets
    22,929       55,028  
TOTAL ASSETS
  $ 8,401,002     $ 17,282,623  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
CURRENT LIABILITIES:
               
Convertible debentures, net of unamortized discounts
  $ 150,000     $ 685,170  
Notes payable to officer, net of unamortized discounts
            150,000  
Short term borrowings
    970,000          
Accounts payable and accrued liabilities
    3,976,771       3,747,807  
Accrued compensation
    554,880       338,283  
Deferred revenues and customer advances
    112,000          
Revolving note, net of unamortized discount
    981,555       1,014,249  
Total current liabilities
    6,745,206       5,935,509  
                 
Convertible note, net of unamortized discount
    940,232       443,430  
Total liabilities
    7,685,438       6,378,939  
                 
COMMITMENTS AND CONTINGENCIES
               
                 
STOCKHOLDERS' EQUITY
               
Common Stock, $.001 par value, authorized shares 200,000,000, 96,053,044 and 75,023,883 shares issued and outstanding, respectively
    96,053       75,024  
Additional paid-in capital
    37,802,940       36,201,479  
Accumulated deficit
    (37,183,429 )     (25,372,819 )
Total stockholders' equity
    715,564       10,903,684  
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 8,401,002     $ 17,282,623  

See accompanying notes to consolidated financial statements.

-34-


NETFABRIC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS

   
YEAR
   
YEAR
 
   
ENDED
   
ENDED
 
   
December 31, 2007
   
December 31, 2006
 
             
Revenues
  $ 16,223,871     $ 17,599,303  
                 
OPERATING EXPENSES:
               
Direct employee compensation and
               
consultant expenses (includes share based compensation
               
of $45,584 and $22,792)
    12,528,503       13,352,858  
Selling, general and administrative expenses (includes
               
share based compensation of $300,303 and $606,574)
    4,962,997       6,272,570  
Non-cash charge for dispute settlements
            9,492,070  
Non-cash goodwill impairment
    8,278,451          
In process research and development
            160,000  
Depreciation and amortization
    316,938       344,846  
Total operating expenses
    26,086,889       29,622,344  
Loss from operations
    (9,863,018 )     (12,023,041 )
                 
OTHER INCOME / (EXPENSE):
               
                 
Amortization of debt discounts
    (758,011 )     (2,819,289 )
Amortization of debt issuance cost
    (282,005 )        
Interest and bank charges
    (315,135 )     (316,439 )
Gain/(charge) on derivative financial instruments & financing costs
            336,352  
Debt extinguishment costs
    (539,043 )     (1,773,181 )
Total other income / (expense)
    (1,894,194 )     (4,572,557 )
Loss before provision for income taxes
    (11,757,212 )     (16,595,598 )
                 
Provision for income taxes
    -       -  
LOSS FROM CONTINUING OPERATIONS
    (11,757,212 )     (16,595,598 )
                 
DISCONTINUED OPERATIONS:
               
Loss from discontinued operations
    (53,398 )     (474,411 )
                 
NET LOSS
  $ (11,810,610 )   $ (17,070,009 )
                 
Net loss from continuing operations per common share, basic and diluted
  $ (0.14 )   $ (0.24 )
                 
Net loss from discontinued operations per common share, basic and diluted
    -     $ (0.01 )
                 
Net loss per common share, basic and diluted
  $ (0.14 )   $ (0.25 )
                 
Weighted average number of shares outstanding, basic and diluted
    84,617,063       68,056,366  

See accompanying notes to consolidated financial statements.

-35-


NETFABRIC HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

   
COMMON STOCK
                         
               
ADDITIONAL
   
DEFERRED
   
ACCUMULATED
   
TOTAL
 
   
SHARES
   
PAR VALUE
   
PAID-IN CAPITAL
   
COMPENSATION
   
DEFICIT
   
STOCKHOLDERS' EQUITY
 
Balances at December 31, 2005
    62,448,357     $ 62,448     $ 16,657,804     $ (36,478 )   $ (8,302,810 )   $ 8,380,964  
                                                 
Issuance of common shares in connection with settlement of payables
    60,526       61       57,439                       57,500  
Value of contributions from shareholder in connection with
                                               
settlement of disputes
    -       -       9,492,070                       9,492,070  
Employee share-based compensation
    -       -       493,762                       493,762  
Reclassification of deferred employee stock option compensation
    -       -       (36,478 )     36,478                  
Allocation of value to beneficial conversion feature in
                                               
connection with issuance of convertible note
    -       -       511,577                       511,577  
Issuance of options and warrants in connection with debt financing
    -       -       1,432,743                       1,432,743  
Reissuance of warrants in connection with debt extinguishment
    -       -       372,353                       372,353  
Reclassification of derivative financial instrument
                                               
relating to beneficial conversion feature
    -       -       804,307                       804,307  
Reclassification of derivative financial instrument relating
                                               
to warrants
    -       -       2,946,858                       2,946,858  
Settlement of bridge loans with common stock
    2,500,000       2,500       1,622,500                       1,625,000  
Conversion of convertible debenture issued to officer with common stock
    500,000       500       129,500                       130,000  
Issuance of shares in connection with extension of convertible debenture to
                                               
officer
    100,000       100       29,900                       30,000  
Allocation of value to beneficial conversion feature issued in
                                               
connection with issuance of convertible debenture
    -       -       322,755                       322,755  
Allocation of value for warrants issued in connection with convertible
                                               
debentures
    -       -       133,969                       133,969  
Allocation of value for common shares issued in connection with convertible
                                               
debentures
    525,000       525       164,510                       165,035  
Allocation of value for warrants issued in connection with extension
                                               
of convertible debentures
    -       -       115,908                       115,908  
Allocation of value of common shares issued in connection with extension
                                               
of convertible debentures
    350,000       350       55,992                       56,342  
Issuance of common shares in connection with convertible debenture
    -       -       -                          
Issuance of common shares for services
    290,000       290       40,744                       41,034  
Issuance of warrants for services
    -       -       51,516                       51,516  
Issuance of shares for licensing agreement acquisition
    8,250,000       8,250       801,750                       810,000  
Net loss
                                    (17,070,009 )     (17,070,009 )
                                                 
BALANCES AT  December 31, 2006
    75,023,883       75,024       36,201,479       -       (25,372,819 )     10,903,684  
                                                 
Issuance of common shares for services
    640,000       640       76,960                       77,600  
Sale of common shares in private placement
    11,250,000       11,250       438,750                       450,000  
Employee share-based compensation
                    268,297                       268,297  
Conversion of warrants to common shares
    3,667,111       3,667       (3,667 )                        
Allocation of value for warrants issued in connection with short term borrowings
                    68,668                       68,668  
Conversion of convertible debenture issued to shareholder with common stock
    5,472,050       5,472       752,453                       757,925  
Net Loss
                                    (11,810,610 )     (11,810,610 )
                                                 
BALANCES AT  December 31, 2007
    96,053,044     $ 96,053     $ 37,802,940     $ 0     $ (37,183,429 )   $ 715,564  

See accompanying notes to consolidated financial statements.

-36-


NETFABRIC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS

   
Year ended
December 2007
   
Year ended
December 2006
 
OPERATING ACTIVITIES
           
Net loss
  $ (11,810,610 )   $ (17,070,009 )
Loss from discontinued operations
    53,398       474,411  
Adjustments to reconcile net loss to net cash used in operating activities:
               
Non-cash charge for interest expense
            22,500  
Non-cash charge for settlement of disputes
            9,492,070  
Non-cash charge in connection with settlement of debt
    539,043       1,152,104  
Non-cash charge for in process R&D
            160,000  
Non-cash charge for reissuance of warrants in connection with
               
debt extinguishment
            372,353  
Common stock issued for services
    77,600       150,000  
Non-cash charge for employee share based compensation
    268,297       629,366  
Non-cash gain on debt extinguishment
            (32,638 )
Non-cash gain on derivative financial instrument
            (336,352 )
Allowance for bad debts
            107,344  
Non-cash goodwill impairment
    8,278,451          
Amortization of debt discounts
    758,011       2,819,289  
Amortization of debt issuance costs
    282,005          
Depreciation and amortization
    316,938       344,846  
Changes in operating assets and liabilities:
               
Trade accounts receivable
    390,859       (59,479 )
Due from related party
            84,712  
Prepaid expenses and other current assets
    (28,902 )     29,956  
Other assets
    31,502       (47,098 )
Accounts payable and accrued liabilities
    248,428       796,496  
Accrued compensation
    216,597       (42,439 )
Deferred revenues and advances
    112,000       (66,019 )
Net cash used in continuing operations
    (266,383 )     (1,018,587 )
Net cash used in discontinued operations
    (53,398 )     (454,344 )
Net cash used in operating activities
    (319,781 )     (1,472,931 )
                 
INVESTING ACTIVITIES
               
Purchases of property and equipment
    (106,024 )     (132,667 )
Net cash used in investing activities
    (106,024 )     (132,667 )
                 
FINANCING ACTIVITIES
               
Proceeds from issuance of common stock
    450,000       -  
Proceeds from short term borrowings
    1,170,000          
Repayment of short term borrowings
    (200,000 )        
Repayment of note to officer
            (200,000 )
Convertible debentures issued (repaid)
            950,000  
Repayments of bridge loans
            (500,000 )
Proceeds (repayment) of convertible debentures
            (1,658,160 )
Cash received of issuance of stock
            500,000  
Proceeds from issuance (repayment of)of revolving note, net
    (210,403 )     1,417,852  
Proceeds from issuance of convertible note, net
            1,430,500  
Debt issuance costs
    (282,005 )     (60,697 )
Repayment of convertible debenture
    (500,000 )     (100,000 )