Untitled Page




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

Form 10-KSB

[X]     ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2006

[   ]     TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________.

Commission file number:  33-23617

Material Technologies, Inc.
(Name of small business issuer in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)

95-4622822
(I.R.S. Employer
Identification No.)

11661 San Vicente Boulevard, Suite 707
Los Angeles, California
(Address of principal executive offices)


90049
(Zip Code)


Issuer’s telephone number    (310) 208-5589
Securities registered under Section 12(g) of the Exchange Act:

Common stock, par value $0.001
(Title of class)


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

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

          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.    The issuer’s revenues for the year ended December 31, 2006 were $156,153.

          State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of a specified date within the past 60 days.  (See definition of affiliate in rule 12b-2 of the Exchange Act.)  $59,189,514, based on the closing price of $1.65 for our common stock on March 27, 2007.

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

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











(APPLICABLE ONLY TO CORPORATE REGISTRANTS)

          State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date.  As of March 27, 2007, there were 113,200,276 shares of our Class A common stock issued, and 82,087,898 shares outstanding.  As of March 27, 2007, there were 600,000 shares of our Series B Common Stock issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

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

          Transitional Small Business Disclosure Format (check one):  Yes _____     No     X



























2






Material Technologies, Inc.

TABLE OF CONTENTS


PART I...............................................................................................................................................
2
  
ITEM 1 – DESCRIPTION OF BUSINESS.......................................................................................
2
ITEM 2 – DESCRIPTION OF PROPERTY......................................................................................
7
ITEM 3 – LEGAL PROCEEDINGS..................................................................................................
7
ITEM 4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
9
PART II.............................................................................................................................................
  
ITEM 5 – MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...
9
ITEM 6 – MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.....
24
ITEM 7 – FINANCIAL STATEMENTS...........................................................................................
33
ITEM 8 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                 ACCOUNTING AND FINANCIAL DISCLOSURE......................................................
33
ITEM 8A – CONTROLS AND PROCEDURES...............................................................................
34
ITEM 8B – OTHER INFORMATION..............................................................................................
35
  
PART III............................................................................................................................................
38
  
ITEM 9 – DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS
                AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(a)
                OF THE EXCHANGE ACT..............................................................................................
38
ITEM 10 – EXECUTIVE COMPENSATION...................................................................................
41
ITEM 11 – SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND...................
                  MANAGEMENT AND RELATED STOCKHOLDER MATTERS.................................
46
ITEM 12 – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............................
47
ITEM 13 – EXHIBITS.......................................................................................................................
48
ITEM 14 – PRINCIPAL ACCOUNTANT FEES AND SERVICES.................................................
53
















1






PART I

          This Annual Report includes forward-looking statements within the meaning of the Securities Exchange Act of 1934 (the “Exchange Act”).  These statements are based on management’s beliefs and assumptions, and on information currently available to management.  Forward-looking statements include the information concerning possible or assumed future results of operations of the Company set forth under the heading “Management’s Discussion and Analysis of Financial Condition or Plan of Operation.”  Forward-looking statements also include statements in which words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “estimate,” “consider” or similar expressions are used.

          Forward-looking statements are not guarantees of future performance.  They involve risks, uncertainties and assumptions.  The Company’s future results and shareholder values may differ materially from those expressed in these forward-looking statements.  Readers are cautioned not to put undue reliance on any forward-looking statements. 

          Throughout this Annual Report, numbers representing shares of our Class A common stock have been adjusted to reflect the 1-for-300 reverse stock split effective November 8, 2006.

ITEM 1 – DESCRIPTION OF BUSINESS

Introduction

          We are engaged in research and development of metal fatigue detection, measurement, and monitoring technologies.  As such, we are developing several monitoring devices for metal fatigue detection and measurement. 

          Our efforts are dedicated to developing devices and systems that indicate the true status of fatigue damage in a metal component.  We have developed two products.  The first is a small, simple device that continuously integrates the effect of fatigue loading in a structural member, called a Fatigue Fuse.  The second is an instrument that detects very small growing fatigue cracks in metals, the Electrochemical Fatigue Sensor; it has demonstrated in the laboratory that it can detect cracks as small as 10 microns (0.0004 inches), which is smaller than any other practical crack detection technology, as acknowledged by the United States Air Force and confirmed by Rockwell Scientific Corporation.  We hold the patents on the Fatigue Fuse and license the technology on the Electrochemical Fatigue Sensor from the University of Pennsylvania.

          We have completed the technology to the point where we are now performing real world bridge inspections.  Additional development will continue for some period of time.

          We were formed as a Delaware corporation on March 4, 1997.  We are the successor to the business of Material Technology, Inc., a Delaware corporation, also doing business as Tensiodyne Scientific, Inc.  Material Technology, Inc. was the successor to the business of Tensiodyne Corporation that began developing the Fatigue Fuse in 1983.  Our two predecessors, Tensiodyne Corporation and Material Technology, Inc. were engaged in developing and testing the Fatigue Fuse and, beginning in 1993, developing the Electrochemical Fatigue Sensor.

          As of December 31, 2006, our investments in our subsidiary companies represented less than 10% of our total assets.  We have controlling interests in each of our subsidiary companies and members of our management also serve as officers and directors of each subsidiary.



2






Our Technologies

The Fatigue Fuse

          The Fatigue Fuse is designed to be affixed to a structure to give warnings at pre-selected percentages of the fatigue life that have been used up (i.e., how close to failure the structure has progressed).  It warns against a condition of widespread generalized cracking due to fatigue.

          The Fatigue Fuse is a thin piece of metal similar to the material being monitored.  It consists of a series of parallel metal strips connected to a common base, much as fingers are attached to a hand.  Each “finger” has a different geometric pattern, called “notches,” defining its boundaries.  Each finger incorporates an application-specific notch near the base.  By applying the laws of physics and fracture mechanics to determine the geometric contour of each notch, the fatigue life of each finger is finite and predictable.  When the fatigue life of a finger (Fuse) is reached, the Fuse breaks.

          By implementing different geometry for each finger notch in the array, different increments of fatigue life are observable.  Typically, notches will be designed to facilitate observing increments of fatigue life of 10% to 20%.  By mechanically attaching or bonding these devices to different areas of the structural member of concern, the Fuse undergoes the same fatigue history (strain cycles) as the structural member.  Therefore, breakage of a Fuse indicates that an increment of fatigue life has been reached for the structural member.  The notch and the size and shape of the notch concentrate energy on each finger.  The Fuse is intimately attached to the structural member of interest.  Therefore, the Fuse experiences the same strain and wear history as the member.  Methods are available for remote indication of Fuse fracturing.

          In a new structure, we generally assume there is no fatigue and can thus design the Fatigue Fuse for 100% of its life potential.  But in an existing structure, one that has experienced loading and wear, we must determine the fatigue status of that structural member so we can design the Fatigue Fuse to monitor the remaining fatigue life potential.

          We believe that the Fatigue Fuse is of value in monitoring aircraft, ships, bridges, conveyor systems, mining equipment, cranes, etc.  Little special training is needed to qualify individuals to report any broken segments of the Fatigue Fuse to the appropriate engineering authority for necessary action.  The success of the device is contingent upon our successful marketing of the Fatigue Fuse, and no assurance can be given that we will be able to overcome the obstacles relating to introducing a new product to the market.  To implement our ability to produce and market the Fatigue Fuse, we need substantial additional capital and no assurance can be given that this needed capital will be available.

The Electrochemical Fatigue Sensor (“EFS”)

          The EFS is a device that employs the principle of electrochemical/mechanical interaction of metals under repeated loading to find growing cracks.  It is an instrument that detects very small cracks and has the potential to determine crack growth rates.  The Electrochemical Fatigue Sensor has demonstrated in the laboratory that it can detect cracks as small as 10 microns (0.0004 inches), which is smaller than any other practical technology, as acknowledged by the United States Air Force and Rockwell Scientific Corporation.  We believe that nothing comparable to this instrument currently exists in materials technology.  We have inspected about fifteen bridges to date using this technology.




3






          The EFS functions by treating the location of interest (the target) associated with the structural member as an electrode of an electrochemical cell (similar to a battery).  By imposing a constant voltage-equivalent circuit as the control mechanism for the electrochemical reaction at the target surface, current flows as a function of stress action.  The EFS is always a dynamic process; therefore stress action is required, e.g. to measure a bridge structural member it is necessary that cyclic loads be imposed, such as normal traffic on the bridge would do.  The results are a specific set of current waveforms and amplitudes that characterize and indicate fatigue damage i.e., growing fatigue cracks.

Status of our Technologies

          Currently, our primary focus is on the development and commercialization of the EFS.

Status of the EFS

          The existence of very small growing cracks can be determined by EFS, and in this regard it appears superior in resolution to other current non-destructive testing techniques.  It has succeeded in regularly detecting growing cracks as small as 40 microns in a titanium alloy, in a laboratory environment, as verified by a scanning electronic microscope, and has proven to be capable of detecting cracks down to ten microns, as acknowledged by the Materials Laboratory at Wright Patterson Air Force on a titanium alloy and confirmed by evaluations at Rockwell Scientific Corporation on bridge grade steel.  This is much smaller than the capability of any other practical non-destructive testing method for structural components.  There is also a vast body of testing supporting successful use of this technology with selected aluminum alloys.  Within the past twelve months, we have successfully used EFS on fifteen highway bridges. We are now beginning the marketing of the EFS for bridges.

Status of the Fatigue Fuse

          The development of the Fatigue Fuse came first.  The inventor, Professor Maurice Brull, conducted the basic research at the University of Pennsylvania.  We conducted the advanced development, including variations of the adhesive bonding process, and fabricating a laboratory-grade remote recorder for finger separation events that constitute proper functioning of the Fatigue Fuse.  The next step, prototype evaluation, encompasses empirical tailoring of Fatigue Fuse parameters to fit the actual spectrum loading expected in specific applications, and needs to be done. The tests associated with further development of the Fatigue Fuse include full-scale structural tests with attached Fatigue Fuses.  A prototype of the Fatigue Fuse has been designed, fabricated, and successfully demonstrated.  The next tasks will be to prepare an analysis for more efficient selection of Fatigue Fuse parameters and to conduct a comprehensive test program to prove the ability of the Fatigue Fuse to accurately indicate fatigue damage when subjected to realistically large variations in measuring stresses and strains in fatiguing metal.  The final tasks prior to marketing will be an even larger group of demonstration tests.

          To date, certain organizations have included our Fatigue Fuse in test programs.  We have already completed the tests for welded steel civil bridge members conducted at the University of Rhode Island.  In 1996, Westland Helicopter, a British firm, tested the Fatigue Fuse on helicopters.  That test was successful with the legs of the Fatigue Fuses failing in sequence as predicted. At the present time we are applying Fatigue Fuses to several portable aluminum bridges for the U.S. Army.



4






          The Fatigue Fuse has been at this stage for the past several years as we have not had the necessary financial resources to finalize our development and commence marketing.  At the present time we have elected to defer future development of the Fatigue Fuse and apply our resources to pursue the EFS technology.

Commercial Markets for our Products and Technologies

          Our technology is applicable to many market sectors such as bridges and aerospace as well as ships, cranes, railways, power plants, nuclear facilities, chemical plants, mining equipment, piping systems, and heavy iron. This past year we have performed evaluations of bridges using our EFS technology in the states of Pennsylvania, Utah and New Jersey, as well as a railroad bridge in Pueblo, Colorado.

Application Of Our Technologies For Bridges

          Our EFS and Fatigue Fuse products primarily address the detection of fatigue in structures such as bridges.  In the United States alone there are more than 610,000 bridges of which over 260,000 are rated by the Federal Highway Administration as requiring major repair, rehabilitation, or replacement.  Our EFS and Fatigue Fuse products can be effectively used as fatigue detection devices for all metal bridges located within the United States.  Our detection devices also address maintenance problems associated with bridge structures.

          Although there are normal business imperatives, the bridge market is essentially macro-economically and government policy driven.  In our opinion, only technology can provide the solution.  The need for increased spending accelerates significantly each year as infrastructure ages.  The Federal government has mandated bridge repair and detection through the passage of the Intermodal Surface Transportation and Efficiency Act in 1991 and again in the $200 billion, 1998 Transportation Equity Act.  We have completed several contracts to install our fatigue detection products on bridge structures within the United States, and are in negotiations for several others.

Our Patent Protections

          We are the owner and/or assignee of four patents as follows:

Title

USPTO No.



  

Devise for Monitoring Fatigue Life

4,590,804

  

Method of Making a Device
for Monitoring Fatigue Life

4,639,997

  

Metal Fatigue Detector

5,237,875

  

Device for Monitoring the
Fatigue Life of a Structural
Member and a Method of
Making Same

5,319,982

  




5






Device for Monitoring the
Fatigue Life of a Structural
Member and a Method of
Making Same

5,425,274

  

Methods and Devices for
Electro Chemically
Determining Metal Fatigue
Status

5,419,201

  

Apparatus for and Method for
Interrogating a Fatigue Fuse

Provisional

  

Indicator for Fatigue Fuse

Provisional


Our Patents are Encumbered

          The patents described in the preceding section are pledged as collateral to secure the repayment of loans extended to us or indebtedness that we currently owe.  On August 30, 1986, we entered into a funding agreement with the Advanced Technology Center, whereby ATC paid $45,000 to us for the purchase of a royalty of 3% of future gross sales and 6% of sublicensing revenue.  The royalty is limited to the $45,000 plus an 11% annual rate of return.  The payment of future royalties was secured by equipment we used in the development of technology as specified in the funding agreement, however, no lien against our equipment or our patents in favor of ATC vested until we generated royalties from product sales.

          On May 4, 1987, we entered into a funding agreement with ATC whereby ATC provided $63,775 to us for the purchase of a royalty of an additional 3% of future gross sales and 6% of sublicensing revenue.  The agreement was amended August 28, 1987, and as amended, the royalty cannot exceed the lesser of (1) the amount of the advance plus a 26% annual rate of return or, (2) total royalties earned for a term of 17 years.  As with our first agreement with ATC, no lien or encumbrance against our assets, including our patents, vested in favor of ATC until we generated royalties from product sales.

          On September 28, 2006, we entered into an agreement with Ben Franklin Technology, the successor to ATC, to give Ben Franklin 3,334 shares of our common stock, valued at $40,000, in exchange for a general release of the above liabilities.

          On May 27, 1994, we borrowed $25,000 from Sherman Baker, one of our shareholders.  We gave Mr. Baker a promissory note due May 31, 2002 and we pledged our patents as collateral to secure the repayment of this note.  As of December 31, 2006, there is a first priority security interest in our patents as collateral for the repayment of the amounts we owe to Mr. Baker.  As additional consideration for this loan, we granted to Mr. Baker a 1% royalty interest in the Fatigue Fuse and a 0.5% royalty interest in the Electrochemical Fatigue Sensor.  We are in default of the repayment terms of the note held by Mr. Baker, and at December 31, 2006, we owe Mr. Baker $55,138 in principal and accrued interest.  Mr. Baker has not taken any action to foreclose his interest in the collateral and we are in discussions with Mr. Baker, with the expectation that we will cure any default in the note he holds and avoid any foreclosure of his security interest held in our patents.  We believe that although we have not yet cured our defaults on the loans to Mr. Baker, our current communications with him suggest that Mr. Baker does not have the



6






present intention of foreclosing on the patents as collateral or the pursuit of legal action against us to collect the balance due under our note.

Distribution of our Products

          Subject to available financing, we have and continue to exhibit the Electrochemical Fatigue Sensor, and to a lesser extent the Fatigue Fuse, at various trade shows and intend to also market our products directly to end users including certain state regulatory agencies charged with overseeing bridge maintenance, companies engaged in manufacturing and maintaining large ships and tankers, and the military.  Although we intend to undertake marketing, dependent on the availability of funds, within and without the United States, no assurance can be given that any such marketing activities will be implemented.

Competition

          Other technologies exist which identify cracks which may be the result of fatigue damage.  Single cracks larger than a minimum size can be found by nondestructive inspection methods such as dye penetrant, radiography, eddy current, acoustic emission, and ultrasonics.  Tracking of load and strain history, to subsequently estimate fatigue damage by computer processing, is possible with recording instruments such as strain gauges and counting accelerometers.  These methods have been used for over 40 years and also offer the advantage of having been accepted in the market, whereas our products remain largely unproven.  Companies marketing these alternate technologies include Magnaflux Corporation, Kraut-Kramer-Branson, Dunegan-Endevco, and Micro Measurements.  These companies have more substantial assets, greater experience, and more resources than us, including, but not limited to, established distribution channels and an established customer base.  The familiarity and loyalty to these technologies may be difficult to dislodge.  Because we are still in the development stage, we are unable to predict whether our technologies will be successfully developed and commercially attractive in potential markets.

Employees

          We have four employees, Robert M. Bernstein, our President, Chief Executive Officer and Chief Financial Officer, a secretary, one part-time engineer, and an office manager.  In addition, we retain consultants for specialized work.

ITEM 2 – DESCRIPTION OF PROPERTY

Corporate Office

          We lease an office at 11661 San Vicente Blvd., Suite 707, Los Angeles, California, 90049.  The space consists of 830 square feet and will be adequate for our current and foreseeable needs.  The total rent is payable at $2,582 per month on a month-to-month basis.  Either party may cancel the lease on 30 days notice.

ITEM 3 – LEGAL PROCEEDINGS

          On March 8, 2006, Stephen Forrest Beck filed a lawsuit against us and our President, Robert M. Bernstein, in the Superior Court of the State of California, County of Los Angeles, Case No. SC088898, titled Stephen Forrest Beck v. Material Technologies, Inc. and Robert M. Bernstein.  Mr. Beck alleged breach of contract and sought damages for prior and future loss of



7






earnings, plus the issuance or value of shares of our Class A common stock to which he believed he was entitled, plus interest.  He also sought a substantial number of shares he believed was owed to him as part of an anti-dilution provision in his contract.  On December 27, 2006, we entered into a Settlement Agreement and Release, as well as Irrevocable Escrow Instructions, to settle the lawsuit.  As consideration under the settlement, we issued 5,000,000 shares of our common stock to Mr. Beck, with said shares to be held by an escrow agent and distributed to Mr. Beck monthly with a trading limit equal to eight percent (8%) of the previous month’s trading volume for our common stock, until Mr. Beck has received a total of $800,000.  In addition, Mr. Beck received $44,000 cash and will, after future conditions are met, receive 1,895,000 shares of our common stock and will have anti-dilution rights on those shares to maintain his percentage ownership for an agreed-upon period of time.

          On June 15, 2005, we filed a Complaint in the Los Angeles Superior Court, State of California, case number BC336689, against Gem Advisors, Inc., GEM Global Emerging Markets, and Global Emerging Markets of North America, Inc., seeking a declaration regarding certain agreements we entered into with the parties.  We did not seek monetary damages.  On November 16, 2005, Gem Advisors, Inc. filed an Answer and Cross-Complaint, seeking approximately $1.9 million in damages arising out of finders fees for certain transactions.  On November 30, 2005, default judgments were entered against the other defendants who failed to respond to our Complaint.  In September 2006, this case was dismissed as to all parties because the principal terms of a settlement agreement have been reached.  As of the date of this Annual Report, we have not yet executed a formal settlement agreement.

          In the ordinary course of business, we may be from time to time involved in various pending or threatened legal actions.  The litigation process is inherently uncertain and it is possible that the resolution of such matters might have a material adverse effect upon our financial condition and/or results of operations.  However, in the opinion of our management, matters currently pending or threatened against us are not expected to have a material adverse effect on our financial position or results of operations.

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

          On October 30, 2006, stockholders owning a majority of our outstanding voting stock approved by written consent an amendment to our Certificate of Incorporation to effectuate a 1-for-300 reverse stock split of the outstanding Class A Common Stock.  Shareholders representing 1,221,987,850 of the 1,500,134,942 possible votes (before giving effect to the 1-for-300 reverse stock split), or 81.5%, approved the amendment.  There were no votes against the amendment, or withheld, and because the amendment was approved by written consent, there were no abstentions or broker non-votes.









8






PART II

ITEM 5 – MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information

          Our common stock is quoted on the OTC Bulletin Board under the symbol “MTTG.”  For the periods indicated, the following table sets forth the high and low bid prices per share of common stock, adjusted to reflect the 1-for-300 reverse stock split effective November 8, 2006, as provided by the Nasdaq Stock Markets, Inc.  These prices represent inter-dealer quotations without retail markup, markdown, or commission and may not necessarily represent actual transactions.

High

Low



  

Fiscal year ended December 31, 2005:

First Quarter.....................................................

$675.00

$375.00

Second Quarter................................................

$495.00

$300.00

Third Quarter...................................................

$738.00

$225.00

Fourth Quarter..................................................

$720.00

$45.00

  

Fiscal year ended December 31, 2006:

First Quarter.....................................................

$84.00

$24.00

Second Quarter................................................

$102.00

$24.00

Third Quarter...................................................

$29.55

$9.60

Fourth Quarter..................................................

$13.00

$10.20

  

Fiscal year ended December 31, 2007:

First Quarter (through February 28, 2007)

$2.85

$1.21

  

          The Securities Enforcement and Penny Stock Reform Act of 1990 requires additional disclosure relating to the market for penny stocks in connection with trades in any stock defined as a penny stock.  The Commission has adopted regulations that generally define a penny stock to be any equity security that has a market price of less than $5.00 per share, subject to a few exceptions which we do not meet.  Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the risks associated therewith.

Holders

          As of December 31, 2006 and March 27, 2007, there were 93,819,289 and 113,200,276  shares, respectively, of our Class A common stock issued, and 73,179,015 and 82,087,898 shares, respectively, of our Class A common stock outstanding and held of record by approximately 2,300 holders of record.  As of December 31, 2006 and March 27, 2007, there were 600,000 shares of our Class B common stock issued and outstanding and held by one shareholder.  The number of record holders was determined from the records of our transfer agent and does not include beneficial owners of common stock whose shares are held in the names of various security brokers, dealers, and registered clearing agencies.  The transfer agent of our common



9






stock is Interwest Transfer Company, Inc., 1981 East 4800 South, Suite 100, Salt Lake City, Utah 84117.

Dividends

          We have never declared or paid any cash dividends on our common stock.  We do not anticipate paying any cash dividends to stockholders in the foreseeable future.  In addition, any future determination to pay cash dividends will be at the discretion of the Board of Directors and will be dependent upon our financial condition, results of operations, capital requirements, and such other factors as the Board of Directors deem relevant.

Securities Authorized for Issuance under Equity Compensation Plans

          On April 18, 2006, our Board of Directors approved the 2006 Non-Qualified Stock Grant and Option Plan (the “2006 Plan”) with 100,000 shares of our common stock available for issuance under the plan.  The plan offers selected employees, directors, and consultants an opportunity to acquire our common stock, and serves to encourage such persons to remain employed by us and to attract new employees.  As of December 31, 2006, we had issued 83,820 shares of common stock under the plan.  As of March 27, 2007, we have issued all 100,000 shares of common stock under the plan.

          On December 1, 2006, our Board of Directors approved the 2006/2007 Non-Qualified Company Stock Grant and Option Plan (the “2006/2007 Plan”) with 3,000,000 shares of our common stock available for issuance under the plan.  The plan offers selected employees, directors, and consultants an opportunity to acquire our common stock, and serves to encourage such persons to remain employed by us and to attract new employees.  As of December 31, 2006, we had not issued any options or shares of common stock under the plan.  As of March 27, 2007, we have issued zero options and 149,820 shares of common stock under the plan.

          As of December 31, 2006, the plan information is as follows:

Plan Category

Number of Securities to
be issued upon exercise of
outstanding options,
warrants and rights



(a)

Weighted-average
exercise price of
outstanding options,
warrants and rights



(b)

Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
(c)

Equity compensation
plans approved by
security holders

n/a

n/a

n/a


Equity compensation
plans not approved by
security holders

35,180,001

$0.14

3,016,180

Total

35,180,001

$0.14

3,016,180







10






Recent Sales of Unregistered Securities

Golden Gate and La Jolla Convertible Debenture and Warrants

          To obtain funding for our ongoing operations, we entered into a Securities Purchase Agreement with Golden Gate Investors, Inc. on December 16, 2005 for the sale of a convertible debenture.  These investment documents have been amended numerous times pursuant to which we increased the principal amount of the debenture to $1,000,000, provided that previous amounts provided to us by Golden Gate ($40,000) were applied to the purchase price.  Golden Gate is required to immediately wire to us the remainder of the purchase price ($1,000,000 less the sum of all amounts previously advanced to us) upon the effectiveness of a registration statement covering the underlying shares of common stock and receipt of 66,667 shares of our Class A common stock in escrow.

          As of the date of this Annual Report, as a result of recent interpretations of Rule 415 by the Securities and Exchange Commission, we have not been successful in getting a registration statement effective.  On September 1, 2006, we withdrew our registration statement and are in the process of negotiating an amendment to these investment documents with Golden Gate.

          The debenture bears interest at 5¼%, matures three years from the date of issuance, and is convertible into our Class A common stock, at the holder's option.  The conversion price of the convertible debenture is the lesser of (i) $210.00, (ii) eighty percent of the average of the three lowest volume weighted average prices during the twenty (20) trading days prior to the conversion or (iii) eighty percent of the volume weighted average price on the trading day prior to the conversion.  Accordingly, there is no limit on the number of shares into which the debenture may be converted.  Golden Gate has agreed that, beginning in the first full calendar month after the registration statement is declared effective, it shall convert at least 10%, but no more than 40%, of the debenture per calendar month, provided that the common stock is available, registered and freely tradable; provided that, we may reduce the monthly maximum conversion from 40% to 6% for any three calendar months during the term of the debenture upon ten business days notice prior to the first day of the applicable calendar month.  However, in the event that our volume weighted average price is less than (i) $15.00 or (ii) the lowest price at which any of the 66,667 additional shares which the investor has permitted us to register in the registration statement are issued or sold, we shall have the option to do one of the following: (a) redeem that portion of the Debenture that Holder elected to convert, plus any accrued and unpaid interest, at 108% of such amount, or (b) increase the Discount Multiplier (as defined therein) to 99% on that portion of the Debenture that the holder elected to convert, or (c) one time during any six month period, not permit any Debenture conversions by holder for a period of 60 days.  If we elect to prepay the debenture, Golden Gate may withdraw its conversion notice. 

          On June 9, 2006, we and Golden Gate entered into an Addendum to Convertible Debenture, Warrant to Purchase Common Stock and Securities Purchase Agreement pursuant to which Golden Gate agreed to purchase, and we agreed to sell, three additional convertible debentures, each in the principal amount of $1,000,000, on the same terms and conditions set forth above.  Each additional debenture will be issued no later than 60 days after the remaining unconverted principal amount of the prior debenture issued to Golden Gate is less than $600,000.  Golden Gate will pay $100,000 for each additional convertible debenture on the day of issuance of such debenture, with the remaining balance to be funded upon the effectiveness of the registration statements we are obligated to file covering the shares underlying each debenture.  In the event that Golden Gate fails to purchase any of the three additional debentures, it shall pay liquidated damages to us in the amount of $100,000.




11






          We entered into a Securities Purchase Agreement with La Jolla Cove Investors, Inc., an affiliate of Golden Gate, dated as of May 30, 2006, as amended by that certain Addendum to Warrant to Purchase Common Stock dated as of June 12, 2006, for the purchase of warrants to purchase 166,667 shares of Class A common stock for a prepayment of $50,000.  La Jolla has agreed that, beginning in the first full calendar month after the registration statement is declared effective, it shall exercise 4,167 warrants per week for 16 consecutive weeks until all warrants are exercised.  This mandatory exercise feature was agreed to between the parties because we believe that we require weekly funding in the amount of $12,500 over the 16 weeks following the effectiveness of this registration statement, in addition to the aggregate of $1,000,000 in proceeds for the purchase price of the Debentures which will all be funded within 5 days of effectiveness, for our operations.  The warrant is exercisable into 166,667 shares of Class A common stock at an exercise price of $3.00 per share, provided that, the exercise price shall be equal to the price at which we sell common stock (through direct stock issuances, and/or conversions or exercises of convertible securities, but not including Class A common stock issued as compensation for services performed on our behalf) during the 30 days prior to the applicable exercise date.

          Golden Gate and La Jolla have contractually agreed to restrict their ability to convert its debenture or exercise its warrants and receive shares of our Class A common stock such that the number of shares of common stock held by them and their affiliates after such conversion or exercise does not exceed 9.99% of the then issued and outstanding shares of Class A common stock.  

Other Convertible Debentures and Warrants

          On October 27, 2006, we entered into a series of agreements with our existing debenture holders, namely Palisades Capital, LLC, Hyde Investments, Ltd., and Livingston Investments, Ltd., whereby we extended the due date on over $2,100,000 in debentures for two years from December 31, 2006 to December 31, 2008.

          Pursuant to the terms of a Settlement Agreement and General Release, we agreed to:

(i)        release each of the debenture holders from all liability arising prior to the date thereof;
  
(ii) effectuate a 1-for-300 reverse split of our Class A common stock;
(iii) issue warrants to purchase an aggregate of 35 million post-split shares of Class A common stock at an exercise price of $0.001;
  
(iv) issue up to 30 million post-split shares of Class A common stock to our President and director, Robert M. Bernstein, as consideration for the receipt of a general release from him and execution of a new employment agreement;
  
(v) issue up to 40 million post-slit shares of Class A common stock to certain third-parties designated by Mr. Bernstein; and
  
(vi) execute an amendment to each of the outstanding debentures held by the debenture holders to (a) extend the due date to December 31, 2008, (b) increase the principal balance by fifteen percent (15%), (c) maintain the conversion price at the lower of $0.10 or 50% of the market price after the reverse stock split,


12






            (d) limit the number of shares we can issue pursuant to a registration statement on Form S-8, (e) eliminate the 75 day waiting requirement between the time we receive a notice of conversion and the time we must deliver the applicable shares, (f) confirm that a default under one of the debentures shall be considered a default under all of them, (g) deposit 9.9% of our issued and outstanding stock with an escrow agent to deliver upon a conversion by the debenture holders, and to maintain that balance with the escrow agent, (h) limit the conversion so that no holder may own more than 4.99% of our outstanding Class A common stock at any one time, and (i) add $60,000 to the principal balance owed to Palisades Capital, LLC.

Other Unregistered Securities Issued During 2006 and 2005

2006

          On January 5, 2006, we issued a total of 950 shares of our common stock, restricted in accordance with Rule 144, to two individuals for cash consideration of $14,450.  The issuances were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the shareholders are sophisticated investors who are familiar with our operations.

          On January 10, 2006, we issued a total of 4,920 shares of our common stock, restricted in accordance with Rule 144, to three individuals for services valued at $236,200.  The issuances were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the shareholders are sophisticated investors who are familiar with our operations.

          On January 16, 2006, we issued a total of 834 shares of our common stock, restricted in accordance with Rule 144, to one investor for services valued at $40,000.  The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the shareholder is a sophisticated investor who is familiar with our operations.

          On January 16, 2006, we issued a total of 12,305 shares of our common stock, restricted in accordance with Rule 144, to one foreign investor in an offshore transaction.  Of these shares, 11,688 were issued for no additional consideration to reduce the average per-share price paid by this investor pursuant to an agreement.  The remaining 618 shares were issued for cash consideration of $17,684.  The issuances were exempt from registration pursuant to Regulation S of the Securities Act of 1933, and the shareholders are sophisticated, foreign investors who are familiar with our operations.

          On January 17, 2006, we issued a total of 2,084 shares of our common stock, restricted in accordance with Rule 144, to one individual for cash consideration of $31,250.  The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the shareholder is a sophisticated investor who is familiar with our operations.

          On January 18, 2006, we issued a total of 46,964 shares of our common stock, without restrictive legend pursuant to Rule 144(k) of the Securities Act of 1933, to five investors upon the cashless exercise of warrants.  The issuances were exempt from registration pursuant to Rule 4(2) of the Securities Act of 1933 and the investors were accredited.

          On January 20, 2006, we issued a total of 334 shares of our common stock, restricted in accordance with Rule 144, to one foreign investor in an offshore transaction for cash consideration of $5,480.  The issuance was exempt from registration pursuant to Regulation S of



13






the Securities Act of 1933, and the shareholder is a sophisticated, foreign investor who is familiar with our operations.

          On January 25, 2006, we issued a total of 13,334 shares of our common stock, restricted in accordance with Rule 144, to one investor for services valued at $512,000.  The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the shareholder is a sophisticated investor who is familiar with our operations.

          On January 25, 2006, we converted 1,420,000 shares of Series D preferred stock to 4,734 shares of Class A common stock.

          On January 25, 2006, we issued a total of 58,221 shares of our common stock, without restrictive legend pursuant to Rule 144(k) of the Securities Act of 1933, to seven investors upon the cashless exercise of warrants, and one investor upon the cashless conversion of preferred stock.  The issuances were exempt from registration pursuant to Rule 4(2) of the Securities Act of 1933 and the investors were accredited.

          On February 1, 2006, we issued a total of 3,334 shares of our common stock, restricted in accordance with Rule 144, to one investor for services valued at $120,000.  The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the shareholder is a sophisticated investor who is familiar with our operations.

          On February 8, 2006, we issued a total of 3,667 shares of our common stock, restricted in accordance with Rule 144, to two investors for services valued at $108,000.  The issuances were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the shareholders are sophisticated investors who are familiar with our operations.

          On February 13, 2006, we issued a total of 4,011 shares of our common stock, restricted in accordance with Rule 144, to one individual for services valued at $173,244.  The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the shareholder is a sophisticated investor who is familiar with our operations.

          On February 21, 2006, we issued a total of 167 shares of our common stock, restricted in accordance with Rule 144, to one foreign investor in an offshore transaction for cash consideration of $2,500.  The issuance was exempt from registration pursuant to Regulation S of the Securities Act of 1933, and the shareholder is a sophisticated, foreign investor who is familiar with our operations.

          On February 22, 2006, we issued a total of 167 shares of our common stock, restricted in accordance with Rule 144, to one individual for services valued at $5,600.  The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the shareholder is a sophisticated investor who is familiar with our operations.

          On February 23 and 24, 2006, we issued a total of 2,334 shares of our common stock, restricted in accordance with Rule 144, to one individual for services valued at $72,800.  The issuances were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the shareholder is accredited.

          On February 24, 2006, we issued a total of 5,686 shares of our common stock, restricted in accordance with Rule 144, to one foreign investor in an offshore transaction for cash consideration of $13,502.  The issuance was exempt from registration pursuant to Regulation S of



14






the Securities Act of 1933, and the shareholder is a sophisticated, foreign investor who is familiar with our operations.

          On March 1, 2006, we issued a total of 167 shares of our common stock, restricted in accordance with Rule 144, to one individual for services valued at $5,600.  The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the shareholder is a sophisticated investor who is familiar with our operations.

          On March 7, 2006, we issued a total of 6,702 shares of our common stock, restricted in accordance with Rule 144, to one foreign investor in an offshore transaction for cash consideration of $38,200.  The issuance was exempt from registration pursuant to Regulation S of the Securities Act of 1933, and the shareholder is a sophisticated, foreign investor who is familiar with our operations.

          On March 10, 2006, we issued a total of 13,000 shares of our common stock, restricted in accordance with Rule 144, to one investor for services valued at $343,200.  The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the shareholder is a sophisticated investor who is familiar with our operations.

          On March 23, 2006, we issued a total of 6,667 shares of our common stock, restricted in accordance with Rule 144, to one investor for services valued at $336,000.  The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the shareholder is a sophisticated investor who is familiar with our operations.

          On March 24, 2006, we issued a total of 634 shares of our common stock, restricted in accordance with Rule 144, to two foreign investors in an offshore transaction for cash consideration of $9,458.  The issuances were exempt from registration pursuant to Regulation S of the Securities Act of 1933, and the shareholders are sophisticated, foreign investors who are familiar with our operations.

          On March 24, 2006, we issued a total of 6,667 shares of our common stock, restricted in accordance with Rule 144, to one individual for a note receivable valued at $100,000.  The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the shareholder is a sophisticated investor who is familiar with our operations.

          On March 30, 2006, we issued a total of 6,667 shares of our common stock, restricted in accordance with Rule 144, to one individual for a note receivable valued at $100,000.  The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the shareholder is a sophisticated investor who is familiar with our operations.

          On April 3, 2006, we issued 3,334 shares of our Class A common stock, restricted in accordance with Rule 144, to one shareholder for services rendered.  The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the shareholder was accredited.

          On April 7, 2006, we issued a total of 5,533 shares of our Class A common stock, restricted in accordance with Rule 144, to one investor for cash consideration of $29,878.  The issuance was exempt from registration pursuant to Regulation S promulgated under the Securities Act of 1933, and the investor was accredited.




15






          On April 12, 2006, we issued a total of 6,667 shares of our Class A common stock, restricted in accordance with Rule 144, to one investor for a note receivable of $100,000.  The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the shareholder was accredited.

          On April 25, 2006, we issued a total of 6,667 shares of our Class A common stock, restricted in accordance with Rule 144, to one investor for a note receivable of $100,000.  The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the shareholder was accredited.

          On April 27, 2006, we issued a total of 13,334 shares of our Class A common stock, restricted in accordance with Rule 144, to one investor for cash consideration of $200,000.  The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the investor is a sophisticated investor who is familiar with our operations.

          On May 9, 2006, we issued a total of 834 shares of our Class A common stock, restricted in accordance with Rule 144, to one shareholder for services rendered valued at $50,000.  The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the shareholder is a sophisticated investor who is familiar with our operations.

          On May 11, 2006, we issued a total of 6,667 shares of our Class A common stock, restricted in accordance with Rule 144, to one shareholder in exchange for a note receivable in the amount of $1,000,000.  The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the shareholder is a sophisticated investor who is familiar with our operations.

          On June 2, 2006, we executed a Securities Purchase Agreement with La Jolla Cove Investors, Inc.  Under the terms of the Agreement, in exchange for a warrant premium of $50,000, we issued to La Jolla warrants to purchase up to 66,667 shares of our Class A common stock.  The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the investor was accredited.

          On or about June 19, 2006, a total of 5,850 shares were purchased from escrow by Birchington Investments Limited for cash consideration of $17,550.  The shares were purchased pursuant to the downside price protection provisions of our agreement with Birchington.  The shares were previously issued but not outstanding.  The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the investors were accredited.

          On June 26, 2006, we issued a total of 1,667 shares of our Class A common stock, restricted in accordance with Rule 144, to one shareholder for services rendered on our behalf valued at $40,000.  The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the shareholder is a sophisticated investor who is familiar with our operations.

          On June 26, 2006, we issued a total of 6,667 shares of our Class A common stock, restricted in accordance with Rule 144, to one investor for a note receivable of $100,000.  The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the shareholder was accredited.

          On June 28, 2006, we issued a total of 6,667 shares of our Class A common stock, restricted in accordance with Rule 144, to one investor for a note receivable of $100,000.  The



16






issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the shareholder was accredited.

          On July 25, 2006, we issued 834 shares of our Class A common stock, restricted in accordance with Rule 144, to one shareholder for services rendered valued at $20,000.  The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the shareholder was sophisticated.

          On July 31, 2006, we issued a total of 2,583 shares of our Class A common stock, restricted in accordance with Rule 144, to five foreign investors in offshore transactions for cash consideration of $19,454.  The issuances were exempt from registration pursuant to Regulation S of the Securities Act of 1933, and the shareholders were sophisticated, foreign investors who were familiar with our operations.

          On August 11, 2006, we issued a total of 8,334 shares of our Class A common stock, without restrictive legend, to one investor upon the conversion of $100,000 in principal and interest outstanding on a convertible debenture.  The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the shareholder was accredited.

          On August 15, 2006, we issued 878 shares of our Class A common stock, restricted in accordance with Rule 144, to one shareholder for services rendered valued at $21,060.  The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the shareholder was accredited.

          On August 18, 2006, pursuant to an Acquisition Agreement we entered into on August 18, 2006, with UTEK CORPORATION, a Delaware corporation, and Materials Monitoring Technologies, Inc., a Florida corporation, we issued an aggregate of 125,436 shares of our common stock with 119,164 shares being issued to UTEK and 6,272 shares being issued to Aware Capital Consultants, all restricted in accordance with Rule 144, valued at $2,634,153, in exchange for 100% of Materials Monitoring’s outstanding stock.  The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and both UTEK and Aware Capital Consultants were sophisticated investors.

          On August 23, 2006, we issued 12,544 shares of our Class A common stock, restricted in accordance with Rule 144, to three shareholders for services rendered valued at $263,411.  The issuances were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the shareholders were sophisticated.

          On August 25, 2006, we issued 3,334 shares of our Class A common stock, restricted in accordance with Rule 144, to one shareholder for services rendered valued at $70,000.  The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the shareholder was sophisticated.

          On August 31, 2006, we issued 40,000 shares of our Class A common stock, restricted in accordance with Rule 144, to one shareholder for consideration of a 90 day promissory note in the principal amount of $999,600.  The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the shareholder was accredited.

          On September 11, 2006, we issued 21,500 shares of our Class A common stock, restricted in accordance with Rule 144, to three shareholders to pay off loans to us totaling



17






$450,697.  The issuances were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the shareholders were sophisticated.

          On September 11, 2006, we issued 3,334 shares of our Class A common stock, restricted in accordance with Rule 144, to one shareholder for services rendered valued at $40,000.  The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the shareholder was sophisticated.

          On September 29, 2006, we issued 67 shares of our Class A common stock, restricted in accordance with Rule 144, to one shareholder for services rendered valued at $800.  The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the shareholder was sophisticated.

          On September 29, 2006, we issued 3,334 shares of our Class A common stock, restricted in accordance with Rule 144, to one shareholder, in settlement of a dispute valued at $40,000.  The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the shareholder was sophisticated.

          On October 12, 2006, we issued 600 shares of our Class A Common Stock, valued at $7,380, to one shareholder pursuant to the downside price protection clause in the agreement with Birchington.  The issuance of the shares was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the holder is a sophisticated investor familiar with our operations.

          On October 27, 2006, pursuant to the terms of a Settlement Agreement and General Release, we entered into an Amendment dated October 27, 2006 to the Class A Senior Secured Convertible Debenture held by each of Palisades Capital, LLC, Hyde Investments, Ltd., and Livingston Investments, Ltd.  In addition, we entered into a Warrant Agreement with each of the parties above, plus GCH Capital, Ltd., to purchase an aggregate of 35,000,000 post-split shares of our Class A common stock at an exercise price of $0.001.  The execution of the debenture amendments and the issuance of the warrants was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the holders were each accredited.

          On November 10, 2006, we issued 20,000 shares of our Class A Common Stock to a single shareholder as collateral for a loan.  The issuance of the shares was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the holder is a sophisticated investor familiar with our operations.

          On November 22, 2006, we issued 200,000 shares of our Class A common stock to Livingston Investments, Ltd. upon the conversion of $20,000 in outstanding principal on a convertible debenture.  The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the shareholder was accredited.

          On November 21, 2006, we entered into a Stock Grant and General Release Agreement (the “Stock Grant Agreement”) with Robert M. Bernstein, for the purpose of showing our appreciation for Mr. Bernstein’s work over the past several years.  Under the Stock Grant Agreement, we issued 30,000,000 shares of our Class A common stock, restricted in accordance with Rule 144 and valued at $1,478,000, to Robert M. Bernstein, our Chief Executive Officer and Chief Financial Officer, as a bonus for his work for us over the past years and in exchange for a full release from any amounts we may owe Mr. Bernstein as of the date of the Stock Grant Agreement.  This issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the holder was accredited.



18






          On November 29, 2006, we issued 100,000 shares of our Class A Common Stock to two employees for services rendered, valued at $479,200.  The issuance of the shares was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the holder is a sophisticated investor familiar with our operations.

          On December 27, 2006, as consideration under the Settlement Agreement and Release entered into with Stephen Forrest Beck, we issued an aggregate of five million (5,000,000) shares to Mr. Beck, with said shares to be held by an escrow agent and distributed to Mr. Beck monthly with a trading limit equal to eight percent (8%) of the previous month’s trading volume for our common stock, until Mr. Beck has received a total of $800,000.  In addition, after future conditions are met, Mr. Beck will receive 1,895,000 shares of our common stock and will have anti-dilution rights on those shares to maintain his percentage ownership for an agreed-upon period of time.  We issued five million (5,000,000) shares to Mr. Beck to be held in escrow until the conditions are met with respect to the anti-dilution shares.  These issuances were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and Mr. Beck is an accredited investor.

          On December 28, 2006, we issued 6,255,070 shares of our common stock to UTEK, pursuant to the anti-dilution provisions of the Acquisition Agreement we entered into with UTEK dated August 18, 2006.  UTEK was entitled to these shares due to the 35,850,000 shares we previously issued to our officers and directors.  This issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and UTEK is a sophisticated investor familiar with our operations.

          On December 28, 2006, we issued 34,641,311 shares of our common stock, valued at $1,668,000, to approximately fifty (50) different individuals and entities that have provided consulting services or advisory services to, or have been inventors for the company.  These issuances were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the holders are sophisticated investors familiar with our operations.

          On December 29, 2006, we issued 300,000 shares of our Class A Common Stock to one shareholder for services rendered valued at $1,080,000.  The issuance of the shares was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the holder is a sophisticated investor familiar with our operations.

2005

          On December 30, 2005, we issued 834 shares of our common stock for consulting services valued at $50,000.

          To obtain funding for our ongoing operations, we entered into a Securities Purchase Agreement with Golden Gate Investors, Inc. (“Golden Gate”) on December 16, 2005, as amended by that certain Addendum to Convertible Debenture, Warrant to Purchase Common Stock and Securities Purchase Agreement, and that certain Addendum to Convertible Debenture and Warrant to Purchase Common Stock, each dated as of December 16, 2005, for the sale of (i) $40,000 in convertible debentures and (ii) warrants to buy 13,334 shares of our common stock.  The investors provided us with an aggregate of $40,000 upon the execution of final definitive agreements.




19






          The debentures bear interest at 5 1/4%, mature three years from the date of issuance, and are convertible into our common stock, at the selling stockholder’s option.  The convertible debentures are convertible into the number of our shares of common stock equal to the dollar amount of the debentures being converted multiplied by 110, less the product of the conversion formula multiplied by 100 times the dollar amount of the debenture being converted, which is divided by the conversion formula.  The conversion formula for the convertible debentures is the lesser of (i) $210, (ii) eighty percent of the average of the three lowest volume weighted average prices during the twenty (20) trading days prior to the conversion or (iii) eighty percent of the volume weighted average price on the trading day prior to the conversion.  Accordingly, there is in fact no limit on the number of shares into which the debenture may be converted.  Golden Gate has agreed that, beginning in the first full calendar month after the registration statement is declared effective, it shall convert at least 5%, but no more than 10%, of the debentures per calendar month, provided that the common stock is available, registered and freely tradable; provided that, if, at any time during the applicable month, the volume weighted average price is below $30, Golden Gate is not obligated to convert any portion of the debenture during that month.  However, in the event that our volume weighted average price is less than $60, we will have the option to prepay the debenture at 130% rather than have the debenture converted.  If we elect to prepay the debenture, Golden Gate will withdraw its conversion notice.  In addition, the selling stockholder is obligated to exercise no less than 5%, and no more than 10%, of the outstanding warrant beginning in the first full month after the Securities and Exchange Commission declares this prospectus effective; provided that, if, at any time during the applicable month, the volume weighted average price is below $30, Golden Gate is not obligated to exercise any portion of the warrant during that month.  The warrant is exercisable into 13,334 shares of common stock at an exercise price of $327 per share. 

          The selling stockholder has contractually agreed to restrict its ability to convert or exercise its warrants and receive shares of our common stock such that the number of shares of common stock held by them and their affiliates after such conversion or exercise does not exceed 9.9% of the then issued and outstanding shares of common stock.

          On December 15, 2005, we issued an aggregate of 453 shares of our common stock to Lynx Consulting as compensation for investor relations services performed on behalf of our company pursuant that certain Investor Relations Services Agreement valued at $32,579.

          On December 12, 2005, we issued 1,771 shares of our common stock pursuant to a Regulation S offering for $25,352.

          On December 8, 2005, we issued 334 shares of our common stock for $2,000.

          On December 2, 2005, we issued 338 shares of our common stock pursuant to a Regulation S offering for $6,196.

          On November 28, 2005, we issued 302 shares of our common stock pursuant to a Regulation S offering for $4,900.

          On November 15, 2005, we issued 579 shares of our common stock pursuant to a Regulation S offering for $14,353.

          On November 9, 2005, we issued 986 shares of our common stock pursuant to a Regulation S offering for $35,207.




20






          On October 31, 2005, we issued 644 shares of our common stock to various shareholders of Matech Aerospace (a majority owned subsidiary of the Company) as compensation for the subsidiary’s inactive status, valued at $67,528.

          On October 28, 2005, we issued 287 shares of our common stock for legal services valued at $34,400.

          On October 27, 2005, we issued 1,367 shares of our common stock to a consultant for media services valued at $123,000.

          On October 14, 2005, we issued 234 shares of our common stock pursuant to a Regulation S offering for $12,565.

          On October 11, 2005, we issued 14 shares of our common stock for cash proceeds of $2,000.

          On October 5, 2005, we issued 209 shares of our common stock pursuant to a Regulation S offering for $11,302.

          On October 4, 2005, we issued 167 shares of our common stock to a consultant for services rendered valued at $67,500.

          On October 4, 2005, we committed to issue 100,451 shares to warrant holders in connection with their cashless exercise of 103,334 warrants.  Such shares were issued in January, 2006.

          On October 3, 2005, we issued 1,042 shares of our common stock for cash proceeds of $156,250. 

          On October 1, 2005, we cancelled 7 outstanding shares for no consideration.

          On September 28, 2005, we issued a total of 300 shares of our Class A common stock to seven foreign investors in offshore transactions, for cash totaling $13,129, pursuant to the terms of stock purchase agreements.  The issuance was exempt from registration pursuant to Regulation S of the Securities Act of 1933, and the shareholders are sophisticated, foreign investors who are familiar with our operations. 

          On September 27, 2005, we issued a total of 26,000 shares of our Class A common stock to Birchington, in an offshore transaction, in exchange for 9,606,000 Ordinary Shares of Birchington, pursuant to the terms of that certain Stock Purchase Agreement dated September 27, 2005 (the “Stock Purchase Agreement”).  Of the shares of our Class A common stock issued to Birchington, 6,000 are held in escrow to be sold or returned to us pursuant to the terms of the Stock Purchase Agreement.  The issuance was exempt from registration pursuant to Regulation S of the Securities Act of 1933, and the shareholder is a sophisticated, foreign investor who is familiar with our operations.

          On September 27, 2005, we issued a total of 2,000 shares of our Class A common stock to an individual who provided us with consulting services in connection with the Birchington transaction set forth in that certain Stock Purchase Agreement dated September 27, 2005.  We valued the 22,000 shares issued in connection with the Birchington purchase (excluding the 6,000 shares held in escrow) at $1,921,200.



21






          On September 26, 2005, we issued a total of 3,000 shares of our Class A common stock to three officers and directors for services rendered as follows:  Bill Berks (1,667), John Goodman (667), and Joel Freedman (667).  These shares are subject to a 2-year lock-up agreement and were valued at $1,080,000.

          On September 22, 2005, we issued a total of 500 shares of our Class A common stock to sixteen foreign investors in offshore transactions, for cash totaling $26,971, pursuant to the terms of stock purchase agreements.  The issuance was exempt from registration pursuant to Regulation S of the Securities Act of 1933, and the shareholders are sophisticated, foreign investors who are familiar with our operations.

          On September 20, 2005, we issued a total of 21 shares of our Class A common stock to two foreign investors in offshore transactions, for cash totaling $1,468, pursuant to the terms of stock purchase agreements.  The issuance was exempt from registration pursuant to Regulation S of the Securities Act of 1933, and the shareholders are sophisticated, foreign investors who are familiar with our operations.

          On September 14, 2005, we issued 15,174 shares of our Class A common stock, subject to an eighteen-month resale restriction, to the University of Pennsylvania (“Penn”), in exchange for Penn’s waiver, valued at $7,733,848, of potential legal remedies under that certain License Agreement dated August 26, 1993, as amended by Amendment 1 dated December 17, 1997 (collectively, the “License Agreement”) and that certain Sponsored Research Agreement dated August 26, 1993, as amended by the Repayment Agreement dated December 17, 1997 (collectively, the “SRA/Repayment Agreement”), pursuant to the terms of that certain Workout Agreement dated August 31, 2005. 

          On September 7, 2005, we issued a total of 32 shares of our Class A common stock to four foreign investors in offshore transactions, for cash totaling $2,246, pursuant to the terms of stock purchase agreements.  The issuance was exempt from registration pursuant to Regulation S of the Securities Act of 1933, and the shareholders are sophisticated, foreign investors who are familiar with our operations.

          On August 3, 2005, we issued 834 shares of our common stock for prepaid consulting services valued at $525,000.

          On June 27, 2005, we issued 133,334 shares to be held in escrow in connection with a proposed loan transaction.  If the transaction is consummated, the 133,334 shares will be pledged as collateral against the loan.  The negotiations on the loan are ongoing and there is no assurance that the loan will be consummated.

          On June 23, 2005, we issued 1,000 shares of our common stock to another consultant in connection with the Birchington transaction.  The recipient of the 1,000 shares issued a check for $300 in addition to providing services.  We valued the 22,450 shares issued in connection with the Birchington purchase (excluding the 5,850 shares held in escrow) at $1,661,400. 

          On June 21, 2005, we returned to treasury 69,440 shares of our common stock that were previously held in escrow.  These shares were subsequently cancelled. 

          On May 17, 2005, we issued 27,300 shares of our common stock in exchange for purchasing 8,307,000 shares in Birchington Investments Limited.  Of the 27,300 shares issued,



22






19,500 were issued to Birchington subject to a one-year lock up agreement, 5,850 shares are being held in escrow and 1,950 shares were issued to a consultant in connection with the transaction. 

          On April 20, 2005, we issued 34 shares of our common stock to a shareholder pursuant to an agreement whereby all company shares held by him are locked up for one year.  We valued the 34 shares at $11,700, which was charged to operations. 

          On April 13, 2005 we issued 167 shares of our common stock to an employee valued at $54,000. The shares are subject to a two-year lock-up agreement. 

          On April 4, 2005 we issued 17 shares of our common stock to a consultant valued at $4,800.  The shares are subject to a two-year lock-up agreement. 

          On March 24, 2005, we issued 1,667 shares for consulting services. These shares are subject to a 2-year lock-up agreement and were valued at $580,000.

          On March 11, 2005, we issued 7 shares of our common stock through an exercise of warrants and received $1,000.

          On March 11, 2005, we issued 253 shares for consulting services. These shares are subject to a 2-year lock-up agreement and were valued at $90,000.

          On February 7, 2005, we issued 1,334 shares for consulting services. These shares are subject to a thirty-month lock-up agreement and were valued at $555,000.

          On January 14, 2005, we issued 1,667 shares through the conversion of 500,000 shares of our Series D preferred stock.

          Unless otherwise noted, all of the above offerings and sales were deemed to be exempt under rule 506 of Regulation D and Section 4(2) of the Securities Act of 1933, as amended.  No advertising or general solicitation was employed in offering the securities.  The offerings and sales were made to a limited number of persons, all of whom were accredited investors, business associates of our company or executive officers of our company, and transfer was restricted by us in accordance with the requirements of the Securities Act of 1933.  In addition to representations by the above-referenced persons, we have made independent determinations that all of the above-referenced persons were accredited or sophisticated investors, and that they were capable of analyzing the merits and risks of their investment, and that they understood the speculative nature of their investment.  Furthermore, all of the above-referenced persons were provided with access to our Securities and Exchange Commission filings.

Company Repurchases of Common Stock

          During the year ended December 31, 2006, we re-purchased a total of 2,740 shares of our Class A common stock for a total purchase price of $33,188.






23






ITEM 6 – MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

Disclaimer Regarding Forward Looking Statements

          Our Management’s Discussion and Analysis contains not only statements that are historical facts, but also statements that are forward-looking (within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934).  Forward-looking statements are, by their very nature, uncertain and risky.  These risks and uncertainties include international, national and local general economic and market conditions; demographic changes; our ability to sustain, manage, or forecast growth; our ability to successfully make and integrate acquisitions; raw material costs and availability; new product development and introduction; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; the loss of significant customers or suppliers; fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; and other risks that might be detailed from time to time in our filings with the Securities and Exchange Commission.

          Although the forward-looking statements in this Annual Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by them.  Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements.  You are urged to carefully review and consider the various disclosures made by us in this report and in our other reports as we attempt to advise interested parties of the risks and factors that may affect our business, financial condition, and results of operations and prospects.

Overview

          We research and develop technologies that detect and measure metal fatigue.  We have developed two products.  Our two products are the Fatigue Fuse and Electrochemical Fatigue Sensor.  We generate very little revenue from the sale of our products, and thus we are a development stage company.  We generate nominal revenue from research and development services provided to third parties, primarily one defense contractor.

          Our biggest challenge is funding the continued research and development of our products, and then the marketing of our products, until they generate sufficient revenue to support our operations.  We try to keep our overhead low and utilize outside consultants as much as possible in order to reduce expenses, and thus far we have been successful in raising enough capital through loans and the sale of our common stock to fund operations.  For the foreseeable future, we will continue to raise capital in this manner.

         Our consolidated financial statements are prepared using the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. We have sustained operating losses since its inception (October 21, 1983).  In addition, we have used substantial amounts of working capital in its operations.  Further, at December 31, 2006, the deficit accumulated during the development stage amounted to approximately $72,000,000.

          In view of these matters, realization of a major portion of the assets in the accompanying consolidated balance sheet is dependent upon our ability to meet its financing requirements and the success of its future operations.  During 2006, we received  approximately $500,000 under convertible debt borrowing agreements, $700,000 from the sale of shares of Class A common stock, and $500,000 through the acquisition of Monitoring.  We also continue to raise funds through the sale of its common stock through private offerings which management expects to continue in 2007. In addition in 2006, we received contracts to inspect certain bridges with three states which generated gross revenue of approximately $100,000.  The work relating to these three contracts was completed in November 2006. We have commenced to market its current technologies while continuing to development new methods and applications.  We believe that these sources of funds and current liquid assets will allow us to continue as a going concern through the end of 2007.  We will need to raise additional debt and/or equity capital to finance future activities beyond 2007.  However, no assurances can be made that current or anticipated future sources of funds will enable us to finance future periods’ operations.  In light of these circumstances, substantial doubt exists about our ability to continue as a going concern.  The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets or liabilities that might be necessary should we be unable to continue as a going concern.



24






Results of Operations for the Three Months Ended December 30, 2006 and 2005

Introduction

          Our revenues for the fourth quarter of 2006 were over fifty percent higher than the fourth quarter of 2005, and were mostly from the limited bridge tests we performed in the quarter.  Most of our research and development costs in both years are related to the recorded cost of stock issued to third party consultants. 

Revenues and Loss from Operations

          Our revenue, research and development costs, general and administrative expenses, and loss from operations for the three months ended December 31, 2006, as compared to the three months ended December 31, 2005 and September 30, 2006, are as follows:

3 Months
Ended
December 31,
2006

3 Months
Ended
December 31,
2005

Percentage
Change

3 Months
Ended
September 30,
2006





  

Revenue

$

127,307

$

82,284

55

%

$

-

Research and development
  costs

170,864

78,253

118

%

2,420,225

General and administrative
  expenses

4,119,599

722,918

470

%

991,843







  

Loss from operations

$

(4,163,156)

$

(718,887)

479

%

$

(3,412,068)

== ============ == ============ == ============


          During the three month periods ended December 31, 2006 and September 30, 2006, we incurred research and development costs of $170,864 and $2,420,225, respectively.  Of the $2,420,225 incurred for the quarter ended September 30, 2006, $2,134,153 was in-process research and development written off in connection with the acquisition of Monitoring, and $147,667 was related to the issuance of 1,883,332 shares of our common stock.

          General and administrative expenses were $4,119,599, $722,918, and $991,843, respectively, for the three month periods ended December 31, 2006 and 2005, and the three months ended September 30, 2006.  The major expenses incurred during the three months ended December 31, 2006 and 2005 and September 30, 2006 were:

3 Months
Ended
December 31,
2006

3 Months
Ended
December 31,
2005

3 Months
Ended
September 30,
2006




  

Consulting services

$

3,093,761

$

505,533

$

735,815

Officer’s salary

62,500

48,000

53,074

Secretarial salary

57,598

10,202

21,694

Professional fees

363,842

98,800

117,160

Office expense

16,351

13,050

12,574

Travel expenses

44,080

13,106

31,086

Rent

16,791

13,737

7,044

Franchise and other taxes

2,150

(11,221)

2,150

Payroll taxes

5,985

4,671

5,424

Telephone

4,572

4,340

3,881




25






          Of the $3,093,761 of consulting services for the fourth quarter of 2006, $2,932,880 relates to the issuance of 34,970,244 shares of common stock.  Of the $735,815 incurred for consulting services for the third quarter of 2006, $397,104 relates to the issuance of 20,088 shares of our common stock.

Other Income and Expenses and Net Loss

          Our other income and expenses and net loss for the three months ended December 31, 2006 and 2005, as compared to the three months ended September 30, 2006 are as follows:

3 Months
Ended
December 31,
2006

3 Months
Ended
December 31,
2005

Percentage
Change

3 Months
Ended
September 30,
2006





  

Loss on subscription receivables

$

(1,368,555)

$

-

N/A

%

$

-

Interest expense

(248,193)

(6,062,376)

(96)

%

(942,310)

Other than temporary
   impairment of securities

(1,791,300)

-

N/A

%

-

Realized/unrealized loss on securities

(215,789)

(1,918,636)

(89)

%

-

Change in fair value of investments
   derivative liability

54,000

(585,735)

(109)

%

90,000

Change in fair value of
   warrants derivative
   liability

3,145,438

-

N/A

%

1,917,132

Interest income

2,926

3,298

(11)

%

10,451

Loss on settlement of lawsuits

(1,267,244)

-

N/A

%

-

Gain on modification of convertible
   debt

831,035

-

N/A

%

-

Other expense

-

-

N/A

%

(40,000)







  

Net loss

$

(4,980,838)

$

(9,282,336)

(46)

%

$

(2,376,795)

==
============
==
============
==
============

          During the three months ended December 31, 2006, we incurred interest expense of $248,193.  Of this amount, $215,000 represents amortization of the discount on convertible debt and accrued interest on our various obligations of $33,193.  Interest income during the quarter was $2,926 which was earned on our investments.    We also recorded impairment losses on our Birchington investment of $1,791,300.

          During the three months ended December 31, 2005, we incurred interest expense of $6,062,376.  Of this amount, $5,917,188 relates to the initial recording of the fair value of the derivative and warrant liabilities, $99,855 represents amortization of the discount on convertible debt and accrued interest on our various obligations of $45,333.  Interest income during the quarter was $3,298 of which $1,050 was accrued on amounts due from our president and $2,248 was earned on our investments.    We also recorded impairment losses on our Langley investment of $1,918,587 and a derivative value of $585,735 related to our Birchington investment.




26






          During the three months ended September 30, 2006, we incurred interest expenses of $942,310.  Of this amount, $99,854 relates to the amortization of the discounts on the Company’s convertible debentures.  $418,530 relates to the increase in the convertible debenture balance, and $338,023 relates to the reduction of the BCF for notes that were converted during the quarter.  The change in fair value of investments derivative liability was $90,000 due primarily to the change in the Company’s stock price during the quarter.  The change in the fair value of derivative and warrant liability was $1,917,132, due primarily to the change in the Company’s stock price during the quarter.  Interest income during the three month period was $10,451 of which $1,128 was accrued on amounts due from our president and $9,323 was earned on our shareholder notes receivable. 

Results of Operations for the Years ended December 31, 2006 and 2005

Introduction

          In 2006, we had revenues from both our research contracts and from bridge testing.  Our revenues for 2006 totaled $156,153.  In 2005, our revenues were limited exclusively to our research contracts with Northrop Grumman, and totaled $139,346.  We continued to fund the majority of our operations through the issuance of our stock, resulting in large expenses in the areas of research and development and consulting.  The amount of cash used in our operations was approximately $1.79 million in 2006 compared to approximately $1.05 million in 2005.  We anticipate that we will continue to fund a substantial portion of our operations through the issuance of stock until such time as we can begin to generate substantial revenue from the sale of our products, and we do not have an estimate of when such revenues will begin.

Revenues and Loss from Operations

          Our revenue, research and development costs, general and administrative expenses, and loss from operations for the year ended December 31, 2006 as compared to the year ended December 31, 2005 are as follows:

Year Ended
December 31,
2006

Year Ended
December 31,
2005

Percentage
Change




  

Revenue

$

156,153

$

139,346

12%

Research and development costs

3,071,289

2,364,059

30%

General and administrative expenses

8,053,572

1,801,928

347%





  

Loss from Operations

$

(10,968,708)

$

(4,026,641)

172%

== ============ == ============

          Our revenues for 2006 came from our research contracts with Northrop Grumman in the amount of $39,446 and from bridge testing in the amount of $116,707.  All of our revenues in 2005 came from our research contracts with Northrop Grumman.

          Of the $3,071,289 in research and developments costs for 2006, $2,724,819 was related to the issuance of 161,464 shares of our common stock for in process research and development related to the UTEK transaction and for services rendered.  Of the $2,364,059 in research and developments costs for 2005, $2,105,000 was related to the issuance of 5,750 shares of our common stock, of which 2,333 shares were issued to Messrs. Goodman and Berks, our officers



27






who are responsible for project development, valued at $840,000.  The 3,417 shares were issued to other consultants.

          General and administrative expenses were $8,053,572 and $1,801,928, respectively, for the years ended December 31, 2006 and 2005.  The major expenses incurred during each of the years were:

Year Ended
December 31,
2006

Year Ended
December 31,
2005



  

Consulting services

$

5,925,041

$

1,093,606

Officer’s salary

211,574

192,000

Secretarial salary

114,561

41,782

Professional fees

938,682

245,153

Office expense

52,855

39,991

Travel expenses

138,896

47,364

Rent

28,176

34,869

Franchise and other taxes

16,070

12,021

Payroll taxes

28,199

22,624

Telephone

17,375

21,274

          Of the $5,925,041 in consulting expense for the year ended December 31, 2006, $4,958,984 was related to the issuance of 35,034,669 shares of common stock.  Of the $1,093,606 in consulting expense for 2005, $948,159 was related to the issuance of 5,396 shares of our common stock.  Included in the 5,396 shares were 833 shares issued for services to be rendered through July 2006 which was valued at $525,000, of which $218,750 was expensed and included in consulting expense.  The remaining $306,250 is considered prepaid for services to be rendered in 2006 and is included in current assets on our balance sheet.  Also included in the 5,396 shares were 667 shares issued to Joel Freedman, our corporate secretary, valued at $240,000 and 167 shares to an employee valued at $54,000.

Other Income and Expenses and Net Loss

          Our gain on modification of convertible debt, modification of research and development sponsorship agreement, loss on subscription receivables, interest expense, other-than-temporary impairment of marketable securities, change in fair value of derivative and warrant liabilities, loss on settlement of lawsuits, and net loss for the year ended December 31, 2006 as compared to the year ended December 31, 2005 are as follows:








28






Year Ended
December 31,
2006

Year Ended
December 31,
2005

Percentage
Change




  

Gain on modification of convertible
   debt

$

831,035

$

-

N/A%

Modification of research and
   development sponsorship
   agreement

-

(7,738,400)

N/A%

Loss on subscription receivables

(1,368,555)

-

N/A%

Interest expense

(1,614,431)

(6,493,345)

(75%)%

Other-than-temporary impairment of
   marketable securities

(3,582,600)

(1,918,587)

86%

Change in fair value of derivative and
   warrant liabilities

6,389,272

-

N/A

Loss on settlement of lawsuits

(1,267,244)

-

N/A%





  

Net loss

$

(11,575,230)

$

(20,749,260)

(44)%

== ============ == ============

          Our gain on modification of convertible debt of $831,035 related to our modification of the Palisades debt and removal of associated derivative liability.  The loss on subscription receivables is a write-off as the funds will not be collected and the shares will not be returned.  Our interest expense includes amortization of debt discounts totaling $1,422,295.  Our other-than-temporary impairment of marketable securities is our full impairment of the Birchington investment.  The change in fair value of derivative and warrant liabilities represents the change in derivative values related to warrants and convertible debt with Palisades and Golden Gate.  Our loss on settlement of lawsuits relates to the settlement of our dispute with Beck and includes $44,000 in cash, 4,011 shares valued at $173,000, $800,000 for the accrued settlement with Beck, and $250,000 related to the settlement agreement with GEM.

          In 2005, we charged $7,738,400 to operations relating to the issuance of 22,760 shares of our common stock to the University of Pennsylvania pursuant to the terms of a workout agreement with them.  There was no such workout agreement in 2004.

          Of the $6,493,345 in interest expense incurred in 2005, $5,917,188 was related to the fair values of derivative and warrant liabilities related to the GGI Notes and $399,420 pertained to the amortization of the debt discount related to the beneficial conversion feature of the Palisades Debentures.  In addition, $45,354 was accrued on the note due the University of Pennsylvania, $127,010 was accrued on the actual outstanding principal balance of the Palisades Debentures, and $4,373 was accrued on our other interest-bearing obligations.

Liquidity and Capital Resources

Introduction

          During the year ended December 31, 2006, as with 2005, we did not generate positive cash flow.  As a result, we funded our operations through the sale of marketable securities that we obtained in a financing transaction, the sale of our common stock, the issuance of our common stock for services, and loans.



29






          Our cash, investments in marketable securities held for trading, investments in marketable securities available for sale, accounts receivable, prepaid services, prepaid expenses and other current assets, total current assets, total assets, total current liabilities, and total liabilities as of December 31, 2006, as compared to December 31, 2005 and September 30, 2006, were as follows:

December 31,

December 31,

September 30,

2006

2005

2006




  

Cash

$

129,296

$

47,345

$

603,804

Marketable securities - trading

135,136

302,841

133,482

Marketable securities –
   available-for-sale

-

162,193

87,466

Accounts receivable

116,707

70,825

-

Prepaid services

32,659

306,250

-

Prepaid expenses and other

7,347

2,153

7,347

Total current assets

421,145

891,607

832,099

Total assets

432,780

4,493,227

2,636,018

Total current liabilities

542,802

1,930,182

2,366,714

Total liabilities

4,414,158

9,768,555

7,033,338

Cash Requirements

          For the year ended December 31, 2006, our net cash used in operations was $(1,790,155) compared to $(1,053,380) for the year ended December 31, 2005. 

          Negative operating cash flows during the year ended December 31, 2006 were primarily created by a net loss from operations of $11,575,230, offset by a write-off of in-process research and development of $2,134,153, a loss on write off of subscription receivables of $1,368,555, the issuance of stock for services of $6,640,173, other-than-temporary impairment of marketable securities available for sale of $3,582,600, amortization of discount on convertible debentures of $1,422,295, and an increase in accounts payable and accrued expenses of $1,447,386.  There was also a gain on modification of convertible debt of $831,035 and a decrease in the fair value of derivative and warrant liabilities of $6,389,272.

          Negative operating cash flows during the year ended December 31, 2005 were primarily created by a net loss from operations of $20,749,260, offset by non-cash stock related expenses of $10,837,657, an adjustment for the fair value of derivative and warrant liabilities arising out of a financing transaction of $5,917,188, an other-than temporary impairment of marketable securities held for sale of $1,918,587, an increase in the fair value of the investment derivative liability of $585,735, accrued interest expense added to principal of $173,987, and amortization of discount on convertible debenture of $399,420.  Because of our need for cash to fund our continuing research and development, we do not have an opinion as to how indicative these results will be of future results.





30






Sources and Uses of Cash

          Net cash provided by investing activities for the years ended December 31, 2006 and 2005, were $241,372 and $679,962, respectively.  For the years ended December 31, 2006 and 2005, the net cash came primarily from the sale of marketable securities in the amount of $242,506 and $1,589,588, respectively, offset by the amount for purchase of securities of $(7,307) and $(907,028), respectively.

          Net cash provided by financing activities for the years ended December 31, 2006 and 2005, were $1,630,734 and $319,963, respectively.  For the year ended December 31, 2006, the net cash came primarily from the sale of common stock and warrants of $1,213,225 and proceeds from convertible debentures and other notes payable of $500,697.  For the year ended December 31, 2005, the net cash came primarily from the sale of common stock and warrants in the amount of $325,239. 

          We are not generating sufficient cash flow from operations to fund growth.  We cannot predict when we will begin to generate revenue from the sale of our products, and until that time, we will need to raise additional capital through the sale of our equity securities.  If we are unsuccessful in raising the required capital, we may have to curtail operations.

Critical Accounting Policies

          The discussion and analysis of the Company’s financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.  The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.  In consultation with its Board of Directors, the Company has identified the following accounting policies that it believes are key to an understanding of its financial statements.  These are important accounting policies that require management’s most difficult, subjective judgments.

          The first critical accounting policy relates to revenue recognition. Income from the Company’s research is recognized at the time services are rendered and billed for.

          The second critical accounting policy relates to research and development expense.  Costs incurred in the development of the Company’s products are expensed as incurred.

          The third critical accounting policy relates to the valuation of non-monetary consideration issued for services rendered. The Company values all services rendered in exchange for its common stock at the quoted price of the shares issued at date of issuance or at the fair value of the services rendered, which ever is more readily determinable.  All other services provided in exchange for other non-monetary consideration is valued at either the fair value of the services received or the fair value of the consideration relinquished, whichever is more readily determinable.

          The Company’s accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services follows the provisions of EITF 96-18, “Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services” and EITF 00-18, “Accounting Recognition for Certain Transactions Involving Equity Instruments Granted to Other Than Employees.” The measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at



31






which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor’s performance is complete.  In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement. In accordance to EITF 00-18, an asset acquired in exchange for the issuance of fully vested, nonforfeitable equity instruments should not be presented or classified as an offset to equity on the grantor’s balance sheet once the equity instrument is granted for accounting purposes. Accordingly, the Company records the fair value of nonforfeitable common stock issued for future consulting services as prepaid services in its consolidated balance sheet.

          The fourth critical accounting policy is the Company’s accounting for conventional convertible debt.  When the convertible feature of the conventional convertible debt provides for a rate of conversion that is below market value, this feature is characterized as a beneficial conversion feature (“BCF”).  A BCF is recorded by the Company as a debt discount pursuant to EITF Issue No. 98-5 (“EITF 98-05”), “Accounting for Convertible Securities with Beneficial Conversion Features or Contingency Adjustable Conversion Ratio,” and EITF Issue No. 00-27, “Application of EITF Issue No. 98-5 to Certain Convertible Instruments.”  In those circumstances, the convertible debt will be record net of the discount related to the BCF.  The Company amortizes the discount to interest expense over the life of the debt using the effective interest method.

          The fifth critical account policy relates to the accounting for non-conventional convertible debt and the related stock purchase warrants.  In the case of non-conventional convertible debt, the Company bifurcates its embedded derivative instruments and records them under the provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, and EITF Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.”  These embedded derivatives include the conversion feature, liquidated damages related to registration rights and default provisions.  The accounting treatment of derivative financial instruments requires that the Company record the derivatives and related warrants at their fair values as of the inception date of the agreement and at fair value as of each subsequent balance sheet date.  In addition, under the provisions of EITF Issue No. 00-19, as a result of entering into the non-conventional convertible debenture, the Company is required to value and classify all other non-employee stock options and warrants as derivative liabilities at that date and mark them to market at each reporting date thereafter.  Any change in fair value will be recorded as non-operating, non-cash income or expense at each reporting date.  If the fair value of the derivatives is higher at the subsequent balance sheet date, the Company will record a non-operating, non-cash charge.  If the fair value of the derivatives is lower at the subsequent balance sheet date, the Company will record non-operating, non-cash income.  The Company values its derivatives primarily using the Black-Scholes Option Pricing Model.  The derivatives are classified as long-term liabilities.

          The sixth critical accounting policy relates to the recording of marketable securities held for trading and available-for-sale.  Marketable securities purchased with the intent of selling them in the near term are classified as trading securities. Trading securities are initially recorded at cost and are adjusted to their fair value, with the change in fair value during the period included in earnings as unrealized gains or losses.  Realized gains or losses on dispositions are based upon the net proceeds and the adjusted book value of the securities sold, using the specific identification method, and are recorded as realized gains or losses in the consolidated statements of operations.  Marketable securities that are not classified as trading securities are classified as available-for-sale securities.  Available-for-sale securities are initially recorded at cost.  Available-for-sale securities with quoted market prices are adjusted to their fair value, subject to an impairment analysis (see below).  Any change in fair value during the period is excluded from



32






earnings and recorded, net of tax, as a component of accumulated other comprehensive income (loss).  Any decline in value of available-for-sale securities below cost that is considered to be “other than temporary” is recorded as a reduction of the cost basis of the security and is included in the statement of operations as a write down of the market value (see below).

          The seventh critical accounting policy is our accounting for the fair market value of non-marketable securities we have acquired.  Non-marketable securities are originally recorded at cost.   In the case of non-marketable securities we acquired with our common stock, we value the securities at a significant discount to the stated per share cost based upon our historical experience with similar transactions as to the amount ultimately realized from the sale of the shares.  Such investments are reduced when we have indications that a permanent decline in value has occurred.  At such time as quoted market prices become available, the net cost basis of these securities will be reclassified to the appropriate category of marketable securities.  Until that time, the securities will be recorded at their net cost basis, subject to an impairment analysis (see below).

          Beginning in 2006, the Company values issuances of large blocks of stock and stock rights (representing more that 20% of the then fully diluted shares of the Company’s common stock) using a market capitalization method.  Under this method, the value of the issuance is based on the value of the Company’s pre-issuance market capitalization multiplied by the percentage of the Company’s common stock issued on a fully diluted basis.

          In accordance with the guidance of EITF 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” the Company assesses any decline in value of available-for-sale securities and non-marketable securities below cost as to whether such decline is “other than temporary.”  If a decline is determined to be “other than temporary,” the decline is recorded as a reduction of the cost basis of the security and is included in the statement of operations as an impairment write down of the investment. 

ITEM 7 – FINANCIAL STATEMENTS

Index to Financial Statements

  

Report of Independent Registered Public Accounting Firm

F-1

  

Consolidated Balance Sheet

F-2

  

Consolidated Statements of Operations

F-4

  

Consolidated Statements of Comprehensive Loss

F-5

  

Consolidated Statements of Stockholders (Deficit)

F-6

  

Consolidated Statements of Cash Flows

F-13

  

Notes to Consolidated Financial Statements

F-16

ITEM 8 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

          We engaged Farber & Hass, LLP as the principal accountant to audit our financial statements effective as of June 3, 2004. Farber & Hass, LLP (hereinafter “Farber”) was dismissed by us as our principal independent accountant, effective January 20, 2005.  Farber did not issue a report in either of the last two years, as they were engaged only to perform reviews of our interim financial statements for each of the three quarters in the period ended September 30, 2004.  The decision to change accountants was recommended and approved by the Board of Directors.  There were no disagreements with Farber on any matter of accounting principles or practices,



33






financial statement disclosure or auditing scope or procedure from the time of their appointment as our certifying accountant through January 20, 2005.

          We engaged Corbin & Company, LLP (hereinafter “Corbin”) as the principal accountants to audit our financial statements effective as of January 21, 2005.  We, during our most recent fiscal year and any subsequent interim period to the date hereof, did not have discussions nor has we consulted with Corbin regarding the following: (i) the application of accounting principles to a specified transaction, either completed or proposed or the type of audit opinion to be rendered on the our financial statements, and neither a written report was provided to us nor oral advice was provided that Corbin concluded was an important factor considered by us in reaching a decision as to the accounting, auditing or financial reporting issue; or (ii) any matters that were the subject of a “disagreement”, as that term is defined in Item 304(a)(1)(iv) of Regulation S-B and the related instructions to Item 304 of Regulation S-B, or a reportable event.

ITEM 8A – CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

          We conducted an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as of December 31, 2006, to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities Exchange Commission’s rules and forms, including to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.  Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of December 31, 2006, our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses described below.

          In light of the material weaknesses described below, we performed additional analysis and other post-closing procedures to ensure our consolidated financial statements were prepared in accordance with generally accepted accounting principles.  Accordingly, we believe that the consolidated financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.

          A material weakness is a control deficiency (within the meaning of the Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 2) or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.  Management has identified the following three material weaknesses which have caused management to conclude that, as of December 31, 2006, our disclosure controls and procedures were not effective at the reasonable assurance level:

          1.       We do not have written documentation of our internal control policies and procedures.  Written documentation of key internal controls over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act and will be applicable to us for the year ending December 31, 2007.  Management evaluated the impact of our failure to have written



34






documentation of our internal controls and procedures on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.

          2.       We do not have sufficient segregation of duties within accounting functions, which is a basic internal control.  Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible.  However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals.  Management evaluated the impact of our failure to have segregation of duties on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.

          3.       We have had, and continue to have, a significant number of audit adjustments.  Audit adjustments are the result of a failure of the internal controls to prevent or detect misstatements of accounting information.  The failure could be due to inadequate design of the internal controls or to a misapplication or override of controls.  Management evaluated the impact of our significant number of audit adjustments and has concluded that the control deficiency that resulted represented a material weakness.

          To address these material weaknesses, management performed additional analyses and other procedures to ensure that the financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented.

Remediation of Material Weaknesses

          We have attempted to remediate the material weaknesses in our disclosure controls and procedures identified above by working with our independent registered public accounting firm and refining our internal procedures.  To date, we have not been successful in reducing the number of audit adjustments, but will continue our efforts in the coming fiscal year.

Changes in Internal Control over Financial Reporting

          Except as noted above, there were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 8B – OTHER INFORMATION

Debt Restructuring and Settlement Agreement

          On October 27, 2006, we entered into a series of agreements with our existing debenture holders, namely Palisades Capital, LLC, Hyde Investments, Ltd., and Livingston Investments, Ltd., whereby we extended the due date on over $2,100,000 in debentures for two years from December 31, 2006 to December 31, 2008.

          Pursuant to the terms of a Settlement Agreement and General Release, we agreed to:

          (i)         release each of the debenture holders from all liability arising prior to the date thereof;





35






          (ii)        effectuate a 1-for-300 reverse split of our Class A common stock;

          (iii)       issue warrants to purchase an aggregate of 35 million post-split shares of Class A common stock at an exercise price of $0.001;

          (iv)       issue up to 30 million post-split shares of Class A common stock to our President and director, Robert M. Bernstein, as consideration for the receipt of a general release from him and execution of a new employment agreement;

          (v)        issue up to 40 million post-slit shares of Class A common stock to certain third-parties designated by Mr. Bernstein; and

          (vi)       execute an amendment to each of the outstanding debentures held by the debenture holders to (a) extend the due date to December 31, 2008, (b) increase the principal balance by fifteen percent (15%), (c) maintain the conversion price at the lower of $0.10 or 50% of the market price after the reverse stock split, (d) limit the number of shares we can issue pursuant to a registration statement on Form S-8, (e) eliminate the 75 day waiting requirement between the time we receive a notice of conversion and the time we must deliver the applicable shares, (f) confirm that a default under one of the debentures shall be considered a default under all of them, (g) deposit 9.9% of our issued and outstanding stock with an escrow agent to deliver upon a conversion by the debenture holders, and to maintain that balance with the escrow agent, (h) limit the conversion so that no holder may own more than 4.99% of our outstanding Class A common stock at any one time, and (i) add $60,000 to the principal balance owed to Palisades Capital, LLC.

Technology Acquisition

          On August 18, 2006, we entered into an Acquisition Agreement with UTEK CORPORATION, a Delaware corporation, and Materials Monitoring Technologies, Inc., a Florida corporation, pursuant to which we acquired 100% of MMTI’s outstanding stock from UTEK in exchange for a total of 125,436 shares of our common stock, with 119,165 shares being issued to UTEK and 6,272 shares being issued to Aware Capital Consultants.  As a result of this transaction MMTI became our wholly-owned subsidiary.  Pursuant to a License Agreement with North Carolina A&T State University, MMTI owns the exclusive, worldwide licensing rights to certain patented inventions entitled “Sensor Array System” and “System for Damage Location Using a Single Channel Continuous Acoustic Emission Sensor”, which permits MMTI to make, use and sell the Licensed Products for the life of the patent or until the License Agreement is terminated.  Under the License Agreement, MMTI must pay certain royalty payments to NCAT out of net sales of products sold that utilize the Licensed Products, and/or certain minimum royalty payments after two years, regardless of whether sales of products that utilize the Licensed Products have occurred and whether or not those sales produce net sales.

Class E Convertible Preferred Stock

          On January 26, 2007, we amended our Certificate of Incorporation by filing a Certificate of Designation of the Rights, Preferences, Privileges and Restrictions of our newly created Class E Convertible Preferred Stock.  We authorized 60,000 shares,


36






each with an original issue price of $19.50 per share.  The Class E Convertible Preferred Stock pays a five percent (5%) dividend, which may be accrued, is convertible into our common stock at the average closing bid price for the ten (10) trading days prior to the date of conversion, has no liquidation preference, and has ten (10) votes per share.

































37






PART III

ITEM 9 – DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

Directors and Executive Officers

          
The following table sets forth the names and ages of the current directors and executive officers of the Company, the director nominees, and the principal offices and positions with the Company held by each person and the date such person became a director or executive officer of the Company.  The executive officers of the Company are appointed by the Board of Directors.  The directors serve one-year terms until their successors are elected.  The executive officers serve until their death, resignation or removal by the Board of Directors.  Unless described below, there are no family relationships among any of the directors and officers, and none of our officers or directors serves as a director of another reporting issuer.

Name
Age

Position(s)



  

Robert M. Bernstein
72
President, Chief Executive Officer, Chief Financial
Officer and Chairman of the Board (1988)
  
Joel R. Freedman
46
Secretary and Director (1989)
  
Dr. William Berks
76
Vice President and Director (1997)

ROBERT M. BERNSTEIN, PRESIDENT/CHIEF FINANCIAL OFFICER/CHAIRMAN OF THE BOARD.

          
Robert M. Bernstein received a Bachelor of Science degree from the Wharton School of the University of Pennsylvania in 1956.  From August 1959 until his certification expired in August 1972, he was a Certified Public Accountant licensed in Pennsylvania.  From 1961 to 1981, he was a consultant specializing in mergers, acquisitions, and financing.  From 1981 to 1986, Mr. Bernstein was Chairman and Chief Executive Officer of Blue Jay Enterprises, Inc. of Philadelphia, PA, an oil and gas exploration company.  In December 1985, he formed a research and development partnership for Tensiodyne, funding approximately $750,000 for research on the Fatigue Fuse.  In October 1988 he became Chairman of the Board, President, Chief Financial Officer, and CEO of Material Technologies and retained these positions with the Company after the spin off from Material Technologies on July 31, 1997.  Mr. Bernstein is not a director of any other company.

JOEL R. FREEDMAN, SECRETARY/DIRECTOR.

          
From October 1989 until the present, Mr. Freedmen holds the position of Secretary and a Director of the company.  Mr. Freedman attends board meetings and provides advice to the Company as needed.  From 1983 through 1999, he was president of Genesis Advisors, Inc., an investment advisory firm in Bala Cynwyd, Pennsylvania.  From January 1, 2000 through December 2002, he was a Senior Vice President of PMG Capital Corp., a securities brokerage and investment advisory firm in West Conshohocken, Pennsylvania.  From December 2002



38






to present, he is a senior vice-president of Wachovia Securities LLC, a securities brokerage and investment advisory firm in Conshohocken, Pennsylvania.  His duties there are a full-time commitment.  Accordingly, he does not take part in Material Technologies’ daily activities.  Mr. Freedman is not a director of any other company.

DR. WILLIAM BERKS, VICE-PRESIDENT/DIRECTOR

          
William Berks managed the previous Material Technologies contracts for the development of EFS at the University of Pennsylvania, Southwest Research Institute, and Optim, Inc.  Mr. Berks has a B. Aero. E and MS in Applied Mechanics from Polytechnic Institute of New York and MS in Industrial Eng., Stevens Institute of Technology.  With Matech since 1997 he has over 30 years’ experience in spacecraft mechanical systems engineering.  He retired from TRW in November 1992 where he was employed for 26 years in a variety of management positions: Manager of the Mechanical Design Laboratory, the engineering design skill center for the design and development of spacecraft mechanical systems, which had as many as 350 individuals: Manager of the Advanced Systems Design Department, which was responsible for mechanical systems design for all spacecraft project: Assistant Project Manager for Mechanical Subsystems for a major spacecraft program, which included preparation of plans, specifications and drawings, supervision of two major subcontracts, and responsibility for flight hardware fabrication and testing.  He holds six patents.  Mr. Berks is not a director of any other company.

Committees of the Board Of Directors

          
We presently do not have an audit committee, compensation committee, nominating committee, an executive committee of our board of directors, stock plan committee or any other committee of our board of directors.

Advisory Board

          
Since 1987, we and our predecessors have had an Advisory Board consisting of very senior experienced businessmen and technologists, most of whom are nationally prominent.  These individuals consult with us on an as needed basis. Members of the Advisory Board serve at will.  The Advisory Board advises our management on technical, financial, and business matters and may in the future be additionally compensated for these services.  A brief biographical description of the members of the advisory board is as follows:

          MARYBETH MICELI.  Ms. Miceli is currently Director of Marketing for Sam Schwartz, LLC, Engineering and Planning Consultants, New York, NY, where she also consults on infrastructure management, non-destructive testing, and fatigue testing.  Previously she was with Lucius Pitkin, Inc., Engineering Consultants, where her responsibilities included Quality Assurance Manager, and Assistant Radiation Safety Officer.  Among her duties was the supervision and performance of failure analysis investigations, fatigue testing investigations, and interfacing with government agencies on testing, regulations, and safety.  She was a director of the American Society of Non-destructive Testing, and Chairman in 2003 of the Metro NY Chapter.  She is also a member of the American Society of Metals.  A graduate of Johns Hopkins University, she has an MS in Materials Science and Engineering, from Virginia Polytechnic Institute. She has published several papers on non-destructive testing of bridge components and other related subjects.

          BRENT M. PHARES.  Dr. Phares has over 15 years of management, inspection, research, and testing experience related to bridge structures.  He currently is the Associate



39






Director for Bridges and Structures at Iowa State University.  In this position, Dr. Phares is responsible for the development and deployment of innovative bridge evaluation and techniques and for the development of applications for innovative materials in bridge engineering.  In the past, Dr. Phares has served as a consulting Research Engineer at the Federal Highway Administration’s Nondestructive Evaluation Validation Center where he lead the execution of several validation and developmental studies.  More recently, Dr. Phares served as President and CEO of a small engineering firm specializing in the evaluation of civil infrastructure based on innovative sensors and monitoring strategies.  He is a registered professional engineer and serves as a voting member of many national and international technical committees.

          CAMPBELL LAIRD. Campbell Laird, age 64, received his Ph.D. in 1963 from the University of Cambridge.  His Ph.D. thesis title was “Studies of High Strain Fatigue.”  He is presently Professor and graduate group Chairman in the Department of Materials, Science & Engineering at the University of Pennsylvania.  His research has focused on the strength, structure, and fatigue of materials, in which areas he published in excess of 250 papers.  He is co-inventor of the EFS.

          SAMUEL I. SCHWARTZ. Samuel I. Schwartz, age 50, is presently President of Sam Schwartz Co., consulting engineers, primarily in the bridge industry.  Mr. Schwartz received his BS in Physics from Brooklyn College in 1969, and his Masters in Civil Engineering from the University of Pennsylvania in 1970.  From February 1986 to March 1990, he was the Chief Engineer/First Deputy Commissioner, New York City Department of Transportation and from April 1990 to the present acted as a director of the Infrastructure Institute at the Cooper Union College, New York City, New York.  From April 1990 to 1994 he was a Senior Vice President of Hayden Wegman Consulting Engineers, and is a columnist for the New York Daily News.

          NICK SIMIONESCU. Mr. Simionescu joined HNTB in 1974, one of the largest consulting engineering companies in the world, and is currently Vice President, Director of Business Development in the New York City Office.  He has over 37 years of management, construction, design, inspection and detailing experience.  Mr. Simionescu is very familiar with the New York City infrastructure.  For nearly 28 years he has been working in New York City, primarily on projects with the New York City Department of Transportation and New York State Department of Transportation Regions 10 and 11.  His projects have included management of the inspections of the Williamsburg, Brooklyn, Triborough, Manhattan, and Queensboro bridges. Additionally, he has been the Project Manager of Bridge Inspection for many other arterial and local bridges throughout New York.  Mr. Simionescu’s responsibilities with HNTB have involved a variety of National and International projects.  He has been the Senior Structural Designer and Manager of bridges in South Carolina (800 ft. span), Rhode Island (366 ft. span), Malaysia (740 ft. span), and Florida (1300 ft. span).

          HENRYKA MANES. Ms. Manes is the founder and President of H. Manes & Associates, a consulting firm that enables environmental and high technology companies to export their products worldwide.  She has a wide-range of experience with projects in more than 20 countries in Asia, Africa, Eastern Europe and South America. Prior to founding HMA, Ms. Manes was Director of Operations for the American Jewish Joint Distribution Committee’s International Development Program and has worked with the World Bank, United States Agency for International Development, and the United Nations Development Program.  Ms. Manes received her B.A. from Macalester College in St. Paul, MN, and did her graduate work at the University of Minnesota, Minneapolis, MN.



40






Compliance with Section 16(a) of the Securities Exchange Act of 1934

          
Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s directors and executive officers and persons who own more than ten percent of a registered class of the Company’s equity securities to file with the SEC initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company.  Officers, directors and greater than ten percent shareholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. 

          During the most recent fiscal year, to the Company’s knowledge, the following delinquencies occurred:

Name

No. of Late
Reports

No. of
Transactions
Reported Late

No. of
Failures to
File

Robert M. Bernstein

1

1

-0-

Code of Ethics

          
We have not adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions.  We have not adopted such a code of ethics because all of management's efforts have been directed to building the business of the company; at a later time, such a code of ethics may be adopted by the board of directors.

Terms of Office

          
Our directors are appointed for a one year term to hold office until the next annual general meeting of the holders of our Common Stock or until removed from office in accordance with our by-laws.  Our officers are appointed by our board of directors and hold office until removed by our board of directors.

          On November 17, 2006, we entered into an indemnification agreement with each of our directors.  Under the terms of the indemnification agreements, we agreed to indemnify each director to the fullest extent permitted by law if the director was or is a party or threatened to be made a party to any action or lawsuit by reason of the fact that he is or was a director.  The indemnification shall cover all expenses, penalties, fines and amounts paid in settlement, including attorneys’ fees.  A director will not be indemnified for intentional misconduct for the primary purpose of his own personal benefit.

ITEM 10 – EXECUTIVE COMPENSATION

          The following tables set forth certain information about compensation paid, earned or accrued for services by (i) our Chief Executive Officer and (ii) all other executive officers who earned in excess of $100,000 in the fiscal year ended December 31, 2006 (“Named Executive Officers”):





41






Name and
Principal
Position

Year

Salary
($)

Bonus
($)

Stock
Awards
($) *

Option
Awards
($) *

Non-Equity
Incentive Plan
Compensation
($)

Nonqualified
Deferred
Compensation
($)

All Other
Compensation
($)

Total
($)

  

Robert M.
Bernstein

2006

206,500

-0-

1,428,000 (6)

-0-

-0-

-0-

-0-

1,634,500

Director
and CEO

2005

192,000 (1)

-0-

-0-

-0-

-0-

-0-

-0-

192,000

  

John W.
Goodman (5)

2006

57,625

-0-

53,000 (7)

-0-

-0-

-0-

-0-

110,625

Director
and
Engineer

2005

41,700

-0-

240,000 (2)

-0-

-0-

-0-

-0-

281,700

  

William Berks

2006

93,615

-0-

60,200 (8)

-0-

-0-

-0-

-0-

153,815

Director
and VP of
Govt Projects

2005

85,350

-0-

600,000 (3)

-0-

-0-

-0-

-0-

685,350

  

Joel
Freedman

2006

-0-

-0-

168,500 (9)

-0-

-0-

-0-

25,000

193,500

Director
and
Secretary

2005

-0-

-0-

240,000 (4)

-0-

-0-

-0-

-0-

240,000


*          Based upon the aggregate grant date fair value calculated in accordance with the Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standard (“FAS”) No. 123R, Share Based Payment.  Our policy and assumptions made in valuation of share based payments are contained in Note 2 to our December 31, 2006 financial statements.
  
(1) Cash compensation actually paid to Mr. Bernstein in 2005 amounted to $210,446 of which $192,000 relates to 2005 with the remaining amount of $18,446 pertained to the payment of prior years’ accrued compensation.
  
(2) In 2005, we issued Mr. Goodman 667 shares our common stock subject to a two-year lockup agreement. The shares were valued at $240,000, which represents 80% of the market price on date of issuance.
  
(3) In 2005, we issued Mr. Berks 1,667 shares our common stock subject to a two-year lockup agreement. The shares were valued at $600,000, which represents 80% of the market price on date of issuance.
  
(4) In 2005, we issued Mr. Freedman 667 shares our common stock subject to a two-year lockup agreement. The shares were valued at $240,000, which represents 80% of the market price on date of issuance.
  
(5) Mr. Goodman passed away in March 2007.
  
(6) Represents the value of 30,000,000 shares issued to Mr. Bernstein.
  
(7) Represents the value of 1,100,000 shares issued as part of the approximately 34 million shares issued on December 28, 2006.
  



42






(8)       Represents the value of 1,250,000 shares issued as part of the approximately 34 million shares issued on December 28, 2006.
(9) Represents the value of 3,500,000 shares issued as part of the approximately 34 million shares issued on December 28, 2006.

Employment Contracts

          On October 1, 2006, we entered into an Employment Agreement with Robert M. Bernstein, our Chief Executive Officer and Chief Financial Officer, which provides certain terms and conditions with respect to Mr. Bernstein’s employment.  The Employment Agreement is for a three year term.  Under the Employment Agreement, Mr. Bernstein will be paid an annual salary of $250,000, with one year of paid severance if he is terminated without good cause prior to the expiration of the employment term.

          On November 21, 2006, we entered into a Stock Grant and General Release Agreement with Robert M. Bernstein, for the purpose of showing our appreciation for Mr. Bernstein’s work over the past several years.  Under the Stock Grant Agreement, Mr. Bernstein will be issued 30,000,000 shares of our Class A common stock, restricted in accordance with Rule 144, and subject to forfeiture back to us in accordance with the terms of the Stock Grant Agreement, if he is not continuously employed by us for the three years from the date of the Stock Grant Agreement.  Under the terms of the Stock Grant Agreement, Mr. Bernstein also released us from any and all claims he may have against us for any monies owed to him as of the date of the Stock Grant Agreement.

Other Compensation

          There are no annuity, pension or retirement benefits proposed to be paid to officers, directors, or employees of our company in the event of retirement at normal retirement date as there was no existing plan as of December 31, 2006 provided for or contributed to by our company.

          During the year ended December 31, 2006, Robert M. Bernstein, our Chief Executive Officer, returned 6,300 shares of common stock to us in exchange for a reduction in his subscription receivable (including accrued interest) totaling $62,077.  The shares returned were valued at the underlying stock price on the date of return, totaling $36,540, and recognized a loss of $25,537 as other expense in the accompanying consolidated statement of operations.

Director Compensation

          The following table sets forth director compensation as of December 31, 2006:







43






Name

Fees
Earned
or Paid
in Cash
($)

Stock
Awards
($) *

Option
Awards
($) *

Non-Equity
Incentive Plan
Compensation
($)

Nonqualified
Deferred
Compensation
Earnings
($)

All Other
Compensation
($)

Total
($)

  

  

  

  

  

  

  

  

Robert M.
Bernstein

-0-

-0-

-0-

-0-

-0-

-0-

-0-

  

  

  

  

  

  

  

  

John W.
Goodman

-0-

-0-

-0-

-0-

-0-

-0-

-0-

  

  

  

  

  

  

  

  

William Berks

-0-

-0-

-0-

-0-

-0-

-0-

-0-

  

  

  

  

  

  

  

  

Joel Freedman

-0-

-0-

-0-

-0-

-0-

-0-

-0-


*          Based upon the aggregate grant date fair value calculated in accordance with the Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standard (“FAS”) No. 123R, Share Based Payment.  Our policy and assumptions made in valuation of share based payments are contained in Note 2 to our December 31, 2006 financial statements.

          The compensation of each of our directors is fully furnished in the Summary Compensation Table above.

          Directors of our company who are also employees do not receive cash compensation for their services as directors or members of the committees of the board of directors.  All directors may be reimbursed for their reasonable expenses incurred in connection with attending meetings of the board of directors or management committees.

          On December 28, 2006, we issued shares of our Class A common stock to our officers and directors, or their nominees, as follows:

                        Nominees of Robert M. Bernstein          1,200,000 shares
                        John Goodman and Nominee                 1,400,000 shares
                        Bill Berks                                              1,250,000 shares
                        Joel Freidman                                        3,500,000 shares

Outstanding Equity Awards at Fiscal Year-End

          The following table sets forth certain information concerning outstanding stock awards held by the Named Executive Officers as of December 31, 2006:










44






  

Option Awards

Stock Awards

Name

Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable

Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable

Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)

Option
Exercise
Price
($)

Option
Expiration
Date

Number
of
Shares
or Units
of Stock
That
Have
Not
Vested
(#)

Market
Value
of
Shares
or
Units
of
Stock
That
Have
Not
Vested
($)

Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested
(#)

Equity
Incentive
Plan
Awards:
Market
or Payout
Value of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested
($)

  

  

  

  

  

  

  

  

  

  

Robert M.
Bernstein

-0-

-0-

-0-

N/A

N/A

-0-

-0-

-0-

-0-

  

  

  

  

  

  

  

  

  

  

John W.
Goodman

-0-

-0-

-0-

N/A

N/A

-0-

-0-

-0-

-0-

  

  

  

  

  

  

  

  

  

  

William Berks

-0-

-0-

-0-

N/A

N/A

-0-

-0-

-0-

-0-

  

  

  

  

  

  

  

  

  

  

Joel Freedman

-0-

-0-

-0-

N/A

N/A

-0-

-0-

-0-

-0-





















45






ITEM 11 – SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

          
The following table sets forth certain information regarding beneficial ownership of our common stock as of March 27, 2007:


Common Stock


Title of Class

Name and Address of
Beneficial Owner (1)

Amount and
Nature of
Beneficial
Ownership

Percent
of Class (2)





  

Class A
Common Stock

Robert M. Bernstein (4)

30,067,006

36.6%

  

Class A
Common Stock

Joel R. Freedman (4)
1 Bala Plaza
Bala Cynwyd, PA  19004

3,508,677

4.3%

  

Class A
Common Stock

John Goodman (6)

1,108,767

1.4%

  

Class A
Common Stock

William Berks (4)

1,260,048

1.5%

  

Class A
Common Stock

Barry Mitchell
28915 Canmore Street
Agoura Hills CA  91301

5,334,853

6.5%

  

Class A
Common Stock

UTEK Corporation
2109 Palm Avenue
Tampa, FL  33605

11,379,734 (5)

13.9%

  

Class B
Common Stock

Robert M. Bernstein (4)

600,000 (3)

100%

  

All Officers and Directors
as a Group (3 Persons)

34,835,731

42.4%

              
(1) Unless otherwise indicated, the address of each director is c/o Material Technologies, Inc., 11661 San Vicente Boulevard, Suite 707, Los Angeles, CA  90049.
  
(2)               Unless otherwise indicated, based on 82,087,898 shares of Class A common stock outstanding and 600,000 shares of Class B common stock outstanding.  Shares of common stock subject to options



46






              or warrants currently exercisable, or exercisable within 60 days, are deemed outstanding for purposes of computing the percentage of the person holding such options or warrants, but are not deemed outstanding for purposes of computing the percentage of any other person.
  
(3) Each share of Class B common stock has 2,000 votes on any matter on which the common shareholders vote.  As a result, Mr. Bernstein holds 1.2 billion votes represented by the Class B common stock, and 95% of the overall votes.
  
(4) Indicates an officer or director of the Company.
  
(5) UTEK Corporation is the holder of 47,500 shares of our Class E Convertible Preferred Stock.  On February 26, 2008, each share of Class E Convertible Preferred Stock will be convertible into that number of fully paid and nonassessable shares of our Class A common stock determined by dividing $19.50 per share, the original issue price, by the the average closing bid price for the ten trading days prior to the date we receive a conversion notice from UTEK Corporation.
  
(6) Mr. Goodman passed away in March 2007.

          There are no current arrangements that will result in a change in control.

ITEM 12 – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

          
Other than as set forth below, during the last two fiscal years there have not been any relationships, transactions, or proposed transactions to which we were or are to be a party, in which any of the directors, officers, or 5% or greater shareholders (or any immediate family thereof) had or is to have a direct or indirect material interest.

          During the year ended December 31, 2006, Robert M. Bernstein, our Chief Executive Officer, returned 6,300 shares of common stock to us in exchange for a reduction in his subscription receivable (including accrued interest) totaling $62,077.  The shares returned were valued at the underlying stock price on the date of return, totaling $36,540, and recognized a loss of $25,537 as other expense in the accompanying consolidated statement of operations.

          On December 28, 2006, we issued shares of our Class A common stock to our officers and directors, or their nominees, as follows:

                        Nominees of Robert M. Bernstein          1,200,000 shares
                        John Goodman and Nominee                 1,400,000 shares
                        Bill Berks                                              1,250,000 shares
                        Joel Freidman                                        3,500,000 shares

          On October 1, 2006, we entered into an Employment Agreement with Robert M. Bernstein, our Chief Executive Officer and Chief Financial Officer, which provides certain terms and conditions with respect to Mr. Bernstein’s employment.  The Employment Agreement is for a three year term.  Under the Employment Agreement, Mr. Bernstein will be paid an annual salary of $250,000, with one year of paid severance if he is terminated without good cause prior to the expiration of the employment term.

          On November 21, 2006, we entered into a Stock Grant and General Release Agreement with Robert M. Bernstein, for the purpose of showing our appreciation for Mr. Bernstein’s work over the past several years.  Under the Stock Grant Agreement, Mr. Bernstein was issued 30,000,000 shares of our Class A common stock, restricted in accordance with Rule 144, and



47






subject to forfeiture back to us in accordance with the terms of the Stock Grant Agreement, if he is not continuously employed by us for the three years from the date of the Stock Grant Agreement.  Under the terms of the Stock Grant Agreement, Mr. Bernstein also released us from any and all claims he may have against us for any monies owed to him as of the date of the Stock Grant Agreement.

          On November 17, 2006, we entered into an indemnification agreement with each of our directors.  Under the terms of the indemnification agreements, we agreed to indemnify each director to the fullest extent permitted by law if the director was or is a party or threatened to be made a party to any action or lawsuit by reason of the fact that he is or was a director.  The indemnification shall cover all expenses, penalties, fines and amounts paid in settlement, including attorneys’ fees.  A director will not be indemnified for intentional misconduct for the primary purpose of his own personal benefit.

          During 2005, we paid our president $210,446, of which $192,000 pertains to salary accruing in 2005 and $18,446 pertained to salary accrued in a previous year.

          During 2005, we accrued $203 of interest on loans due us from our president.  The balance of the loans owed by our president including accrued interest as of December 31, 2005 totaled $2,153.

          During 2005, we accrued $3,989 of interest due us from our president on a stock subscription.  The balance owed us on this subscription as of December 31, 2005 totaled $59,085.

          During 2005, we issued Mr. John Goodman, a member of the board and our employee, 667 shares of our common stock subject to a two year lockup agreement.  The shares were valued at $240,000.

          During 2005, we issued Mr. William Berks, Vice-President, Director, and our employee, 1,667 shares of our common stock subject to a two year lockup agreement.  The shares were valued at $600,000.

          During 2005, we issued Mr. Joel Freedman, Director, and Corporate Secretary, 667 shares of our common stock subject to a two year lockup agreement.  The shares were valued at $240,000.

ITEM 13 – EXHIBITS

          (a)       Exhibits

3.1 (1)          

          

Certificate of Incorporation of Material Technologies, Inc.

  

3.2 (2)

Certificate of Amendment to Articles of Incorporation dated February 16, 2000

  

3.3 (2)

Certificate of Amendment to Articles of Incorporation dated July 12, 2000




48






3.4 (2)        

          

Certificate of Amendment to Articles of Incorporation dated July 31, 2000

  

3.5 (3)

Amended and Restated Certificate of Incorporation dated September 12, 2003

  

3.6 (5)

Certificate of Amendment to Certificate of Incorporation of Material Technologies, Inc. dated May 31, 2006

  

3.7 (5)

Certificate of Amendment to Certificate of Incorporation of Material Technologies, Inc. dated October 25, 2006

  

3.8 (1)

Bylaws of Material Technologies, Inc.

  

4.1 (1)

Class A Convertible Preferred Stock Certificate of Designations

  

4.2 (1)

Class B Convertible Preferred Stock Certificate of Designations

  

4.3 (6)

Class E Convertible Preferred Stock Certificate of Designations

  

10.1 (1)

License Agreement between Tensiodyne Scientific Corporation and the Trustees of the University of Pennsylvania

  

10.2 (1)

Sponsored Research Agreement between Tensiodyne Scientific Corporation and the Trustees of the University of Pennsylvania

  

10.3 (1)

Amendment No. 1 to the License Agreement between Tensiodyne Scientific Corporation and the Trustees of the University of Pennsylvania

  

10.4 (1)

Repayment Agreement between Tensiodyne Scientific Corporation and the Trustees of the University of Pennsylvania

  

10.5 (1)

Teaming Agreement between Tensiodyne Scientific Corporation and Southwest Research Institute

  

10.6 (1)

Letter Agreement between Tensiodyne Scientific Corporation, Robert M. Bernstein, and Stephen Forrest Beck and Handwritten modification

  

10.7 (7)

Agreement between Tensiodyne Corporation and Tensiodyne 1985-1 R&D Partnership

  

10.8 (7)

Amendment to Agreement between Material Technologies, Inc. and Tensiodyne 1985-1 R&D Partnership

  

10.9 (7)

Agreement between Advanced Technology Center of Southeastern Pennsylvania and Material Technologies

  

10.10 (7)

Addendum to Agreement between Advanced Technology Center of Southeastern Pennsylvania and Material Technologies, Inc.

  




49






10.11 (3)

          

Class A senior preferred convertible debenture of Material Technologies, Inc. issued to Palisades Capital, LLC

  

10.12 (8)

Stock Purchase Agreement dated as of April 7, 2005 by and between Material Technologies, Inc. and Birchington Investments Ltd.

  

10.13 (8)

Escrow Agreement by and between Material Technologies, Inc. and Birchington Investments Ltd dated as of September 27, 2005

  

10.14 (8)

Master Agreement with Barclay Asset Management, LLC dated as of June 28, 2005

  

10.15 (8)

Stock Purchase Agreement of Material Technologies, Inc. dated as of June 29, 2005

  

10.16 (8)

Consulting Services Agreement with Mark Theriot dated as of July 28, 2005

  

10.17 (8)

Workout Agreement the with the Trustees of the University of Pennsylvania dated as of August 15, 2005

  

10.18 (9)

Securities Purchase Agreement by and between Material Technologies, Inc. and Golden Gate Investors, Inc.

  

10.19 (9)

Convertible Debenture of Material Technologies, Inc. issued to Golden Gate Investors, Inc.

  

10.20 (9)

Common Stock Purchase Warrant of Material Technologies, Inc. issued to Golden Gate Investors, Inc.

  

10.21 (9)

Registration Rights Agreement by and between Material Technologies, Inc. and Golden Gate Investors, Inc.

  

10.22 (9)

Letter Agreement by and between Material Technologies, Inc. and Golden Gate Investors, Inc.

  

10.23 (9)

Letter Agreement by and between Material Technologies, Inc. and Golden Gate Investors, Inc.

  

10.24 (9)

Addendum to Convertible Debenture, Warrant to Purchase Common Stock and Securities Purchase Agreement by and between Material Technologies, Inc. and Golden Gate Investors, Inc.

  

10.25 (9)

Addendum to Convertible Debenture and Warrant to Purchase Common Stock by and between Material Technologies, Inc. and Golden Gate Investors, Inc.

  

10.26 (10)   

Addendum to Convertible Debenture, Warrant to Purchase Common Stock and Securities Purchase Agreement dated as of May 2, 2006 by and between Material Technologies, Inc. and Golden Gate Investors, Inc.

  




50






10.27 (11)

          

Securities Purchase Agreement dated as of May 30, 2006 by and between Material Technologies, Inc. and La Jolla Cove Investors, Inc.

  

10.28 (11)

Warrant to Purchase Common Stock of Material Technologies, Inc. issued to La Jolla Cove Investors, Inc.

  

10.29 (12)

Addendum to Warrant to Purchase Common Stock dated as of June 12, 2006 issued to La Jolla Cove Investors, Inc.

  

10.30 (13)

Addendum to Convertible Debenture, Warrant to Purchase Common Stock and Securities Purchase Agreement dated as of June 9, 2006

  

10.31 (14)

Regulation S Distribution Agreement and Instruction of Escrow dated May 31, 2006

  

10.32 (4)

Acquisition Agreement with UTEK Corporation and Materials Monitoring Technologies, Inc.

  

10.33 (4)

License Agreement between Material Monitoring Technologies, Inc. and North Carolina A&T State University

  

10.34 (4)

Consulting Agreement with Mannur J. Sundaresan, PhD

  

10.35 (4)

Settlement Agreement and General Release dated August 23, 2006 with Ben Franklin Technology Partners of Southeastern Pennsylvania

  

10.36 (15)

Settlement Agreement and General Release dated October 27, 2006

  

10.37 (15)

Warrant Agreement dated October 27, 2006 with Palisades Capital, LLC

  

10.38 (15)

Warrant Agreement dated October 27, 2006 with Hyde Investments, Ltd.

  

10.39 (15)

Warrant Agreement dated October 27, 2006 with Livingston Investments, Ltd.

  

10.40 (15)

Warrant Agreement dated October 27, 2006 with Palisades Capital, LLC

  

10.41 (15)

Warrant Agreement dated October 27, 2006 with GCH Capital, Ltd.

  

10.42 (15)

Amendment to Class A Senior Secured Convertible Debenture dated October 27, 2006 with Palisades Capital, LLC

  

10.43 (15)

Amendment to Class A Senior Secured Convertible Debenture dated October 27, 2006 with Hyde Investments, Ltd.

  

10.44 (15)

Amendment to Class A Senior Secured Convertible Debenture dated October 27, 2006 with Livingston Investments, Ltd.

  

10.45 (15)

Stockholder Lockup Agreement dated October 27, 2006 with Robert M. Bernstein

  




51






10.46 (15)   

          

Escrow Agreement dated October 27, 2006

  

10.47 (16)

Employment Agreement with Robert M. Bernstein dated October 1, 2006.

  

10.48 (16)

Stock Grant and General Release Agreement with Robert M. Bernstein dated November 21, 2006.

  

10.49

Form of Indemnification Agreement

  

10.50 (17)

Settlement Agreement and Release with Stephen F. Beck dated as of December 27, 2006

  

10.51 (17)

Irrevocable Escrow Instructions with Stephen F. Beck dated as of December 27, 2006

  

10.52

Promissory Note dated March 30, 2007 with Nathan J. Esformes

  

23.1

Consent of KMJ Corbin & Company

  

31.1

Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

  

31.2

Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer

  

32.1

Chief Executive Officer Certification Pursuant to 18 USC, Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

  

32.2

Chief Financial Officer Certification Pursuant to 18 USC, Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


     (1)     
Incorporated by reference from our registration statement on Form S-1 filed with the Commission on April 30, 1997.
  
(2)
Incorporated by reference from our Annual Report on Form 10-K filed with the Commission on March 30, 2001.
  
(3)
Incorporated by reference from our Annual Report on Form 10-K filed with the Commission on April 9, 2004.
  
(4)
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on August 24, 2006.
  
(5)
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on November 8, 2006.
  
(6)
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on February 5, 2007.
  



52






     (7)     
Incorporated by reference from our registration statement on Form S-1 which became effective on January 19, 1996.
  
(8)
Incorporated by reference from our Quarterly Report on Form 10-Q filed with the Commission on November 14, 2005.
  
(9)
Incorporated by reference from our Current Report on Form 8-K/A filed with the Commission on January 5, 2006.
  
(10)
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on May 17, 2006.
  
(11)
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on June 8, 2006.
(12)
Incorporated by reference from our Current Report on Form 8-K/A filed with the Commission on June 15, 2006.
  
(13)
Incorporated by reference from our registration statement on Form SB-2 filed with the Commission on June 15, 2006.
  
(14)
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on June 9, 2006.
  
(15)
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on November 2, 2006.
  
(16)
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on November 28, 2006.
  
(17)
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on January 3, 2007.

ITEM 14 – PRINCIPAL ACCOUNTANT FEES AND SERVICES

Audit Fees

          
The aggregate fees billed in each of the fiscal years ended December 31, 2006 and 2005 for professional services rendered by the principal accountant for the audit of our annual financial statements and review of the financial statements included in our Form 10-KSB or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years were $77,540 and $73,270, respectively.

Audit – Related Fees

          
There were no fees billed for services reasonably related to the performance of the audit or review of the financial statements outside of those fees disclosed above under “Audit Fees” for fiscal years ended December 31, 2006 and 2005.




53






Tax Fees

          
For the fiscal years ended December 31, 2006 and December 31, 2005, our principal accountants did not render any services for tax compliance, tax advice, and tax planning work.

All Other Fees

          
None.
































54






SIGNATURES

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

Material Technologies, Inc.

  

  

Dated:  March 30, 2007

/s/  Robert M. Bernstein                           

By:     Robert M. Bernstein, President,
          Chief Executive Officer, Chief
          Financial Officer and Chairman

  

  

  

Dated:  March 30, 2007

/s/  Joel R. Freedman                               

By:     Joel R. Freedman, Secretary and
          Director



          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.


/s/  Robert M. Bernstein                                    

Dated:  March 30, 2007

By:    Robert M. Bernstein, President, Chief
         Executive Officer, Chief Financial
         Officer and Chairman

  

  

/s/  Joel R. Freedman                                        

Dated:  March 30, 2007

By:    Joel R. Freedman, Secretary and
         Director

  

  

/s/  Dr. William Berks                                        

Dated:  March 30, 2007

By:    Dr. William Berks, Vice President and
         Director











55








MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED FINANCIAL STATEMENTS

For The Years Ended December 31, 2006 and 2005

with

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM























MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)

TABLE OF CONTENTS



Report of Independent Registered Public Accounting Firm............................................... F-1

Financial Statements

    Consolidated Balance Sheets............................................................................................... F-2

    Consolidated Statements of Operations................................................................................ F-4

    Consolidated Statements of Comprehensive Loss................................................................. F-5

    Consolidated Statements of Stockholders’ Equity (Deficit).................................................... F-6

    Consolidated Statements of Cash Flows............................................................................. F-13

    Notes to Consolidated Financial Statements....................................................................... F-16






























REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
Material Technologies, Inc.


We have audited the accompanying consolidated balance sheet of Material Technologies, Inc. (a development stage company) (the “Company”) as of December 31, 2006, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity (deficit) and cash flows for each of the years in the two-year period 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 audits. We did not audit the cumulative data from October 21, 1983 (inception) to December 31, 2003 in the consolidated statements of operations, comprehensive loss, stockholders' deficit and cash flows, which were audited by other auditors whose reports dated March 7, 2003 and March 16, 2004, which expressed unqualified opinions (the March 16, 2004 report was modified related to the uncertainty of the Company's ability to continue as a going concern) have been furnished to us. Our opinion, insofar as it relates to the amounts included for the cumulative period from October 21, 1983 (inception) to December 31, 2003 is based soley on the reports of the other auditors.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Material Technologies, Inc. (a development stage company) as of December 31, 2006, and the results of their operations and their cash flows for each of the years in the two-year period then ended and for the period from October 21, 1983 (inception) through December 31, 2006 in conformity with accounting principles generally accepted in the United States of America.

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 incurred recurring losses and has yet to be successful in establishing profitable operations.  These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern.  Management’s plans regarding 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.


                                                                                                KMJ | CORBIN & COMPANY LLP

Irvine, California
March 30, 2007


F-1





(A Development Stage Company)
  
CONSOLIDATED BALANCE SHEET

  
  
 December 31,   
2006

ASSETS
  
Current assets:
Cash and cash equivalents
 $
129,296
Investments in marketable securities held for trading
135,136
Accounts receivable
116,707
Prepaid services
32,659
Prepaid expenses and other current assets
7,347

  
Total current assets
         421,145
  
Property and equipment, net 
5,371
Intangible assets, net
3,916
Deposit
2,348

  
 $
         432,780
=============






















Continued . . .
F-2



(A Development Stage Company)
  
CONSOLIDATED BALANCE SHEET

  
                                                    
 December 31,   
 
2006

  
  
LIABILITIES AND STOCKHOLDERS'  DEFICIT
  
Current liabilities:
Accounts payable 
$
427,664
Current portion of research and development sponsorship payable
                25,000
Notes payable
90,138

  
Total current liabilities
              542,802
  
Acrued legal settlement
1,050,000
Research and development sponsorship payable, net of current portion
747,713
Convertible debentures and accrued interest payable, net of discount 
of $2,447,780
169,160
Derivative and warrant liabilities
1,904,483

  
Total liabilities
           4,414,158

  
Minority interest in consolidated subsidiary
825

  
Commitments and contingencies
  
Stockholders' deficit:
Class A preferred stock, $0.001 par value, liquidation preference
of  $720 per share; 350,000 shares authorized; 337 shares issued
and outstanding
                          -
Class B preferred stock, $0.001 par value, liquidation preference of
$10,000 per share; 15 shares authorized;  none issued and
outstanding
                          -
Class C preferred stock, $0.001 par value, liquidation preference of
$0.001 per share; 25,000,000 shares authorized; 1,517 shares issued
and outstanding
1
Class D preferred stock, $0.001 par value, liquidation preference of
$0.001 per share; 20,000,000 shares authorized; 0 shares issued 
and outstanding
                          -
Class A Common Stock, $0.001 par value, 600,000,000 shares
authorized; 93,819,289 shares issued; 73,179,015 shares outstanding
(including 20,640,274 shares committed but not issued)
73,179
Class B Common Stock, $0.001 par value, 600,000 shares authorized,
issued and outstanding
600
Warrants subscribed
10,000
Additional paid-in-capital
68,306,674
Deficit accumulated during the development stage
(72,358,976)
Treasury stock (2,067 shares at cost)
(13,681)

  
Total stockholders' deficit
         (3,982,203)

  
$
              432,780
=============



See report of independent registered public accounting firm
and accompanying notes to the consolidated financial statements
F-3



MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
  
CONSOLIDATED STATEMENTS OF OPERATIONS

  
From
October 21, 1983
For the Year Ended 
(Inception)
December 31,
through
2006
2005
December 31, 2006



  
Revenues:
  Research and development
$
39,446
 $ 
       139,346
 $ 
           5,392,085
  Revenue from bridge testing
116,707
               116,707
  Other
                     -  
                 -  
               274,125



  
    Total revenues
           156,153
        139,346
              5,782,917



  
Costs and expenses:
  Research and development
3,071,289
     2,364,059
            18,301,175
  General and administrative
8,053,572
      1,801,928
            31,851,802



  
    Total costs and expenses
      11,124,861
      4,165,987
            50,152,977



  
      Loss from operations
     (10,968,708)
  (4,026,641)
            (44,370,060)



  
Other income (expense):
  Gain on modification of convertible debt
831,035
                   -
586,245
  Modification of research and development sponsorship
    agreement
                     -
(7,738,400)
(7,738,400)
  Loss on subscription receivables
(1,368,555)
                   -
              (1,368,555)
  Interest expense
(1,614,431)
   (6,493,345)
              (9,354,979)
  Other-than-temporary impairment of marketable
    securities
(3,582,600)
   (1,918,587)
              (9,785,947)
  Net unrealized and realized loss of marketable securities
(215,916)
          (3,589)
              (5,411,665)
  Change in fair value of investments derivative liability
182,085
      (585,735)
                 (403,650)
  Change in fair value of derivative and warrant liabilities
6,389,272
                   -
              6,389,272
  Interest income
33,624
         17,837
                 406,199
  Gain on sale of assets
7,008
                   -
                    7,008
  Loss on settlement of lawsuits
(1,267,244)
                   -
              (1,267,244)
  Other
                        -
                    -
                   (33,000)



  
    Other expense, net
           (605,722)
(16,721,819)
          (27,974,716)



  
Loss before provision for income taxes
      (11,574,430)
(20,748,460)
         (72,344,776)
  
Provision for income taxes
                (800)
        (800)
                (14,200)



  
      Net loss
$
     (11,575,230)
$
(20,749,260)
$
       (72,358,976)
============= ============= ===============
                                      
Per share data:
  Basic and diluted net loss per share
$
              (10.45)
$
          (60.13)
============= =============
  Weighted average Class A common shares
    outstanding - basic and diluted
       1,107,863
       345,096
=============
=============














See report of independent registered public accounting firm
and accompanying notes to the consolidated financial statements
F-4



MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
  
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

  
From
October 21, 1983
For the Year Ended
(Inception)
December  31, 
Through
 
2006
2005
December  31, 2005



  
Net loss
$
(11,575,230)
 $ 
   (20,749,260)
 $ 
              (72,358,976)



  
Other comprehensive loss:
Temporary decrease in market value of
   securities available for sale
   6,324,564
        (872,188)
                                 -
Reclassification to other-than-temporary
   impairment of marketable securities
   available for sale
 (6,203,347)
      1,918,587
                                 -



  
      121,217
      1,046,399
                                  -



  
 
 
 
Net comprehensive loss
$
(11,454,013)
 $ 
   (19,702,861)
 $ 
              (72,358,976)
=============
=============
================























See report of independent registered public accounting firm
and accompanying notes to the consolidated financial statements
F-5



MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
  
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

Deficit
Adjusted
Accumulated
Notes
Accumulated
Class A
Class B
Class C
Class D
Class A
Class B
Additional
During the
Receivable-
Post Split
Other
Total
Preferred Stock
Preferred Stock
Preferred Stock
Preferred Stock
Common Stock
Post split
Common Stock
Warrants
Paid-in
Development
Common
Treasury Stock
Comprehensive
Stockholders'
Shares
Amount
Shares
Amount
Shares
Amount
Shares
Amount
Shares
Amount
Shares
Amount
Subscribed
Capital
Stage
Stock
Shares
Amount
Loss
Equity (Deficit)
Initial issuance of common stock
October 21, 1983
                       -
          -
                       -
          -
                -
           -
                       -
          -
                      0
             0
                       -
           -
                -
           2,500
              2,500
Adjustment to give effect
to recapitalization on
December 15, 1986 - cancellation
of shares
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                     (0)
            (0)
                       -
           -
                -
                (4)
                   (4)
  Balance, October 21, 1983
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      -
              -
                       -
           -
                -
           2,496
                    -
                 -
                      -
             -
                       -
              2,496
  
Shares issued by
Tensiodyne
Corporation in
connection with
pooling of interests
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      0
             0
                       -
           -
                -
           4,342
                    -
              4,342
Net loss
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      -
              -
                       -
           -
                -
                  -
            (4,317)
             (4,317)
  
                  -
                     -
Balance, December 31, 1983
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      0
             0
                       -
           -
                -
           6,838
            (4,317)
                 -
                      -
             -
                       -
              2,521
  
                      -
              -
                  -
                     -
Capital contribution
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      -
              -
                       -
           -
                -
         21,755
                    -
                 -
                      -
             -
                       -
            21,755
Shares issued for cash
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      0
             0
                       -
           -
                -
         10,700
                    -
                 -
                      -
             -
                       -
            10,700
Offering costs
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      -
              -
                       -
           -
                -
          (2,849)
                    -
                 -
                      -
             -
                       -
             (2,849)
Net loss
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      -
              -
                       -
           -
                -
                  -
           (21,797)
                 -
                      -
             -
                       -
           (21,797)
  
                  -
                     -
  Balance, December 31, 1984
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      0
             0
                       -
           -
                -
         36,444
           (26,114)
                 -
                      -
             -
                       -
            10,330
  
                      -
              -
                  -
                     -
Capital contribution
                       -
          -
                      -
              -
                  -
                     -
Sale of 12,166 warrants
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      -
              -
                       -
           -
                -
        200,555
                    -
                 -
                      -
             -
                       -
           200,555
at $1.50
                      -
              -
                  -
                     -
per warrant
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      -
              -
                       -
           -
                -
         18,250
                    -
                 -
                      -
             -
                       -
            18,250
Cancellation of shares
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                     (0)
            (0)
                       -
           -
                -
                (0)
                    -
                 -
                      -
             -
                       -
                   (0)
Net loss
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      -
              -
                       -
           -
                -
                  -
         (252,070)
                 -
                      -
             -
                       -
          (252,070)
  Balance, December 31, 1985
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      0
             0
                       -
           -
                -
        255,249
         (278,184)
                 -
                      -
             -
                       -
           (22,935)
  
                      -
              -
                  -
                     -
Net loss
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      -
              -
                       -
           -
                -
                  -
           (10,365)
                 -
                      -
             -
                       -
           (10,365)
  Balance, December 31, 1986
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      0
             0
                       -
           -
                -
        255,249
         (288,549)
                 -
                      -
             -
                       -
           (33,300)
  
                      -
              -
                  -
                     -
Issuance of common stock
                      -
              -
                  -
                     -
upon
                      -
              -
                  -
                     -
exercise of warrants
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      -
              -
                       -
           -
                -
         27,082
                    -
                 -
                      -
             -
                       -
            27,082
Net loss
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      -
              -
                       -
           -
                -
                  -
           (45,389)
                 -
                      -
             -
                       -
           (45,389)
  
                      -
              -
                  -
                     -
  Balance, December 31, 1987
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      0
             0
                       -
           -
                -
        282,331
         (333,938)
                 -
                      -
             -
                       -
           (51,607)
  
                      -
              -
                  -
                     -
Shares issued for cash
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      0
             0
                       -
           -
                -
        101,752
                    -
                 -
                      -
             -
                       -
           101,752
Shares issued as
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      0
             0
                       -
           -
                -
         70,600
                    -
                 -
                      -
             -
                       -
            70,600
compensation
                      -
              -
                  -
                     -
Net loss
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      -
              -
                       -
           -
                -
                  -
         (142,335)
                 -
                      -
             -
                       -
          (142,335)
  
                      -
              -
                  -
                     -
  Balance, December 31, 1988
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      0
             0
                       -
           -
                -
        454,683
         (476,273)
                 -
                      -
             -
                       -
           (21,590)
  
                      -
              -
                  -
                     -
Shares issued for cash
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      0
             0
                       -
           -
                -
           2,000
                    -
                 -
                      -
             -
                       -
              2,000
Shares issued as
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      0
             0
                       -
           -
                -
         18,000
                    -
                 -
                      -
             -
                       -
            18,000
compensation
                      -
              -
                  -
                     -
Net loss
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      -
              -
                       -
           -
                -
                  -
           (31,945)
                 -
                      -
             -
                       -
           (31,945)
  
                      -
              -
                  -
                     -
  Balance, December 31, 1989
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      0
             0
                       -
           -
                -
        474,683
         (508,218)
                 -
                      -
             -
                       -
           (33,535)
  
                      -
              -
                  -
                     -
Shares issued for cash
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      0
             0
                       -
           -
                -
         59,250
                    -
                 -
                      -
             -
                       -
            59,250



F-6




Shares issued as
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      0
             0
                       -
           -
                -
         32,400
                    -
                 -
                      -
             -
                       -
            32,400
compensation
                      -
              -
                  -
                     -
Net income
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      -
              -
                       -
           -
                -
                  -
          133,894
                 -
                      -
             -
                       -
           133,894
  Balance, December 31, 1990
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      0
             0
                       -
           -
                -
        566,333
         (374,324)
                 -
                      -
             -
                       -
           192,009
  
                      -
              -
                  -
                     -
Shares issued for cash
                   350
          -
                       -
          -
                       -
           -
                       -
          -
                      0
             0
                       -
           -
                -
        273,686
                    -
                 -
                      -
             -
                       -
           273,686
Shares issued as
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      0
             0
                       -
           -
                -
         64,884
                    -
                 -
                      -
             -
                       -
            64,884
compensation
                      -
              -
                  -
                     -
Conversion of stock
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                     (0)
            (0)
              60,000
        60
                -
                (6)
                    -
                 -
                      -
             -
                       -
                   54
Net loss
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      -
              -
                       -
           -
                -
                  -
         (346,316)
                 -
                      -
             -
                       -
          (346,316)
  Balance, December 31, 1991
                   350
          -
                       -
          -
                       -
           -
                       -
          -
                      0
             0
              60,000
        60
                -
        904,897
         (720,640)
                 -
                      -
             -
                       -
           184,317
  
                      -
              -
                  -
                     -
Shares issued for cash
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      0
             0
                       -
           -
                -
         16,000
                    -
                 -
                      -
             -
                       -
            16,000
Shares issued as
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      0
             0
                       -
           -
                -
         15,520
                    -
                 -
                      -
             -
                       -
            15,520
compensation
                      -
              -
                  -
                     -
Conversion of warrants
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      0
             0
                       -
           -
                -
         15,000
                    -
                 -
                      -
             -
                       -
            15,000
  
                      -
              -
                  -
                     -
Sale of Class B common
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      -
              -
              60,000
           -
                -
         14,940
                    -
                 -
                      -
             -
                       -
            14,940
stock
                      -
              -
                  -
                     -
Issuance of stock to
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      -
              -
                       -
           -
                -
                  -
                    -
                 -
                      -
             -
                       -
                     -
unconsolidated
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      0
             0
                       -
           -
                -
         71,664
                    -
                 -
                      -
             -
                       -
            71,664
subsidiary
                      -
              -
                  -
                     -
Conversion of stock
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      0
             0
             (60,000)
           -
                -
                 6
                    -
                 -
                      -
             -
                       -
                    6
Cancellation of shares
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                     (0)
            (0)
                       -
           -
                -
                (0)
                    -
                 -
                      -
             -
                       -
                   (0)
Net loss
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      -
              -
                       -
           -
                -
                  -
         (154,986)
                 -
                      -
             -
                       -
          (154,986)
  
                      -
              -
                  -
                     -
  Balance, December 31, 1992
                   350
          -
                       -
          -
                       -
           -
                       -
          -
                      0
             0
              60,000
        60
                -
     1,038,027
         (875,626)
                 -
                      -
             -
                       -
           162,461
  
                      -
              -
                  -
                     -
Shares issued for cash
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      -
              -
                       -
           -
                -
                  -
                    -
                 -
                      -
             -
                       -
                     -
Shares issued for license
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      0
             0
                       -
           -
                -
           6,250
                    -
                 -
                      -
             -
                       -
              6,250
agreement
                      -
              -
                  -
                     -
Shares issued as
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      0
             0
                       -
           -
                -
         13,913
                    -
                 -
                      -
             -
                       -
            13,913
compensation
                      -
              -
                  -
                     -
Warrant conversion
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      0
             0
                       -
           -
                -
        304,999
                    -
                 -
                      -
             -
                       -
           304,999
Cancellation of shares
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                     (0)
            (0)
                       -
           -
                -
          (7,569)
                    -
                 -
                      -
             -
                       -
             (7,569)
Net loss
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      -
              -
                       -
           -
                -
                  -
         (929,900)
                 -
                      -
             -
                       -
          (929,900)
  
                      -
              -
                  -
                     -
  Balance, December 31, 1993
                   350
          -
                       -
          -
                       -
           -
                       -
          -
                      1
             0
              60,000
        60
                -
     1,355,620
      (1,805,526)
                 -
                      -
             -
                       -
          (449,846)
  
                      -
              -
                  -
                     -
Adjustment to give effect
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      -
              -
                  -
                     -
to
                      -
              -
                  -
                     -
recapitalization on
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      0
             0
                       -
           -
                -
        385,424
                    -
                 -
                      -
             -
                       -
           385,424
February 1, 1994
                      -
              -
                  -
                     -
Shares issued for cash
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      5
             0
                       -
           -
                -
         24,786
                    -
                 -
                      -
             -
                       -
            24,786
Shares issued as
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      1
             0
                       -
           -
                -
              223
                    -
                 -
                      -
             -
                       -
                 223
compensation
                      -
              -
                  -
                     -
Issuance of shares for
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      -
              -
                  -
                     -
the
                      -
              -
                  -
                     -
modification of
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      0
             0
                       -
           -
                -
                 0
                    -
                 -
                      -
             -
                       -
                    0
agreements
                      -
              -
                  -
                     -
Net loss
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      -
              -
                       -
           -
                -
                  -
         (377,063)
                 -
                      -
             -
                       -
          (377,063)
  
  Balance, December 31, 1994
                   350
          -
                       -
          -
                       -
           -
                       -
          -
                      7
             0
              60,000
        60
                -
     1,766,054
      (2,182,589)
                 -
                      -
             -
                       -
          (416,475)
  
                      -
              -
                  -
                     -
Issuance of shares for
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      -
              -
                  -
                     -
the
                      -
              -
                  -
                     -
modification of
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      1
             0
                       -
           -
                -
              153
                    -
                 -
                      -
             -
                       -
                 153
agreements
                      -
              -
                  -
                     -
Net loss
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      -
              -
                       -
           -
                -
                  -
         (197,546)
                 -
                      -
             -
                       -
          (197,546)
  
  Balance, December 31, 1995
                   350
          -
                       -
          -
                       -
           -
                       -
          -
                      7
             0
              60,000
        60
                -
     1,766,207
      (2,380,135)
                 -
                      -
             -
                       -
          (613,868)
  
                      -
              -
                  -
                     -
Shares issued as
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      1
             0
                       -
           -
                -
         16,466
                    -
                 -
                      -
             -
                       -
            16,466
compensation
                      -
              -
                  -
                     -
Shares issued for cash
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      0
             0
                       -
           -
                -
        174,040
                    -
                 -
                      -
             -
                       -
           174,040
Issuance of shares for
                      -
              -
                  -
                     -
the
                      -
              -
                  -
                     -
modification of
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      1
             0
                       -
           -
                -
                 0
                    -
                 -
                      -
             -
                       -
                    0




F-7



agreements
                      -
              -
                  -
                     -
Cancellation of shares
                      -
              -
                  -
                     -
held in
                      -
              -
                  -
                     -
treasury
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                     (0)
            (0)
                       -
           -
                -
       (154,600)
                    -
                 -
                      -
             -
                       -
          (154,600)
Net loss
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      -
              -
                       -
           -
                -
                  -
         (450,734)
                 -
                      -
             -
                       -
          (450,734)
  
                      -
              -
                  -
                     -
  Balance, December 31, 1996
                   350
          -
                       -
          -
                       -
           -
                       -
          -
                      9
             0
              60,000
        60
                -
     1,802,114
      (2,830,869)
                 -
                      -
             -
                       -
       (1,028,695)
  
                      -
              -
                  -
                     -
Shares issued for cash
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      0
             0
                       -
           -
                -
        100,000
                    -
                 -
                      -
             -
                       -
           100,000
Conversion of
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      3
             0
                       -
           -
                -
        166,000
                    -
                 -
                      -
             -
                       -
           166,000
indebtedness
                      -
              -
                  -
                     -
Class A common stock
                      -
              -
                  -
                     -
issued for
                      -
              -
                  -
                     -
cancellation of
                      -
              -
                  -
                     -
$372,000 accrued
                      -
              -
                  -
                     -
wages due officer
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      5
             0
                       -
           -
                -
        371,999
                    -
                 -
                      -
             -
                       -
           372,000
Shares issued as
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      1
             0
                       -
           -
                -
           2,471
                    -
                 -
                      -
             -
                       -
              2,471
compensation
                      -
              -
                  -
                     -
Adjustment to give effect
                      -
              -
                  -
                     -
to
                      -
              -
                  -
                     -
recapitalization on
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      2
             0
                       -
           -
                -
                (0)
                    -
                 -
                      -
             -
                       -
                   (0)
March 9, 1997
                      -
              -
                  -
                     -
Net loss
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      -
              -
                       -
           -
                -
                  -
         (133,578)
                 -
                      -
             -
                       -
          (133,578)
  
  Balance, December 31, 1997
                   350
          -
                       -
          -
                       -
           -
                       -
          -
                    19
             0
              60,000
        60
                -
     2,442,584
      (2,964,447)
                 -
                      -
             -
                       -
          (521,803)
  
                      -
              -
                  -
                     -
Shares issued for
                      -
              -
                  -
                     -
cancellation of
                      -
              -
                  -
                     -
indebtedness
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      8
             0
                       -
           -
                -
        170,000
                    -
                 -
                      -
             -
                       -
           170,000
Conversion of options
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      2
             0
                       -
           -
                -
        124,999
                    -
                 -
                      -
             -
                       -
           125,000
Shares issued as
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      4
             0
                       -
           -
                -
        112,162
                    -
                 -
                      -
             -
                       -
           112,162
compensation
                      -
              -
                  -
                     -
Shares issued for
                      -
              -
                  -
                     -
cancellation of
                      -
              -
                  -
                     -
redeemable preferred
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      0
             0
                       -
           -
                -
        150,000
                    -
                 -
                      -
             -
                       -
           150,000
stock
                      -
              -
                  -
                     -
Shares returned to
                      -
              -
                  -
                     -
treasury and
                      -
              -
                  -
                     -
cancelled
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                     (2)
            (0)
                       -
           -
                -
                (1)
                    -
                 -
                      -
             -
                       -
                   (1)
  
                      -
              -
                  -
                     -
Modification of royalty
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      2
             0
                       -
           -
                -
           7,333
                    -
                 -
                      -
             -
                       -
              7,333
agreement
                      -
              -
                  -
                     -
Issuance of warrants to
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      -
              -
                       -
           -
                -
         27,567
                    -
                 -
                      -
             -
                       -
            27,567
officer
                      -
              -
                  -
                     -
Net loss
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      -
              -
                       -
           -
                -
                  -
         (549,187)
                 -
                      -
             -
                       -
          (549,187)
  
  Balance, December 31, 1998
                   350
          -
                       -
          -
                       -
           -
                       -
          -
                    34
             0
              60,000
        60
                -
     3,034,645
      (3,513,634)
                 -
                      -
             -
                       -
          (478,929)
  
                      -
              -
                  -
                     -
Shares issued for
                      -
              -
                  -
                     -
cancellation
                      -
              -
                  -
                     -
of indebtedness
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      7
             0
                       -
           -
                -
        166,667
                    -
                 -
                      -
             -
                       -
           166,667
Shares issued as
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      4
             0
                       -
           -
                -
         95,099
                    -
                 -
                      -
             -
                       -
            95,099
compensation
                      -
              -
                  -
                     -
Shares issued for
                      -
              -
                  -
                     -
modification of
                      -
              -
                  -
                     -
licensing agreement
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      2
             0
                       -
           -
                -
                (0)
                    -
                 -
                      -
             -
                       -
                   (0)
Shares issued for cash
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      1
             0
                       -
           -
                -
        173,540
                    -
                 -
                      -
             -
                       -
           173,540
Net loss
                       -
          -
                       -
          -
                       -
           -
                       -
          -
                      -
              -
                       -
           -
                -
                  -
         (539,283)
                 -
                      -
             -
                       -
          (539,283)
  
                      -
              -
                  -
                     -
  Balance, December 31, 1999
                   350
          -
                       -