Untitled Page



As filed with the Securities and Exchange Commission on February 17, 2006
An Exhibit List can be found on page II-11.
Registration No. 333-

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
_____________________________

FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
_____________________________

MATERIAL TECHNOLOGIES, INC.
(Name of small business issuer in its charter)

Delaware
3823
95-4622822
(State or other
Jurisdiction of
Incorporation or
Organization)
(Primary Standard Industrial
Classification Code Number)
(I.R.S. Employer
Identification No.)

11661 San Vicente Boulevard, Suite 707
Los Angeles, California 90049
(310) 208-5589
(Address and telephone number of principal executive offices and principal place of business)

Robert M. Bernstein, Chief Executive Officer
MATERIAL TECHNOLOGIES, INC.
11661 San Vicente Boulevard, Suite 707
Los Angeles, California 90049
(310) 208-5589
(Name, address and telephone number of agent for service)

Copies to:

Gregory Sichenzia, Esq.
Eric A. Pinero, Esq.
Sichenzia Ross Friedman Ference LLP
1065 Avenue of the Americas, 21st Flr.
New York, New York 10018
(212) 930-9700
(212) 930-9725 (fax)



APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
From time to time after this Registration Statement becomes effective.

If any securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box: [X]










If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ________

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. _________

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. _________

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. _________























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CALCULATION OF REGISTRATION FEE

Title of each class of securities to be registered

Amount to be registered (1)

Proposed maximum offering
price per
share

Proposed maximum aggregate offering price

Amount of registration fee

Common stock issuable upon conversion of debentures

72,646,330 (2)

$.15(3)

$10,896,949.48

$1,165.97

Common Stock issuable upon exercise of warrants

4,000,000(4)

$1.09(5)

$4,360,000.00

$466.52

Common Stock, par value $.001 per share

735,747(6)

$.15(3)

$110,362.05

$11.81

Total

77,382,077 

  

  

$1,644.30

(1) Includes shares of our common stock, par value $0.001 per share, which may be offered pursuant to this registration statement, which shares are issuable upon conversion of convertible debentures and the exercise of warrants held by the selling stockholder. In addition to the shares set forth in the table, the amount to be registered includes a good faith estimate of the number of shares issuable upon conversion of the debentures. The amount to be registered also includes shares of common stock issuable upon exercise of the warrants, as such number may be adjusted as a result of stock splits, stock dividends and similar transactions in accordance with Rule 416.  Should the conversion ratio of our convertible debentures result in our having insufficient shares, we will not rely upon Rule 416, but will file a new registration statement to cover the resale of such additional shares should that become necessary.  In addition, should a decrease in the exercise price as a result of an issuance or sale of shares below the then current market price, result in our having insufficient shares, we will not rely upon Rule 416, but will file a new registration statement to cover the resale of such additional shares should that become necessary.

(2) Includes a good faith estimate of the shares (150%) underlying convertible debentures to account for market fluctuations.

(3) Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(c) under the Securities Act of 1933, using the average of the high and low price as reported on the Over-The-Counter Bulletin Board on February 16, 2006, which was $.15 per share.

(4) Includes shares underlying warrants exercisable at $1.09 per share.

(5) Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(g) under the Securities Act of 1933, using the exercise price of $1.09.

(6) Includes shares of common stock issued to one of the selling stockholders pursuant to certain Investor Relations Service Agreements dated as of December 8, 2005 and February 7, 2006 as compensation for investor relations services performed by the selling stockholder under the Agreements. 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.













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PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED FEBRUARY 17, 2006

MATERIAL TECHNOLOGIES, INC.
77,382,077
SHARES OF
COMMON STOCK

          This prospectus relates to the resale by the selling stockholder of up to 77,382,077 shares of our common stock, including up to 72,646,330 shares of common stock underlying convertible debentures, up to 4,000,000 issuable upon the exercise of common stock purchase warrants and 735,747 shares of common stock issued to one of the selling stockholders.  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) $0.70, (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.  The warrant is exercisable into 4,000,000 shares of common stock for a period of three years at an exercise price of $1.09 per share.  The selling stockholder may sell common stock from time to time in the principal market on which the stock is traded at the prevailing market price or in negotiated transactions. The selling stockholder may be deemed an underwriter of the shares of common stock, which it is offering.  We will pay the expenses of registering these shares.

          Our common stock is registered under Section 12(g) of the Securities Exchange Act of 1934 and is listed on the Over-The-Counter Bulletin Board under the symbol "MTNA".  The last reported sales price per share of our common stock as reported by the Over-The-Counter Bulletin Board on February 16, 2006, was $.15.

Investing in these securities involves significant risks.   See "Risk Factors" beginning on page 4.

          Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this Prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The date of this prospectus is _______, 2006.

          The information in this Prospectus is not complete and may be changed.  This Prospectus is included in the Registration Statement that was filed by Material Technologies, Inc., with the Securities and Exchange Commission.  The selling stockholder may not sell these securities until the registration statement becomes effective.  This Prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the sale is not permitted.













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Table Of Contents

Prospectus Summary......................................................................................................................... 3

Risk Factors...................................................................................................................................... 4

Use of Proceeds.............................................................................................................................. 11

Market for Common Equity and Related Stockholder Matters………………………………….......11

Management’s Discussion and Analysis of Financial Condition
            and Results of Operations……………………………………………………………......  12

Description of Business…………………………………………………………………...……… 19

Description of Property................................................................................................................... 22

Legal Proceedings........................................................................................................................... 22

Directors, Executive Officers, Promoters and Control Persons.......................................................... 23

Executive Compensation.................................................................................................................. 26

Certain Relationships and Related Transactions................................................................................ 28

Changes In and Disagreements with Accountants on
            Accounting and Financial Disclosure.................................................................................... 29

Security Ownership of Certain Beneficial Owners and Management.................................................. 29

Description of Securities Being Registered........................................................................................ 30

Indemnification for Securities Act Liabilities...................................................................................... 30

Plan of Distribution.......................................................................................................................... 31

Selling Stockholder.......................................................................................................................... 33

Legal Matters.................................................................................................................................. 35

Experts........................................................................................................................................... 35

Available Information....................................................................................................................... 35

Financial Statements........................................................................................................................ 36





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PROSPECTUS SUMMARY

          The following summary highlights selected information contained in this prospectus. This summary does not contain all the information you should consider before investing in the securities. Before making an investment decision, you should read the entire prospectus carefully, including the "risk factors" section, the financial statements and the notes to the financial statements.

MATERIAL TECHNOLOGIES, INC.

          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.  We are a development stage company doing business as Tensiodyne Scientific Corporation.

          Our efforts are dedicated to developing devices and systems that indicate the true fatigue status of a metal component.  We have developed two products.  The first is a small, extremely 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 cracks in metals, The Electrochemical Fatigue Sensor.  It has demonstrated that it can detect cracks, in the laboratory, 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.  

          For the years ended December 31, 2005 and 2004, we generated revenue in the amount of $139,346and $146,932, respectively, and a net loss of $20,749,260 and $25,495,291, respectively. As a result of our substantial need for working capital and other factors, our auditors in their report dated January 31, 2006, have expressed substantial doubt about our ability to continue as going concern.  

          Our principal offices are located at 11661 San Vicente Boulevard, Suite 707, Los Angeles, California 90049 and our telephone number is (310) 208-5589. We are a Delaware corporation.

The Offering

  

Common stock offered by selling stockholder

Up to 77,382,077 shares, including up to 72,646,330 shares of common stock underlying convertible debentures in the amount of $40,000 and up to 4,000,000 issuable upon the exercise of common stock purchase warrants at an exercise price of $1.09 per share, based on current market prices and assuming full conversion of the convertible debentures and the full exercise of the warrants (includes a good faith estimate of the shares underlying convertible debentures and shares underlying warrants). In addition, this prospectus includes 735,747 shares of common stock issued to one of the selling stockholders pursuant to certain Investor Relations Service Agreements dated as of December 8, 2005 and February 7, 2006 as compensation for investor relations services performed by the selling stockholder under the Agreements. This number represents 43.31% of our then current outstanding stock.

Common stock to be outstanding after the offering

Up to 255,304,794 shares assuming the full exercise of our warrants and conversion of our convertible debentures

Use of proceeds

We will not receive any proceeds from the sale of the common stock    However, we will receive up to $4,360,000 upon exercise of the warrants by the selling stockholder.  We expect to use the proceeds received from the exercise of the warrants, if any, for general working capital purposes. We




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   received an aggregate of $40,000 in connection with the issuance of the convertible debenture to the selling stockholder.  We used the $40,000 for the general working capital purposes.

Over-The-Counter Bulletin Board Symbol

MTNA


          The above information regarding common stock to be outstanding after the offering is based on 178,658,464 shares of common stock outstanding as of February 16, 2006 and assumes the subsequent conversion of our issued convertible debentures and exercise of warrants by our selling stockholder.

          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 4,000,000 shares of our common stock.  This prospectus relates to the resale of the common stock underlying these convertible debentures and warrants.  The investors provided us with an aggregate of $40,000 upon the execution of final definitive agreements.

          The debentures bear interest at 5¼%, 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) $0.70, (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 $.10, 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 $.20, 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 may withdraw its conversion notice.  Golden Gate has agreed that, beginning in the first full calendar month after the registration statement is declared effective, it shall exercise at least 5%, but no more than 10%, of the warrants 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 $.10, Golden Gate is not obligated to exercise any portion of the warrant during that month. If Golden Gate exercises more than 5% of the warrants in any calendar month, the excess over 5% shall be credited against the next month’s minimum exercise amount. In the event Golden Gate does not exercise at least 5% of the warrants in any particular calendar month, it shall not be entitled to collect interest on the debenture for that month. The warrant is exercisable into 4,000,000 shares of common stock at an exercise price of $1.09 per share

          The selling stockholder has contractually agreed to restrict its ability to convert its debenture 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 9.99% of the then issued and outstanding shares of common stock.  

          On December 8, 2005 and February 7, 2006, we entered into Investor Relations Services Agreements with Lynx Consulting (“Lynx”), in which we engaged Lynx as our consultant to provide investor relations services to our company.  In accordance with the Investor Relations Services Agreements, Lynx was provided with piggyback registration rights for 735,747 the shares of common stock it received as compensation for services performed by Lynx under the Agreements.  Accordingly, we are registering 735,747 shares of common stock issued to Lynx pursuant to this prospectus.

          See the "Selling Stockholders" and "Risk Factors" sections for a complete description of the convertible debentures.






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RISK FACTORS

          This investment has a high degree of risk. Before you invest you should carefully consider the risks and uncertainties described below and the other information in this prospectus. If any of the following risks actually occur, our business, operating results and financial condition could be harmed and the value of our stock could go down. This means you could lose all or a part of your investment.

Risks Relating to Our Business:

We have a history of losses which may continue, requiring us to seek additional sources of capital which may not be available, requiring us to curtail or cease operations.

          We incurred net losses of $20,749,260 for the year ended December 31, 2005 and $25,495,291 for the year ended December 31, 2004.  Our monthly burn rate is approximately $100,000 per month and, accordingly, we will need to raise approximately $1,200,000 over the next 12 months in order to sustain our current operations.  We cannot assure you that we can achieve or sustain profitability on a quarterly or annual basis in the future.  If revenues grow more slowly than we anticipate, or if operating expenses exceed our expectations or cannot be adjusted accordingly, we will continue to incur losses.  We will continue to incur losses until we are able to market and sell our products. Our possible success is dependent upon the successful development and marketing of our products, as to which there is no assurance. Any future success that we might enjoy will depend upon many factors, including factors out of our control or which cannot be predicted at this time. These factors may include changes in or increased levels of competition, including the entry of additional competitors and increased success by existing competitors, changes in general economic conditions, increases in operating costs, including costs of supplies, personnel and equipment, reduced margins caused by competitive pressures and other factors. These conditions may have a materially adverse effect upon us or may force us to reduce or curtail operations.  In addition, we will require additional funds to sustain and expand our sales and marketing activities, particularly if a well-financed competitor emerges.  Based on our current funding arrangement with Golden Gate, upon the effectiveness of this prospectus, which will allow Golden Gate to convert its convertible debenture and exercise its warrants and, in turn, provide us with funding, we do not anticipate that we will require additional funds to continue our operations for the next 6 months.  In the event that our financing arrangement with Golden Gate is terminated or if we need additional financing, there can be no assurance that financing will be available in amounts or on terms acceptable to us, if at all.  The inability to obtain sufficient funds from operations or external sources would require us to curtail or cease operations. Any additional equity financing may involve substantial dilution to our then existing shareholders.

Our Independent Auditors have expressed substantial doubt about our ability to continue as a going concern, which may hinder our ability to obtain future financing.

          In their report dated January 31, 2006, our independent auditors stated that our financial statements for the year ended December 31, 2005 were prepared assuming that we would continue as a going concern. Our ability to continue as a going concern is an issue raised as a result of cash flow constraint, an accumulated deficit of $60,783,746 at December 31, 2005 and recurring losses from operations.  We continue to experience net losses. Our ability to continue as a going concern is subject to our ability to generate a profit and/or obtain necessary funding from outside sources, including obtaining additional funding from the sale of our securities, increasing sales or obtaining loans and grants from various financial institutions where possible. Our continued net losses and stockholders’ deficit increases the difficulty in meeting such goals and there can be no assurances that such methods will prove successful.

Our products are in the final development stage and there can be no assurance that we will ever bring any of our products into the commercial marketplace.

          Our products are in the final development stage. Unexpected problems, technological or specifications changes: (i) may make our technologies obsolete; (ii) may affect our products' overall feasibility; or (iii) may delay completion and increase costs of development and testing. The time required to bring our products to market is uncertain. Market acceptance of our products cannot be determined until product development is complete. There can be no assurance that we will ever bring any of our products into the commercial marketplace.

Since our products are not yet distributed to a commercial market, we do not have a sales force or distribution network to bring our products to market and it may be difficult for us to establish a sales and distribution network in the future.



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          Since our products are in the development our future operating results will depend on our ability to market our products. We have not yet established a direct sales force or distribution network. Failure to put into place an experienced and skillful marketing infrastructure, in a timely manner, could have a materially adverse impact upon our ability to bring our products to market and continue operating.

We have generated revenues to date from our government and research contracts. We cannot give any assurances that we will be able to generate any significant revenues from our products if and when they become commercialized, nor can we provide assurances that our contract revenue will continue to any extent.

          Our revenue generated to date has been limited to revenue received from our government and research contracts. We have not yet developed our products for distribution or sale to multiple customers. Our operating results will depend on our ability to increase and replace our sources of contract revenue through product sales and to market our products to a variety of potential customers rather than relying in large measure on contract revenues. We cannot give any assurances that we will be able to generate any significant revenues from our products if and when they become commercialized, nor can we provide assurances that our contract revenue will continue to any extent.

We currently have a limited number of employees to develop and market our products.

          We currently only have four employees, Robert M. Bernstein, president, a part-time engineer, a part-time vice president and a secretary. There is a substantial risk that we may not have funds to hire additional employees that may be needed to complete the development and marketing of our products. Without the ability to market products we have developed, our business and financial condition will be materially adversely affected.

We rely heavily on our President and CEO, management consultants and outside advisors.  Our business and prospects may be adversely affected if we are unable to retain the services of our President and CEO, and our consultants and advisors.

          Our success largely depends on the performance of our president and chief executive officer, Robert M. Bernstein, and the various independent consultants, and advisors we rely on for consulting services. Our consultants provide us with technological advice and guidance, product development expertise and financial advice and services. During the fiscal year ended December 31, 2005, we issued 3,440,435 shares of our common stock, valued at $3,405,507 to compensate these consultants for their services since we are unable to compensate them in any other manner.. Loss of these consultants or our inability to continue compensating these consultants by issuing shares of our common stock to them could seriously impair our ability to develop and market our products. Moreover, failure to attract and retain key consultants, advisors, and employees with necessary skills could have a materially adverse impact on our ability to bring our products to market and continue operating.

Our products and technologies may not be as competitive as other fatigue measuring processes that have been in use for up to 40 years and offer advantages of being accepted in the marketplace.

          The metal fatigue measuring industry has significant competition. Other technologies exist which indicate the presence of metal fatigue damage. Single cracks larger than a certain minimum size can be found by non-destructive inspection methods such as dye penetrant, radiography, eddy current, acoustic emission, and ultrasonics. Tracking of load and strain history, for subsequent estimation of fatigue damage by computer processing, is possible with recording instruments such as strain gauges and counting accelerometers. These methods have been in use for up to 40 years and offer the advantage that they have been accepted in the marketplace, whereas our products will remain largely unproven for some currently indeterminable time. Other companies with greater financial and technical resources and larger marketing organizations than ours pose a potential threat if they commence competing in our market segment. We are unaware of any other companies developing technology similar to our technology and our patents protect our unique technologies. On the other hand, companies marketing alternative technologies addressing the same market needs as our products, include Magnaflux Corporation, Kraut-Kremer-Branson, Dunegan-Endevco, and MicroMeasurements. These companies have more substantial assets, greater experience, more human and other resources than ours, including but not limited to established distribution channels and an established customer base.

Our patents covering our fatigue fuse products and technologies have been encumbered as security to certain of our lenders.  We may lose our patent protection, as we have defaulted on one of our lending commitments.

          We hold patents on our fatigue fuse technology. Our patents are encumbered by certain liabilities as described under the heading of this prospectus, "Business." A first priority security interest in our patents is held by




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one of our lenders and a shareholder. If we fail to pay obligations to our lenders when they become due that are secured by a pledge of our patents, including the debt obligation, we may lose the interests in our patents, resulting in a loss of patent protection covering our technologies and products, or certain rights to exploit our technology. Presently, we are in default on the debt obligations we owe, but the shareholder has not taken any action as a result of our default.

          No assurances can be given that we will not be in default on some or all of our other debt obligations in the future, which could then result in loss of our patents and our patent protection. No assurances can be given that the shareholder that is holding the note that we are in default on will not seek to foreclose on his interest held in our patents as collateral for his loan.

We cannot be certain that our proprietary rights in our products and technologies are adequately protected from infringement by competitors or other third parties.

          We rely on a combination of patent and trade secret protection, non-disclosure agreements, licensing arrangements and new patent filings to establish and protect our proprietary rights. We have in the past and intend in the future to file applications as appropriate for patents covering our products. Due to the increasing number of patent applications filed with the United States Patent and Trademark Office, we are uncertain as to if or when patents will issue from any of our pending applications or, if patents do issue, that claims allowed will be sufficiently broad to protect our technology and products. In addition, there is a possibility that any patents that may be issued could be challenged, invalidated or circumvented, or that the rights granted to us as owners of the patents will not provide proprietary protection to us. Since U.S. patent applications are maintained in secrecy until patents issue, and since publication of inventions in the technical or patent literature tend to lag behind such inventions by several months, there is a possibility that we may not be the first creator of inventions covered by such patents or pending patent applications or that we may not be the first to file patent applications for such inventions. Despite our efforts to safeguard and maintain our proprietary rights, we are uncertain as to whether we will be successful in doing so or that our competitors will not independently develop or patent technologies that are substantially equivalent or superior to our technologies.

Since the technologies we have developed for our products are subject to rapid technological changes, we may need to make significant capital investments in newer technologies and equipment.

          The technologies we expect to use in our manufacturing and marketing of our products are subject to rapid technological change and could cause us to make significant capital investment in new technologies and equipment. Our market is characterized by rapid technological changes. Newer technologies, techniques or products for determining metal fatigue could be developed with better performance and results than our products. Developing new technologies for manufacture is frequently subject to unforeseen expenses, difficulties, and complications and, in some cases, such development cannot be accomplished. The availability of new and better metal fatigue testing technologies or other products could require us to make significant investments in technology, render our current technology obsolete and have a significant negative impact on our business and results of operations.

If we do not obtain additional financing to continue our development activities, we will not be able to complete our product development.

          If we fail to raise additional funds necessary for development from either government grants, sales of securities, borrowings, or other sources, we will not have a product for a potential market and shareholders will have no possibility of any financial return or economic benefit from their ownership of our shares. We are likely to have negative cash flow through at least 6 months, although we have sufficient cash to continue our development efforts for the next 6 months. Over the next 12 months, we anticipate that approximately $3,000,000 will be required to complete development of our products and market them. Even if the necessary $3,000,000 is raised and development is completed, no assurance can be given that the results will establish that our products will be marketable. Moreover, no assurance can be given that our products can be produced at a cost that will make it possible to market them at a commercially feasible price.

We have relied on the issuance of shares of our common stock to compensate many of our consultants and advisors and the issuance of these shares will result in additional dilution to our existing shareholders.

          To compensate our consultants and advisors, we have had to rely on the issuance of shares of our common stock as compensation for their services. In our most recent fiscal year ended December 31, 2005, we issued a total of 3,440,435 shares to our various consultants and advisors. These shares had an aggregate market value of $3,405,507 when issued.  Since we are reliant on the issuance of common stock as compensation, additional dilution




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has occurred to our shareholders that may have paid cash for their shares. We believe that additional dilution to existing shareholders will occur in the future since we plan to continue to issue our common stock to our officers and consultants as compensation for their services.

Our royalty and license agreements will also reduce our revenue generated from our future products sales.

          In order to finance development of the Fatigue Fuse and Electrochemical Sensor, our corporate predecessors sold substantial royalty rights to the Advanced Technology Center, which is affiliated with the University of Pennsylvania. As of the date of this prospectus, we are obligated to pay royalties totaling 12% of revenues from sales of our Fatigue Fuse and 10% of revenues from sales of EFS. If these products are manufactured and sold, these royalty obligations will reduce our revenue from the sale of these products.

Risks Relating to Our Current Financing Arrangement:

There are a large number of shares underlying our convertible debentures, and warrants that may be available for future sale and the sale of these shares may depress the market price of our common stock.

          As of February 16, 2006, we had 178,658,464 and 600,000 shares of Class A and Class B common stock issued and outstanding, respectively, and convertible debentures outstanding that may be converted into an estimated 48,430,887 shares of common stock at current market prices, and outstanding warrants to purchase 4,000,000 shares of common stock.    In addition, the number of shares of common stock issuable upon conversion of the outstanding convertible debentures may increase if the market price of our stock declines.  All of the shares, including all of the shares issuable upon conversion of the debentures and upon exercise of our warrants, may be sold without restriction. The sale of these shares may adversely affect the market price of our common stock.

The continuously adjustable conversion price feature of our convertible debentures could require us to issue a substantially greater number of shares, which will cause dilution to our existing stockholders.

          
Our obligation to issue shares upon conversion of our convertible debentures is essentially limitless. The following is an example of the amount of shares of our common stock that are issuable, upon conversion of our convertible debentures (excluding accrued interest), based on market prices 25%, 50% and 75% below the market price, as of February 16, 2006 of $0.15.

                                                                    Effective                 Number                    % of
% Below                    Price Per                 Conversion              of Shares               Outstanding
Market                        Share                         Price                     Issuable                    Stock

25%                           $.1125                         $.09                   44,888,889              20.08%
50%                           $.075                           $.06                   69,333,333              27.96%
75%                           $.0375                         $.03                 142,666,667              44.40%

          As illustrated, the number of shares of common stock issuable upon conversion of our convertible debentures will increase if the market price of our stock declines, which will cause dilution to our existing stockholders.

The continuously adjustable conversion price feature of our convertible debentures may encourage investors to make short sales in our common stock, which could have a depressive effect on the price of our common stock.

          Golden Gate is contractually required to exercise its warrants on a concurrent basis.  The issuance of shares in connection with the exercise of the warrants and conversion of the convertible debentures results in the issuance of shares at an effective 20% discount to the trading price of the common stock prior to the conversion. The significant downward pressure on the price of the common stock as the selling stockholder converts and sells material amounts of common stock could encourage short sales by investors. This could place further downward pressure on the price of the common stock. The selling stockholder could sell common stock into the market in anticipation of covering the short sale by converting their securities, which could cause the further downward pressure on the stock price. In addition, not only the sale of shares issued upon conversion or exercise of debentures, warrants and options, but also the mere perception that these sales could occur, may adversely affect the market price of the common stock.




8






The issuance of shares upon conversion of the convertible debentures and exercise of outstanding warrants may cause immediate and substantial dilution to our existing stockholders.

          The issuance of shares upon conversion of the convertible debentures and exercise of warrants may result in substantial dilution to the interests of other stockholders since the selling stockholder may ultimately convert and sell the full amount issuable on conversion. Although the selling stockholder may not convert its convertible debentures and/or exercise their warrants if such conversion or exercise would cause them to own more than 9.9% of our outstanding common stock, this restriction does not prevent the selling stockholder from converting and/or exercising some of their holdings and then converting the rest of their holdings. In this way, the selling stockholder could sell more than this limit while never holding more than this limit. There is no upper limit on the number of shares that may be issued which will have the effect of further diluting the proportionate equity interest and voting power of holders of our common stock, including investors in this offering.

If we are unable to issue shares of common stock upon conversion of the convertible debenture for any reason, we are required to pay penalties to Golden Gate, redeem the convertible debenture at 130% and/or compensate Golden Gate for any buy-in that it is required to make.

          If we are unable to issue shares of common stock upon conversion of the convertible debenture as a result of our inability to increase our authorized shares of common stock or as a result of any other reason, we are required to:

		
		          In the event that we are required to pay penalties to Golden Gate or redeem the convertible debentures held by Golden Gate, we may be required to curtail or cease our operations.
		

		

If We Are Required for any Reason to Repay Our Outstanding Convertible Debentures, We Would Be Required to Deplete Our Working Capital, If Available, Or Raise Additional Funds.  Our Failure to Repay the Convertible Debentures, If Required, Could Result in Legal Action Against Us, Which Could Require the Sale of Substantial Assets.

          In December 2005, we entered into a Securities Purchase Agreement for the sale of an aggregate of $40,000 principal amount of convertible debentures, which are presently outstanding.  The convertible debentures are due and payable, with 5¼ % interest, three years from the date of issuance, unless sooner converted into shares of our common stock.  In addition, any event of default could require the early repayment of the convertible debentures at a price equal to 130% of the amount due under the debentures.  We anticipate that the full amount of the convertible debentures, together with accrued interest, will be converted into shares of our common stock, in accordance with the terms of the convertible debentures. If we are required to repay the convertible debentures, we would be required to use our limited working capital and raise additional funds. If we were unable to repay the debentures when required, the debenture holders could commence legal action against us and foreclose on all of our assets to recover the amounts due. Any such action would require us to curtail or cease operations.




9






Risks Relating to Our Common Stock:

If We Fail to Remain Current on Our Reporting Requirements, We Could be Removed From the OTC Bulletin Board Which Would Limit the Ability of Broker-Dealers to Sell Our Securities and the Ability of Stockholders to Sell Their Securities in the Secondary Market.

          Companies trading on the OTC Bulletin Board, such as us, must be reporting issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and must be current in their reports under Section 13, in order to maintain price quotation privileges on the OTC Bulletin Board. If we fail to remain current on our reporting requirements, we could be removed from the OTC Bulletin Board. As a result, the market liquidity for our securities could be severely adversely affected by limiting the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities in the secondary market.

Our Common Stock is Subject to the "Penny Stock" Rules of the SEC and the Trading Market in Our Securities is Limited, Which Makes Transactions in Our Stock Cumbersome and May Reduce the Value of an Investment in Our Stock.

          The Securities and Exchange Commission has adopted Rule 15g-9 which establishes the definition of a "penny stock," for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require:

          In order to approve a person's account for transactions in penny stocks, the broker or dealer must:

          The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the Commission relating to the penny stock market, which, in highlight form:

          Generally, brokers may be less willing to execute transactions in securities subject to the "penny stock" rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock.

          Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.








10






USE OF PROCEEDS

          This prospectus relates to shares of our common stock that may be offered and sold from time to time by the selling stockholder. We will not receive any proceeds from the sale of shares of common stock in this offering.  However, we will receive the sale price of any common stock we sell to the selling stockholder upon exercise of the warrants in the amount up to $4,360,000 and we received an aggregate of $40,000 in connection with the issuance of the convertible debenture to the selling stockholder.  We have used the $40,000 for the general working capital purposes.  We expect to use the proceeds received from the exercise of the warrants, if any, for general working capital purposes.

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

          Our common stock is quoted on the OTC Bulletin Board under the symbol "MTNA".  For the periods indicated, the following table sets forth the high and low bid prices per share of common stock. These prices represent inter-dealer quotations without retail markup, markdown, or commission and may not necessarily represent actual transactions.

     
High Bid Price

Low Bid Price

First Quarter 2003 $.024 * $ .006 *
Second Quarter 2003 $.016 * $ .008 *
Third Quarter 2003 $1.90 ** $ .003 **
Fourth Quarter 2003 $2.70 ** $1.80 **
First Quarter 2004 $3.15 ** $2.70 **
Second Quarter 2004 $3.55 ** $3.15 **
Third Quarter 2004 $3.45 ** $3.02 **
Fourth Quarter 2004 $3.05 ** $1.75 **
First Quarter 2005 $2.25 ** $1.25 **
Second Quarter 2005 $1.65 ** $1.00 **
Third Quarter 2005 $2.46 ** $0.75 **
Fourth Quarter 2005 $2.40 ** $0.15 **
First Quarter 2006*** $0.21** $0.08**

* Price prior to September 23, 2003 1000:1 reverse stock split.
** Price after September 23, 2003 1000:1 reverse stock split.
***Through January 27, 2006.

HOLDERS

          As of February 16, 2006, we had approximately 1,492 holders of our Class A common stock and 1 holder of our Class B common stock. 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 stock is Interwest Transfer Company, Inc., 1981 East 4800 South, Suite 100, Salt Lake City, Utah 84117.

          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.









11






MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

          Some of the information in this Form SB-2 contains forward-looking statements that involve substantial risks and uncertainties. You can identify these statements by forward-looking words such as "may," "will," "expect," "anticipate," "believe," "estimate" and "continue," or similar words. You should read statements that contain these words carefully because they:

          We believe it is important to communicate our expectations. However, there may be events in the future that we are not able to accurately predict or over which we have no control. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors," "Business" and elsewhere in this prospectus. See "Risk Factors."

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 do not generate any revenue from the sale of our products, and thus we are a development stage company.  We do generate revenue from research and development services provided to third parties, primarily one defense contractor, however our revenues are minimal.

          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.

Results of Operations

Three Months Ended December 31, 2005 Compared to Three Months Ended December 31, 2004

Introduction

          Our revenues for the fourth quarter of 2005 were substantially similar to the fourth quarter of 2004 and the third quarter of 2005, and were limited exclusively to our research contracts with Northrop Grumman.  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, 2005, as compared to the three months ended December 31, 2004 and September 30, 2005, are as follows:

3 Months
Ended
December 31,
       2005       

3 Months
Ended
December 31,
       2004       

Percentage
      Change      

3 Months Ended
September 30,
       2005       





  

Revenue

$

82,284

$

47,410

74

%

$

22,963

Research and development
  costs

78,253

3,198,861

(98)

890,607




12






General and administrative
  expenses

722,918

6,122,205

(88)

495,410




  

Loss from operations

$

(718,887)

$

(9,273,656)

(91)

%

$

(1,363,054)

===========

===========

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


          Our revenue for all three quarters shown above came from our research contracts with Northrop Grumman.

          During the three-month periods ended December 31, 2005 and September 30, 2005, we incurred research and development costs of $78,253 and $890,607, respectively.  Of the $890,607 incurred in 2005, $840,000 was related to the issuance of 700,000 shares of our common stock for services provided by employees.

          General and administrative expenses were $722,918 and $495,410, respectively, for the three-month periods ended December 31, 2005 and September 30, 2005.  The major expenses incurred during the three months ended December 31, 2005 and 2004 and September 30, 2005 were:

3 Months Ended
December 31,
2005

3 Months Ended
December 31,
2004

3 Months Ended
September 30,
 2005




(Restated)

    

Consulting services

$

505,533

$

343,792

$

364,878

Officer’s salary

48,000

48,000

45,000

Secretarial salary

10,202

28,283

10,336

Professional fees

98,800

270,610

22,916

Office expense

13,050

10,808

9,658

Travel expenses

13,106

13,304

7,795

Rent

7,044

7,044

7,044

Franchise and other taxes

-

                   5,808

2,040

Payroll taxes

4,671

                   2,134

3,853

Telephone

4,340

6,392

6,988


          Of the $505,533 of consulting services for the fourth quarter of 2005, $340,608 relates to the issuance of 688,685 shares of our common stock.  Of the $364,878 incurred for consulting services for the third quarter of 2005, $327,500 relates to the issuance of 450,000 shares of our common stock.  Additionally, $306,250 and $437,500 were included in prepaid expenses and other current assets as of December 31, 2005 and September 30, 2005, respectively.

Other Income and Expenses and Net Loss

          Our other income and expenses and net loss for the three months ended December 31, 2005 and 2004, as compared to the three months ended September 30, 2005 are as follows:

3 Months
Ended
December 31,
2005

3 Months
Ended
December 31,
2004

Percentage
Change

3 Months
Ended
September 30,
2005





    

Modification of research and
    development sponsorship
    agreement

$

-

$

-

0

%

$

(7,738,400)

Interest expense

(6,062,376)

(180,779)

3,253

(97,635)

Realized/unrealized loss on
    securities

(1,918,636)

(9,476,920)

(79)

-




13






Change in fair value of
    investments derivative liability

(585,735)

-

100

-

Interest income

3,298

2,995

10

3,649




   

Net loss

$

(9,282,336)

$

(18,883,210)

(51)

%

$

(9,195,440)

===========

===========

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


          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 ot our Birchington investment.

          During the three months ended September 30, 2005, we charged $7,738,400 to operations relating to the issuance of 4,552,000 shares of our common stock to the University of Pennsylvania pursuant to the terms of a workout agreement with them.  Interest expense for the quarter totaling $97,635 consists of $44,969 in accrued interest due on our various obligations, the amortization of the discount on our convertible debenture totaling $99,856, and a credit of $47,190 relating to the retroactive change in the computation of interest under the workout agreement with the University of Pennsylvania.  Interest income during the same quarter totaled $3,649, of which $1,048 was accrued on amounts due from our president, and $1,171 was earned on our investments.

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

Introduction

          In 2005, our revenues were limited exclusively to our research contracts with Northrop Grumman, and totaled $139,346.  In 2004 we generated only $46,932 from our contracts with Northrop Grumman, but also generated $100,000 of our income for the year from research contract with URS Corporation.  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 our operations was relatively consistent at approximately $1.05 million in 2005 and $1.32 million in 2004.  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 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, 2005 as compared to the year ended December 31, 2004 are as follows:

Year Ended
December 31,
2005

Year Ended
December 31,
2004

Percentage
Change




    

Revenue

$

139,346

$

146,932

(5) %

Research and development costs

2,364,059

7,605,747

(69) %

General and administrative expenses

1,801,928

8,010,423

(78) %



  

Loss from Operations

$

(4,026,641)

$

(15,469,238)

(74) %

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

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


          All of our revenues in 2005 came from our research contracts with Northrop Grumman.  Of the $146,932 in revenues in 2004, $46,932 came from research contracts with Northrop Grumman, while the balance came from a research contract with URS Corporation.

          Of the $2,364,059 in research and developments costs for 2005, $2,105,000 was related to the issuance of 1,725,000 shares of our common stock, of which 700,000 shares were issued to Messrs. Goodman and Berks, our




14






officers who are responsible for project development, valued at $840,000.  The 1,025,000 shares were issued to other consultants.  Of the $7,605,747 in research and development costs for 2004, $7,174,203 was related to the issuance of 3,422,075 shares of our common stock, of which 2,507,500 shares were issued to Messrs. Goodman and Berks, valued at $5,164,000.      

          General and administrative expenses were $1,801,928 and $8,010,423, respectively, for the years ended December 31, 2005 and 2004.  The major expenses incurred during each of the years were:

Year Ended
December 31,
2005

Year Ended
December 31,
2004



    

Consulting services

$

1,093,606

$

7,149,240

Officer’s salary

192,000

192,000

Secretarial salary

41,782

61,750

Professional fees

245,153

398,492

Office expense

39,991

35,608

Travel expenses

47,364

49,456

Rent

28,176

28,171

Franchise and other taxes

12,021

9,317

Payroll taxes

22,624

10,670

Telephone

21,274

20,295

          Of the $1,093,606 in consulting expense for 2005, $948,159 was related to the issuance of 1,618,685 shares of our common stock.  Included in the 1,618,685 shares were 250,000 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 1,618,685 shares were 200,000 shares issued to Joel Freedman, our corporate secretary, valued at $240,000 and 50,000 shares to an employee valued at $54,000.

          Of the $7,149,240 in consulting expense for 2004, $6,842,477 was related to the issuance of 3,159,923 shares of our common stock.  Included in the 3,159,923 shares was 2,260,000 shares issued to Joel Freedman, valued at $4,972,000.

Other Income and Expenses and Net Loss

          Our license modification expense, write-down of marketable securities, realized loss on the sale of marketable securities, unrealized loss on decrease in value of marketable securities, interest expense, interest income, and net loss for the year ended December 31, 2005 as compared to the year ended December 31, 2004 are as follows:

Year Ended
December 31,
2005

Year Ended
December 31,
2004

Percentage Change




  

Modification of research and
    development agreement

$

(7,738,400)

$

-

100 %

Realized/unrealized loss on
     securities

(1,922,176)

(9,476,920)

(80)%

Change in fair value of
     investment derivative
     liability

(585,735)

-

Interest expense

           (6,493,345)

(605,980)

972 %

Interest income

17,837

12,497

43 %



  

Net loss

$

(20,749,260)

$

(25,495,291)

(19)%

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

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




15






          In 2005, we charged $7,738,400 to operations relating to the issuance of 4,552,000 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.

          The realized/unrealized loss on securities relates to the Langley investment.  In 2004, the shares experienced a sharp decline, which leveled off in 2005. As a result, the loss recognized to operations was much larger in 2004.

          The change in fair value of investments derivative liability relates to our investment in Birchington.  This value represents the value of the downside price protection shares that we would be required to sell to Birchington based on the value of our shares as of December 31, 2005.  The Birchington transaction was new in 2005.

          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.

          Of the $605,980 in interest expense incurred in 2004, $122,827 was accrued on the note due to the University of Pennsylvania, $93,119 was accrued on the actual outstanding principal balance of the convertible debenture, $326,161 pertains to the amortized portion of the discount attributed to the conversion feature of the debenture, and $59,500 was paid to the holder of a past due note as additional consideration.  The $59,500 was paid through the issuance of 25,000 shares of our common stock.

Liquidity and Capital Resources

Introduction

          During the year ended December 31, 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.

          Our cash, investments in marketable securities held for trading, investments in marketable securities available for sale, prepaid services, prepaid expenses and other current assets, total current assets, total assets, total current liabilities, and total liabilities as of December 31, 2005, as compared to December 31, 2004 and September 30, 2005, were as follows:

December 31,

December 31,

September 30,

2005

2004

2005




  

Cash

$

47,345

$

100,800

$

461,898

Marketable securities - trading

302,841

988,990

10,919

Marketable securities –      available-for-sale

162,193

-

-

Prepaid services

306,250

-

437,500

Prepaid expenses and other

2,153

1,950

2,100

Total current assets

891,607

1,107,635

929,524

Total assets

4,493,227

2,167,089

5,217,769

Total current liabilities

1,930,182

1,192,425

390,024

Total liabilities

9,768,555

1,617,037

1,953,156

Cash Requirements

          For the year ended December 31, 2005, our net cash used in operations was $(1,053,380), compared to $(1,321,389) for the year ended December 31, 2004.  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




16






$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.

          Negative operating cash flows during the year ended December 31, 2004, were primarily created by a net loss from operations of $25,495,291, offset by non-cash stock related expenses of $14,252,195, net realized and unrealized loss on marketable securities held for trading of $5,192,160, an other-than temporary impairment of marketable securities held for sale of $4,284,760, accrued interest expense added to principal of $216,713, and amortization of discount on convertible debenture of $326,161.

Sources and Uses of Cash

          Net cash provided by investing activities for the years ended December 31, 2005 and 2004, were $679,962 and $395,379, respectively.  For the years ended December 31, 2005 and 2004, the net cash came primarily from the sale of marketable securities in the amount of $1,589,588 and $1,205,611, respectively, offset by the amount for purchase of securities of $(907,028) and $(900,000), respectively.

          Net cash provided by financing activities for the years ended December 31, 2005 and 2004, were $319,963 and $979,146, respectively.  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.  For the year ended December 31, 2004, the net cash came primarily from the sale of common stock in the amount of $212,025, and proceeds from convertible debentures and other notes of $785,000.

          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 our financial condition and results of operations are based upon our 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 us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.  In consultation with our Board of Directors, we have identified four accounting policies that we believe are key to an understanding of our 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 our 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 our products are expensed as incurred.

          The third critical accounting policy relates to the valuation of non-monetary consideration issued for services rendered. We value all services rendered in exchange for our 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.

          Our 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 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




17






classified as an offset to equity on the grantor’s balance sheet once the equity instrument is granted for accounting purposes. Accordingly, we record the fair value of nonforfeitable common stock issued for future consulting services as prepaid services in our consolidated balance sheet.

          The fourth critical accounting policy is our 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 us 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.  We amortize 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, we bifurcate our 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 we 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, we are 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, we will record a non-operating, non-cash charge.  If the fair value of the derivatives is lower at the subsequent balance sheet date, we will record non-operating, non-cash income.  We value our 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 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).

          In accordance with the guidance of EITF 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” we assess 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. 



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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.  We are a development stage company doing business as Tensiodyne Scientific Corporation.

          Our efforts are dedicated to developing devices and systems that indicate the true fatigue status of a metal component.  We have developed two products.  The first is a small, extremely 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 cracks in metals, the Electrochemical Fatigue Sensor.  It has demonstrated that it can detect cracks, in the laboratory, 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 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, 2005, 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.

Our Technologies

The Fatigue Fuse

          The Fatigue Fuse is designed to be affixed to a structure to give warnings as pre-selected portions of the fatigue life have been used up (i.e., how far 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 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 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.  No 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




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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 to find 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.

          The EFS functions by treating the location of interest (the target) associated with the structural member as an electrode of an electrochemical cell.  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, 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., fatigue cracks.

Development of our Technologies

          Currently, our primary focus is on the development and commercialization of the EFS.  Due to our limited resources, efforts in the development and testing of the Fatigue Fuse have been delayed.

Status of the Fatigue Fuse

          The development and application sequence for the Fatigue Fuse and EFS is (a) basic research, (b) exploratory development, (c) advanced development, (d) prototype evaluation, (e) application demonstration, and (f) commercial sales and service. 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.

          The Fatigue Fuse is at its final stages of testing and development.  To begin marketing the Fatigue Fuse, it is our belief that it will take from six to 12 months and cost approximately $600,000, including technical and beta testing and final development.  If testing, development, and marketing are successful, we estimate we should begin receiving revenue from the sale of the Fatigue Fuse within a year of completing development. However, we cannot estimate the amount of revenue that may be realized from sales of the Fuse, if any.

          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.

          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.

Status of the EFS

          The existence of very small 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 cracks as small




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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 evaluated EFS on six highway bridges.  These are considered Beta Tests verifying the procedure in the real world.  We are now preparing to begin the marketing of the EFS for bridges.

Commercial Markets for our Products and Technologies

          No commercial application of our products has been arranged to date, but we believe it can be applied to certain markets.  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.

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 recently 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 do not currently have contracts in place to install our fatigue detection products on bridge structures within the United States.

Our Patent Protections

          We are the assignee of four patents originally issued to Tensiodyne Corporation.  The first was issued on May 27, 1986, and expired on May 27, 2003.  It is titled “Device for Monitoring Fatigue Life” and bears United States Patent Office Number 4,590,804.  The second patent, titled “Metal Fatigue Detector” was issued on August 24, 1993 and expires on August 24, 2010, United States Patent Number 5,237,875.  The third patent, titled “Device for Monitoring the Fatigue Life of a Structural Member and a Method of Making Same,” was issued on June 14, 1994 and expires on June 14, 2011, United States Patent Number 5,319,982.  In addition, we own a fourth patent, titled “Device for Monitoring the Fatigue Life of a Structural Member and a Method of Making Same,” which was issued June 20, 1995, United States Patent Number 5,425,274, and expires June 20, 2012.

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. At December 31, 2005, the future royalty commitment was limited to approximately $344,000.  The payment of future royalties is secured by equipment we use in the development of technology as specified in the funding agreement, however, no lien against our equipment or our patents in favor of ATC vests until we generate 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 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, vests in favor of ATC until we generate royalties from product sales.  If we were to default on these payments to ATC, our obligations relating to these agreements then




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become secured by our patents, products and accounts receivable.  At December 31, 2005, the total future royalty commitments, including the accumulated 26% annual rate of return, were limited to approximately $6,142,000.

          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 the date of this prospectus, 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, 2005, we owe Mr. Baker $53,515 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 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 intend to exhibit the Fatigue Fuse and the Electrochemical Fatigue Sensor 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 measure and indicate fatigue damage.  Single cracks larger than a minimum size can be found by nondestructive inspection methods such as dye penetrate, 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 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-Kermer-Branson, Dunegan-Endevco, and Micro Measurements. These companies have more substantial assets, greater experience, and more resources than ours, 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, President, Chief Executive Officer and Chief Financial Officer, a Secretary, and two part time engineers. In addition, we retain consultants for specialized work.

DESCRIPTION OF PROPERTIES

          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 $2,348 per month on a month-to-month basis. Either party may cancel the lease on 30 days notice.

LEGAL PROCEEDINGS

          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.  No discovery has been taken.  We intend to pursue our Complaint and defend the Cross-Complaint vigorously and anticipate that discovery will commence shortly.




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          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.

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

          The following information sets forth the names of our officers and directors, their present positions with us, and their biographical information.

Name

Age

Office

Robert M. Bernstein

71

President, Chief Executive Officer, Chief Financial Officer and Chairman of the Board

Joel R. Freedman

45

Secretary and Director

Dr. John W. Goodman

71

Chief Engineer and Director

Dr. William Berks

75

Vice President and Director

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

          Robert M. Bernstein is 71 years of age. He 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 Matech 1 and retained these positions with the Company after the spin off from Matech 1 on July 31, 1997.

JOEL R. FREEDMAN, SECRETARY/DIRECTOR.

          Joel R. Freedman is 45 years of age. 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 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 Matech's daily activities. He is not a director of any other company.

DR. JOHN W. GOODMAN, CHIEF ENGINEER/DIRECTOR.

          Dr. John W. Goodman is 71 years of age. He is retired from TRW Space and Electronics and was formerly Chairman of the Aerospace Division of the American Society of Mechanical Engineers. He holds a Doctorate of Philosophy in Materials Science that was awarded with distinction by the University of California at Los Angeles in 1970. In 1957, he received a Masters of Science degree in Engineering Mechanics from Penn State University and in 1955 he received a Bachelor of Science degree in Mechanical Engineering from Rutgers University. From 1972 to 1987, Dr. Goodman was with the U. S. Air Force as lead Structural Engineer for the B-1 aircraft; Chief of the Fracture and Durability Branch, and Materials Group Leader, Structures Department, Aeronautical Systems Center, Wright-Patterson Air Force Base. From 1987 to December 1993, he was on the Senior Staff, Materials Engineering Department of TRW Space and Electronics. He has been Chief Engineer for Development of Matech's products since May 1993. Over the last four years he has consulted part time for the Company.




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DR. WILLIAM BERKS, VICE-PRESIDENT/DIRECTOR

          William Berks- Vice-President/Director, age 75. He managed the previous Matech 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.

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

          Section 16(a) of the Securities Exchange Act of 1934 requires our directors, certain officers and persons holding 10% or more of our common stock to file reports regarding their ownership and regarding their acquisitions and dispositions of the Registrant's common stock with the Securities and Exchange Commission ("SEC"). Such persons are required by SEC regulations to furnish our company with copies of all Section 16(a) forms they file.

          Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to the registrant under Rule 16a-3(d) during fiscal 2005, and certain written representations from executive officers and directors, we are unaware that any required reports that have not been timely filed.

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.

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.

          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 Matech's 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.

          We issued the following shares of common stock to Ms. Miceli as compensation for services performed on our behalf:




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          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 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.

          On January 9, 2006, we issued Dr. Phares 1,000,000 shares of our common stock as compensation for services performed on our behalf valued at $160,000. 

          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.

          On December 17, 2004, we issued Dr. Laird 100,000 shares of our common stock subject to a two-year lockup agreement and valued at $180,000. Also in 2004 we issued Dr. Laird 260,000 shares subject to a three-year lockup agreement which were valued at $582,400.

          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, 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.

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




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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.

EXECUTIVE COMPENSATION

          The following tables set forth certain information regarding each of our most highly-compensated executive officers whose total annual salary and bonus for the fiscal year ending December 31, 2005, 2004 and 2003 exceeded $100,000:

==========================================================================================
                                                                                               Other
Name and                                                                                 Annual         Restricted                                                 All Other
Principal                                                                                  Compen-           Stock             Options          LTIP        Compen-
Position                              Year        Salary ($)      Bonus ($)      sation ($)       Awards ($)        (SARs (#)   Payout($)     sation ($)   

Robert M. Bernstein
CEO                                 2005   $  192,000(2)   $      --       $       --              $       0                   --            $     --         $      --
                                         2004   $  192,000 (1)          --                --                       0                   --                   --                 --
                                         2003   $  138,000        $      --       $   19,617(9)     $   320,000            --            $     --         $      --

John W. Goodman
Director and
Engineer                            2005   $   41,700         $      --       $       --              $   240,000 (4)      --            $     --         $      --
                                         2004   $   35,250         $      --       $       --              $ 2,760,000 (3)     --                   --                 --
                                         2003   $   18,943         $      --       $       --              $    10,000 (10)     --            $     --         $      --

William Berks
Vice-President
of Government                   2005   $   83,350         $      --       $       --              $   600,000 (6)      --           $     --          $      --
Projects and                      2004   $   79,500         $      --       $       --              $ 2,404,000 (5)     --           $     --          $      --
Director                             2003   $   71,374         $      --       $       --              $    30,000 (11)     --           $     --          $      --

Joel Freedman
Secretary and                    2005    $       --             $      --       $       --              $   240,000 (8)    --            $     --          $      --
Director                             2004   $       --             $      --       $       --              $ 4,972,000 (7)    --           $     --           $      --==========================================================================================

(1)  Cash compensation actually paid to Mr. Bernstein in 2004 amounted to $316,000 of which $120,000 relates to 2004 with the remaining amount of $196,000 pertained to the payment of prior years accrued compensation. Mr. Bernstein used the net pay received from the cashing of the accrued compensation to reduce the loan balance he owed us by $97,450.

(2)  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.

(3)  In 2004, we issued Mr. Goodman 1,500,000 shares of our common stock subject to a two-year lockup agreement. The shares were valued at $2,760,000, which represents 80% of the market price on date of issuance.

(4)  In 2005, we issued Mr. Goodman 200,000 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)   In 2004, we issued Mr. Berks 1,000,000 shares its common stock subject to a three-year lockup agreement. The shares were valued at $2,380,000, which represents 70% of the market price on date of issuance. In addition, in 2004, we issued Mr. Berks an additional 7,500 shares of our common stock which was valued at $24,000, the fair value of the shares on date of issuance.

(6)   In 2005, we issued Mr. Berks 500,000 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.

(7)   During 2004, we issued 2,260,000 shares of our common stock to Mr. Freedman a member of the Board and Company Secretary, which were valued at $4,972,000, which represents 80% of the market price on the date of issuance.  The shares are subject to a two-year lockup agreement.

(8)   In 2005, we issued Mr. Freedman 200,000 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.




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(9)   In 2003, Mr. Bernstein’s 1,962 shares of common stock held in escrow were vested, and he recognized $19,617 in additional compensation as a result.  

(10) In 2003, we issued 1,000 shares of common stock to Mr. Goodman.  The shares were valued at $10,000, the fair value of the shares on date of issuance. 

(11) In 2003, we issued 3,000 shares of common stock to Mr. Berks.  The shares were valued at $30,000, the fair value of the shares on date of issuance.

Directors’ Compensation

          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.

Employment Contract

          On September 24, 2003, we entered into an Employment Agreement with Robert M. Bernstein, our President, Chief Executive Officer, and Chief Financial Officer.  Pursuant to the Employment Agreement, we will employ Mr. Bernstein for a period of 3 years commencing September 24, 2003.  Mr. Bernstein will be paid an annual base salary of $16,000 per month (“Base Salary”), of which $6,000 per month shall be deferred until the later of (i) 18 months from September 24, 2003, or (ii) when we report at least $250,000 of earnings before depreciation and amortization in one fiscal quarter. During the term of his employment and for a period thereafter, Mr. Bernstein will be subject to non-disclosure, non-competition and non-solicitation provisions, subject to standard exceptions.

          Upon the execution of the employment agreement, Mr. Bernstein was issued an aggregate 300,000 shares of our common stock.

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, 2005 provided for or contributed to by our company.

Stock Options

          We have three stock option plans:  The 1998 Stock Plan (“the 1998 Plan”), the 2002 Stock Issuance/Stock Plan (“the 2002 Plan”) and the 2003 Stock Option, SAR and Stock Bonus Consultant Plan (“the 2003 Plan”). There are currently no options outstanding under any of the plans.

          In September 1998, we adopted the 1998 Plan and reserved 800,000 shares of our common stock for grant under the plan.  Eligible participants include employees, advisors, consultants, and officers who provide services to us.  The option price is 100% of the fair market value of a share of common stock at either the date of grant or such other day as the as the Board may determine.  During 2005 and 2004, there were no options granted under the 1998 Plan. The 1998 Plan expires upon the earlier of all reserved shares being granted or September 10, 2008.

          In February 2002, we adopted the 2002 Plan and reserved 20,000,000 shares of our common stock for grant under the plan.  Eligible plan participants include employees, advisors, consultants, and officers who provide services to us.  The option price is 100% of the fair market value of a share of common stock at either the date of grant or such other day as the Board may determine.  There were no options granted under the 2002 Plan in 2005 or 2004.  The 2002 Plan expires upon the earlier of all reserved shares being awarded or December 31, 2007.

          In September 2003, we adopted the 2003 Plan and reserved and 10,000,000 shares of our common stock for grant.  Eligible plan participants include independent consultants.  The option price shall be no less than 85% of the fair market value of a share of common stock at date of grant.  During 2005 and 2004, there were no options granted under the 2003 Plan.  The 2003 Plan expires upon the earlier of all reserved shares being granted or September 23, 2006.




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          We also have agreements with two consultants whereby we will grant options to purchase shares of our common stock upon us increasing our annual revenue by $5 million in any fiscal year over our revenues in 2002. The collective number of shares to be issued will give the two consultants a fifteen percent interest in the outstanding shares of our common stock. No grants have been made pursuant to these agreements as we have not achieved the required revenues. The agreements expire in March 2008.

Plan category         Number of securities        Weighted-average        Number of securities
                             To be issued upon             exercise price              remaining for
                             exercise of                        of outstanding              available for future
                             outstanding options,          options, warrants          issuance under
                             warrants and rights           and rights                      equity compensation
                                                                                                         plans (excluding
                                                                                                         securities reflected
                                                                                                         in column a))

                                         (a)                               (b)                                 (c)

Equity
Compensation
plans approved
by shareholders                 n/a                               n/a                                  n/a

Equity
Compensation
plans not approved
by shareholders           30,800,000                        n/a                           30,800,000

Total                           30,800,000                        n/a                           30,800,000

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 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, 200,000 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, 500,000 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, 200,000 shares of our common stock subject to a two year lockup agreement.  The shares were valued at $240,000.

          During 2004, we paid our president $196,000 of the accrued compensation we owed him. Mr. Bernstein paid down the loan balance he owed us by $90,450. The remaining balance due from him at December 31, 2004 was $1,950. Interest credited to operations on this loan for 2004 amounted to $8,460.





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          The balance on the stock subscription due from our president at December 31, 2004 totaled $55,096. Interest credited to operations on this receivable for 2004 amounted to $4,000.

          During 2004, we issued 1,500,000 shares of our common stock to Mr. Goodman, a member of the board and our employee that were valued at $2,760,000. The shares are subject to a two-year lockup agreement.

          During 2004, we issued 2,260,000 shares of our common stock to Mr. Freedman a member of the Board and our Secretary, that were valued at $4,972,000. The shares are subject to a two-year lockup agreement.

          During 2004, we issued 1,000,000 shares of our common stock to Mr. Berks, Vice-President and Director, that were valued at $2,380,000. The shares are subject to a three-year lockup agreement. In addition, we in 2004 issued Mr. Berks 7,500 shares of our common stock that were valued at $24,000.

CHANGES IN REGISTRANTS CERTIFYING ACCOUNTANT


		

          Gumbiner, Savett, Finkel, Fingleson & Rose, Inc., Certified Public Accountants (hereinafter "Gumbiner") was dismissed by us as our principal independent accountant, effective June 3, 2004. Gumbiner's report on the financial statements for the year ended December 31, 2003, contained a modification as to the uncertainity of us continuing as a going concern.

          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 the 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, 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.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

          The following table sets forth certain information regarding beneficial ownership of our common stock as of February 16, 2006

CLASS OF STOCK   NAME AND ADDRESS OF           AMOUNT AND NATURE OF    PERCENT OF
                                    BENEFICIAL OWNER                   BENEFICIAL OWNERSHIP      CLASS(1)       

Common Stock            Robert M. Bernstein, CEO                        21,987,850 Shares                    12.3%
                                    Suite 707
                                    11661 San Vicente Blvd.
                                    Los Angeles, CA  90049

                                    Joel R. Freedman, Director                          2,603,000 Shares                     1.5%
                                    1 Bala Plaza
                                    Bala Cynwyd, PA 19004



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                                    John Goodman, Director                             2,630,000  Shares                     1.5%
                                    Suite 707
                                    11661 San Vicente Blvd.
                                    Los Angeles, CA 90049

                                    William Berks, Vice President
                                    Government Projects
                                    Suite 707
                                    11661 San Vicente Blvd.
                                     Los Angeles, CA 90049                              2,512,500 Shares                     1.4%

                                     Birchington Investments Ltd.
                                     Suite 621 (1/2)
                                     Europort, Gibraltar                                  11,850,000 Shares                   6.6%

Class B                        Robert M. Bernstein                                        600,000 Shares(2)            100.00%
Common Stock            Suite 707
                                    11661 San Vicente Blvd.
                                    Los Angeles, CA 90049

                                    Directors and executive                               29,733,350 Shares                  16.6%
                                    officers as a group
                                    (4 persons)

(1) Unless otherwise indicated, based on 178,658,464 shares of common stock outstanding.  Shares of common stock subject to options 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.               

(2) 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 85.5% of the overall votes.

DESCRIPTION OF SECURITIES BEING REGISTERED

COMMON STOCK

          
We are authorized to issue up to 1,699,400,000 and 600,000 shares of Common Stock, par value $.001, and Class B Common Stock, par value $.001, respectively.  As of February 16, 2006, we had approximately 1,492 holders of our common stock and 1 holder of our Class B common stock. Holders of the common stock are entitled to one vote per share and holders of the Class B common stock are entitled to 2,000 votes per share on all matters to be voted upon by the stockholders. The Class B common stock is convertible to common stock on a one-for-one basis.  Holders of common stock and Class B Common Stock are entitled to receive ratably such dividends, if any, as may be declared by the Board of Directors out of funds legally available therefor. Upon the liquidation, dissolution, or winding up of our company, the holders of common stock and Class B Common Stock common stock are entitled to share ratably in all of our assets which are legally available for distribution after payment of all debts and other liabilities and liquidation preference of any outstanding common stock or Class B Common Stock common stock. Holders of common stock and Class B Common Stock common stock have no preemptive, subscription, redemption or conversion rights. The outstanding shares of common stock and Class B Common Stock common stock are validly issued, fully paid and nonassessable. 

          We have engaged Interwest Transfer Company, Inc., 1981 East 4800 South, Suite 100, Salt Lake City, Utah 84117, as independent transfer agent or registrar.

INDEMNIFICATION FOR SECURITIES ACT LIABILITIES

          Our Articles of Incorporation, as amended and restated, provide to the fullest extent permitted by Section 145 of the General Corporation Law of the State of Delaware, that our directors or officers shall not be personally liable to us or our shareholders for damages for breach of such director's or officer's fiduciary duty. The effect of this provision of our Articles of Incorporation, as amended and restated, is to eliminate our rights and our shareholders (through shareholders' derivative suits on behalf of our company) to recover damages against a director or officer for




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breach of the fiduciary duty of care as a director or officer (including breaches resulting from negligent or grossly negligent behavior), except under certain situations defined by statute. We believe that the indemnification provisions in our Articles of Incorporation, as amended, are necessary to attract and retain qualified persons as directors and officers.

          Our By Laws also provide that the Board of Directors may also authorize us to indemnify our employees or agents, and to advance the reasonable expenses of such persons, to the same extent, following the same determinations and upon the same conditions as are required for the indemnification of and advancement of expenses to our directors and officers. As of the date of this Registration Statement, the Board of Directors has not extended indemnification rights to persons other than directors and officers.

          Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act" or "Securities Act") may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable.

PLAN OF DISTRIBUTION

          The selling stockholder and any of its pledgees, donees, assignees and other successors-in-interest may, from time to time, sell any or all of their shares of common stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions. These sales may be at fixed or negotiated prices. The selling stockholder may use any one or more of the following methods when selling shares:

          The selling stockholder may also sell shares under Rule 144 under the Securities Act, if available, rather than under this prospectus. The selling stockholder shall have the sole and absolute discretion not to accept any purchase offer or make any sale of shares if they deem the purchase price to be unsatisfactory at any particular time.

          The selling stockholder or its pledgees, donees, transferees or other successors in interest, may also sell the shares directly to market makers acting as principals and/or broker-dealers acting as agents for themselves or their customers.  Such broker-dealers may receive compensation in the form of discounts, concessions or commissions from the selling stockholder and/or the purchasers of shares for whom such broker-dealers may act as agents or to whom they sell as principal or both, which compensation as to a particular broker-dealer might be in excess of customary commissions. Market makers and block purchasers purchasing the shares will do so for their own account and at their own risk. It is possible that a selling stockholder will attempt to sell shares of common stock in block transactions to market makers or other purchasers at a price per share which may be below the then market price. The selling stockholder cannot assure that all or any of the shares offered in this prospectus will be issued to, or sold by, the selling stockholder. The selling stockholder and any brokers, dealers or agents, upon effecting the sale of any of the shares offered in this prospectus, may be deemed to be "underwriters" as that term is defined under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, or the rules and regulations under such acts. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act.

          We are required to pay all fees and expenses incident to the registration of the shares, including fees and disbursements of counsel to the selling stockholder, but excluding brokerage commissions or underwriter discounts.

          The selling stockholder, alternatively, may sell all or any part of the shares offered in this prospectus through an underwriter. No selling stockholder has entered into any agreement with a prospective underwriter and there is no assurance that any such agreement will be entered into.



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          The selling stockholder may pledge its shares to their brokers under the margin provisions of customer agreements. If a selling stockholder defaults on a margin loan, the broker may, from time to time, offer and sell the pledged shares.  The selling stockholder and any other persons participating in the sale or distribution of the shares will be subject to applicable provisions of the Securities Exchange Act of 1934, as amended, and the rules and regulations under such act, including, without limitation, Regulation M. These provisions may restrict certain activities of, and limit the timing of purchases and sales of any of the shares by, the selling stockholder or any other such person.  In the event that the selling stockholder are deemed affiliated purchasers or distribution participants within the meaning of Regulation M, then the selling stockholder will not be permitted to engage in short sales of common stock. Furthermore, under Regulation M, persons engaged in a distribution of securities are prohibited from simultaneously engaging in market making and certain other activities with respect to such securities for a specified period of time prior to the commencement of such distributions, subject to specified exceptions or exemptions.  In regards to short sells, the selling stockholder is contractually restricted from engaging in short sells.  In addition, if a such short sale is deemed to be a stabilizing activity, then the selling stockholder will not be permitted to engage in a short sale of our common stock. All of these limitations may affect the marketability of the shares.

          We have agreed to indemnify the selling stockholder, or their transferees or assignees, against certain liabilities, including liabilities under the Securities Act of 1933, as amended, or to contribute to payments the selling stockholder or their respective pledgees, donees, transferees or other successors in interest, may be required to make in respect of such liabilities.

          If the selling stockholder notifies us that it has a material arrangement with a broker-dealer for the resale of the common stock, then we would be required to amend the registration statement of which this prospectus is a part, and file a prospectus supplement to describe the agreements between the selling stockholder and the broker-dealer.

PENNY STOCK

          The Securities and Exchange Commission has adopted Rule 15g-9 which establishes the definition of a "penny stock," for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require:

          In order to approve a person's account for transactions in penny stocks, the broker or dealer must

          The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the Commission relating to the penny stock market, which, in highlight form:

          Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.






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SELLING STOCKHOLDERS

          The table below sets forth information concerning the resale of the shares of common stock by the selling stockholder. We will not receive any proceeds from the resale of the common stock by the selling stockholder. We will receive proceeds from the exercise of the warrants. Assuming all the shares registered below are sold by the selling stockholder, it  will not continue to own any shares of our common stock.

          The following table also sets forth the name of each person who is offering the resale of shares of common stock by this prospectus, the number of shares of common stock beneficially owned by each person, the number of shares of common stock that may be sold in this offering and the number of shares of common stock each person will own after the offering, assuming they sell all of the shares offered.

                                                                               Total
                                           Total Shares of        Percentage                                                                                                         Percentage
                                           Common Stock      of Common         Shares of                                   Beneficial                               of Common
                                             Issuable Upon            Stock,      Common Stock     Beneficial       Percentage of       Ownership   Stock Owned
                                            Conversion of           Assuming        Included in        Ownership     Common Stock      After the           After
        Name                             Debentures                 Full             Prospectus        Before the      Owned Before       Offering         Offering
                                           and/or Warrants       Conversion              (1)               Offering*           Offering*              (4)                 (4)           

Golden Gate Investors        76,646,330(3)            42.90%               Up to          17,847,980            9.99%                 --                   --
  Investors, Inc.(2)                                                                      76,646,330
                                                                                                    shares of
                                                                                                common stock
                                                                                                                                                                                                                        

Lynx Consulting (5)                 735,747(6)                 **                  Up to              735,747                 **                    --                   --
                                                                                                     735,747
                                                                                                    shares of
                                                                                                 common stock

* These columns represents the aggregate maximum number and percentage of shares that the selling stockholder can own at one time (and therefore, offer for resale at any one time) due to their 9.9% limitation.

**Less than 1%.

          The number and percentage of shares beneficially owned is determined in accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rule, beneficial ownership includes any shares as to which the selling stockholder has sole or shared voting power or investment power and also any shares, which the selling stockholder has the right to acquire within 60 days. The actual number of shares of common stock issuable upon the conversion of the convertible debentures is subject to adjustment depending on, among other factors, the future market price of the common stock, and could be materially less or more than the number estimated in the table.

 (1) Includes a good faith estimate of the shares issuable upon conversion of the convertible debentures and exercise of warrants, based on current market prices. Because the number of shares of common stock issuable upon conversion of the convertible debentures is dependent in part upon the market price of the common stock prior to a conversion, the actual number of shares of common stock that will be issued upon conversion will fluctuate daily and cannot be determined at this time.  Under the terms of the convertible debentures, if the convertible debentures had actually been converted on February 15, 2006, the conversion price would have been $.0839.  The actual number of shares of common stock offered in this prospectus, and included in the registration statement of which this prospectus is a part, includes such additional number of shares of common stock as may be issued or issuable upon conversion of the convertible debentures and exercise of the related warrants by reason of any stock split, stock dividend or similar transaction involving the common stock, in accordance with Rule 416 under the Securities Act of 1933.  However the selling stockholder has contractually agreed to restrict their ability to convert their convertible debentures or exercise their warrants and receive shares of our common stock such that the number of shares of common stock held by them in the aggregate and their affiliates after such conversion or exercise does not exceed 9.99% of the then issued and outstanding shares of common stock as determined in accordance with Section 13(d) of the Exchange Act.  Accordingly, the number of shares of common stock set forth in the table for the selling stockholder exceeds the number of shares of common stock that the selling stockholder could own beneficially at any given time through their ownership of the convertible debentures and the warrants.  In that regard, the beneficial ownership of the common stock by the selling stockholder set forth in the table is not determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended.




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(2) The selling stockholder is an unaffiliated third party.  In accordance with rule 13d-3 under the Securities Exchange Act of 1934, Norman Lizt may be deemed a control person of the shares owned by the selling stockholder.

(3) Includes 72,646,330 (150%) shares of common stock underlying our $40,000 convertible debenture and 4,000,000 shares of common stock underlying common stock purchase warrants issued to Golden Gate Investors, Inc.

(4) Assumes that all securities registered will be sold, which does not represent all of the shares of common stock potentially issuable upon conversion of the convertible debenture held by Golden Gate at current market prices.

(5) The selling stockholder is an unaffiliated third party.  In accordance with rule 13d-3 under the Securities Exchange Act of 1934, Michael Sobeck and Chris Lipa may be deemed control persons of the shares owned by the selling stockholder. The selling stockholder has notified us that they are not broker-dealers or affiliates of broker-dealers and that they believe they are not required to be broker-dealers. 

(6) Includes shares of common stock issued to the selling stockholder pursuant to that certain Investor Relations Services Agreements dated as of December 8, 2005 and February 7, 2006 as compensation for investor relations services performed by the selling stockholder under said agreements. 

Terms of Convertible Debentures

          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 4,000,000 shares of our common stock.  This prospectus relates to the resale of the common stock underlying these convertible debentures and warrants.  The investors provided us with an aggregate of $40,000 upon the execution of final definitive agreements.

          The debentures bear interest at 5¼%, 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) $0.70, (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 $.10, 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 $.20, 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 may withdraw its conversion notice.  Golden Gate has agreed that, beginning in the first full calendar month after the registration statement is declared effective, it shall exercise at least 5%, but no more than 10%, of the warrants 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 $.10, Golden Gate is not obligated to exercise any portion of the warrant during that month. If Golden Gate exercises more than 5% of the warrants in any calendar month, the excess over 5% shall be credited against the next month’s minimum exercise amount. In the event Golden Gate does not exercise at least 5% of the warrants in any particular calendar month, it shall not be entitled to collect interest on the debenture for that month. The warrant is exercisable into 4,000,000 shares of common stock at an exercise price of $1.09 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. 




34






Sample Conversion Calculation

          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) $0.70, (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.  For example, assuming conversion of $40,000 of debentures on February 15, 2006, a conversion price of $0.0839 per share, the number of shares issuable upon conversion would be:

($40,000 x 110) – ($.0839 x (100 x $40,000))  = 3,888,000 /$.0839 = 48,430,887

          The following is an example of the amount of shares of our common stock that are issuable, upon conversion of the principal amount of our convertible debentures, based on market prices 25%, 50% and 75% below the market price, as of February 16, 2006 of $0.15.

                                                        Effective            Number                    % of
% Below              Price Per            Conversion         of Shares              Outstanding
Market                   Share                    Price              Issuable                   Stock

25%                      $.1125                    $.09             44,888,889             20.08%
50%                      $.075                      $.06             69,333,333             27.96%
75%                      $.0375                    $.03           142,666,667             44.40%

LEGAL MATTERS

          Sichenzia Ross Friedman Ference LLP, New York, New York will issue an opinion with respect to the validity of the shares of common stock being offered hereby.

EXPERTS

          Corbin & Company, LLP have audited, as set forth in their report thereon appearing elsewhere herein, our financial statements at December 31, 2005 and for each of the years in the two-year period then ended and for the period from October 21, 1983 (inception) through December 31, 2005 that appear in the prospectus.  The financial statements referred to above are included in this prospectus with reliance upon the auditors’ opinion based on their expertise in accounting and auditing.

AVAILABLE INFORMATION

          We have filed a registration statement on Form SB-2 under the Securities Act of 1933, as amended, relating to the shares of common stock being offered by this prospectus, and reference is made to such registration statement. This prospectus constitutes the prospectus of Material Technologies, Inc., filed as part of the registration statement, and it does not contain all information in the registration statement, as certain portions have been omitted in accordance with the rules and regulations of the Securities and Exchange Commission.

          We are subject to the informational requirements of the Securities Exchange Act of 1934 which requires us to file reports, proxy statements and other information with the Securities and Exchange Commission. Such reports, proxy statements and other information may be inspected at public reference facilities of the SEC at Judiciary Plaza, 100 F Street N.E., Washington D.C. 20549. Copies of such material can be obtained from the Public Reference Section of the SEC at Judiciary Plaza, 100 F Street N.E., Washington, D.C. 20549 at prescribed rates. Because we file documents electronically with the SEC, you may also obtain this information by visiting the SEC's Internet website at http://www.sec.gov.







35






INDEX TO FINANCIAL STATEMENTS

MATERIAL TECHNOLOGIES, INC.

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 Statement of in Stockholders’ Deficit                                                        F-6
Consolidated Statements of Cash Flows                                                                        F-11
Notes to Financial Statements                                                                                       F-13






























36







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, 2005, and the related consolidated statements of operations, comprehensive loss, stockholders’ 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 solely 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, audits 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 opinions. 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, based on our audits and the reports of the other auditors, 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, 2005 and the results of its operations and its 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, 2005 in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the 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 its ability to continue as a going concern. Management’s plans regarding those matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.


                                                                                                                                        CORBIN & COMPANY, LLP

Irvine, California
January 31, 2006


F-1




(A Development Stage Company)
  
CONSOLIDATED BALANCE SHEET




  
 December 31,   
           2005          
  
ASSETS
     Current assets:
          Cash and cash equivalents
 $ 
 47,345
          Investments in marketable securities held for trading
    302,841
          Investments in marketable securities available for sale
     162,193
          Receivable due on research contracts
       70,825
          Prepaid services
      306,250
          Prepaid expenses and other current assets
     2,153

Total current assets
         891,607
          Investments in non-marketable securities 
      3,582,600
          Property and equipment, net 
           10,900
          Intangible assets, net
             5,772
          Deposit
             2,348

 $ 
      4,493,227
=============














Continued . . .
F-2





(A Development Stage Company)
CONSOLIDATED BALANCE SHEET



  
                                                    
 December 31,   
 
          2005          
  
  
LIABILITIES AND STOCKHOLDERS'  DEFICIT
  
     Current liabilities:
          Accounts payable and accrued expenses
$
              279,889
          Current portion of research and development sponsorship payable
                25,000
          Notes payable
                88,515
          Investments deriviative liability
              585,735
          Convertible debentures and accrued interest payable, net of discount 
             of $399,420
              951,043

  
               Total current liabilities
           1,930,182
  
     Research and development sponsorship payable, net of current portion
756,185
     Convertible debentures and accrued interest payable, net of discount 
        of $40,000
                          -
     Derivative and warrant liabilities
           7,082,188

  
               Total liabilities
           9,768,555

  
     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; 1,420,000  shares 
             issued and outstanding
                  1,420
          Class A common stock, $0.001 par value, 1,699,400,000 shares
             authorized; 184,199,770 shares issued; 140,643,927 shares outstanding
             (including 30,135,172 shares committed but not issued)
              140,644
          Class B common stock, $0.001 par value, 600,000 shares authorized,
             issued and outstanding
                     600
          Warrants subscribed
                10,000
          Additional paid-in-capital
         55,561,366
          Deficit accumulated during the development stage
       (60,783,746)
          Note receivable - common stock
              (59,085)
          Treasury stock (76,800 shares at cost)
              (26,136)
          Accumulated other comprehensive loss
            (121,217)

  
Total stockholders' deficit
         (5,276,153)

  
$
           4,493,227
=============




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
         2005        
         2004        
    December 31, 2005  
  
Revenues:
  Research and development revenue
$
         139,346
 $ 
     146,932
 $ 
                   5,352,639
  Other
                     -  
                -  
                      274,125



  
    Total revenues
           139,346
      146,932
                   5,626,764



  
Costs and expenses:
  Research and development
        2,364,059
   7,605,747
            15,229,886
  General and administrative
        1,801,928
    8,010,423
                 23,798,230



  
    Total costs and expenses
        4,165,987
  15,616,170
                 39,028,116



  
      Loss from operations
      (4,026,641)
(15,469,238)
               (33,401,352)



  
Other income (expense):
  Modification of research and development
      sponsorship agreement
      (7,738,400)
               -
                 (7,738,400)
  Interest expense
    (6,493,345)
    (605,980)
                 (7,740,548)
  Other-than-temporary impairment of marketable
    securities available for sale
      (1,918,587)
 (4,284,760)
              (6,203,347)
  Realized loss on sale of marketable securities
             (3,589)
  (3,668,850)
                 (3,672,439)
  Unrealized loss on decrease in market value of
    securities held for trading
                      -
 (1,523,310)
                 (1,523,310)
  Change in fair value of investments derivative liability
        (585,735)
                 -
                    (585,735)
  Interest income
            17,837
         12,497
                      372,575
  Gain (loss) on settlement of indebtedness
                      -
        45,150
                    (244,790)
  Other
                       -
                 -
                      (33,000)



  
    Other expense, net
  (16,721,819)
(10,025,253)
               (27,368,994)



  
Loss before provision for income taxes
     (20,748,460)
(25,494,491)
               (60,770,346)
  
Provision for income taxes
                (800)
           (800)
                      (13,400)



  
      Net loss
$
    (20,749,260)
$
(25,495,291)
$
               (60,783,746)
============ ============ =================
                                        
Per share data:
  Basic and diluted net loss per share
$
              (0.20)
$
          (0.35)
   ============ ============
  Weighted average Class A common shares
    outstanding - basic and diluted
  103,528,817
    72,472,662
============
============












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
 
        2005        
        2004        
   December  31, 2005   
  
  
Net loss
$
(20,749,260)
 $ 
(25,495,291)
 $ 
                (60,783,746)



  
Other comprehensive loss:
Temporary decrease in market value of
   securities available for sale
    (872,188)
(5,452,376)
             (6,324,564)
Reclassification to other-than-temporary
   impairment of marketable securities
   available for sale
  1,918,587
     4,284,760
               6,203,347



  
    1,046,399
  (1,167,616)
                 (121,217)



    
 
 
 
Net comprehensive loss
$
(19,702,861)
 $ 
(26,662,907)
 $ 
                (60,904,963)
===========
===========
=================






















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 STOCKHOLDERS' DEFICIT



Class A
Preferred Stock
Class B
Preferred Stock
Class C
Preferred Stock
Class D
Preferred Stock
Class A
Common Stock
Class B
Common Stock
Warrants Subscribed
Additional
Paid-in
Capital
Deficit
Accumulated
During the
Development
Stage
Notes
Receivable-
Common
Stock
Treasury Stock
Accumulated
Other
Comprehensive
Loss
Total
Stockholders'
Equity (Deficit)
Shares
Amount
 Shares 
 Amount 
 Shares 
 Amount 
 Shares 
 Amount 
 Shares 
 Amount 
 Shares 
 Amount 
 Shares 
 Amount 
Initial issuance of common stock
  October 21, 1983
   -
$
         -
          -
$
            -
       -
$
            -
                -
$
-
2
$
          -
           -
$
            -
$
           -
$
          2,500
$
                   -
$
                -
          -
$
            -
$
                           -
$
               2,500
Adjustment to give effect to
  recapitailization on December 15,
  1986 - cancellation of shares
     -
               -
                -
                  -
                -
                  -
                      -
                  -
                       (2)
                       -
                 -
                  -
                -
              (4)
               -
                 -
           -
             -
                            -
                     (4)
Balance, October 21, 1983
     -
               -
                -
                  -
                -
                  -
                      -
                  -
                         -
                       -
                 -
                  -
             -
         2,496
                    -
                -
           -
                  -
                           -
                2,496
  
Shares issued by Tensiodyne
  Corporation in connection with 
  pooling of interests
     -
               -
                -
                  -
                -
                  -
                      -
                  -
                      42
                       -
                 -
                  -
            -
       4,342
                   -
              -
           -
                  -
                          -
            4,342
Net loss
      -
               -
                -
                  -
                -
                  -
                      -
                  -
                         -
                       -
                 -
                  -
                -
                  -
           (4,317)
                 -
            -
             -
                             -
           (4,317)




















Balance, December 31, 1983
      -
               -
                -
                  -
                -
                  -
                      -
                  -
                      42
                       -
                 -
                  -
                -
          6,838
           (4,317)
                 -
            -
              -
                             -
                 2,521
  
Capital contribution
    -
               -
                -
                  -
                -
                  -
                      -
                  -
                         -
                       -
                 -
                  -
                -
        21,755
                    -
                 -
            -
              -
                             -
               21,755
Shares issued for cash
      -
               -
                -
                  -
                -
                  -
                      -
                  -
                        5
                       -
                 -
                  -
                -
        10,700
                    -
                 -
            -
              -
                             -
               10,700
Offering costs
       -
               -
                -
                  -
                -
                  -
                      -
                  -
                         -
                       -
                 -
                  -
                -
       (2,849)
                    -
                  -
            -
             -
                             -
               (2,849)
Net loss
            -
               -
                -
                  -
                -
                  -
                      -
                  -
                         -
                       -
                 -
                  -
                -
                  -
         (21,797)
                  -
            -
              -
                             -
              (21,797)




















Balance, December 31, 1984
            -
               -
                -
                  -
                -
                  -
                      -
                  -
                      47
                       -
                 -
                  -
                -
        36,444
         (26,114)
                  -
            -
              -
                             -
               10,330
  
Capital contribution
            -
               -
Sale of 12,166 warrants at $1.50
                -
                  -
                -
                  -
                      -
                  -
                         -
                       -
                 -
                  -
              -
      200,555
                    -
                  -
            -
              -
                             -
              200,555
  per warrant
            -
               -
                -
                  -
                -
                  -
                      -
                  -
                         -
                       -
                 -
                  -
               -
        18,250
                    -
                  -
            -
              -
                             -
                18,250
Cancellation of shares
            -
               -
                -
                  -
                -
                  -
                      -
                  -
                       (9)
                       -
                 -
                  -
                -
                  -
                    -
                  -
            -
              -
                            -
                          -
Net loss
            -
               -
                -
                  -
                -
                  -
                      -
                  -
                         -
                       -
                 -
                  -
                -
                  -
       (252,070)
                  -
            -
          -
                             -
            (252,070)
Balance, December 31, 1985
            -
               -
                -
                  -
                -
                  -
                      -
                  -
                      38
                       -
                 -
                  -
                -
      255,249
       (278,184)
                  -
            -
              -
                             -
              (22,935)
  
Net loss
            -
               -
                -
                  -
                -
                  -
                      -
                  -
                         -
                       -
                 -
                  -
                -
                  -
         (10,365)
                  -
           -
              -
                             -
              (10,365)
Balance, December 31, 1986
            -
               -
                -
                  -
                -
                  -
                      -
                  -
                      38
                       -
                 -
                  -
                -
      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
            -
               -
                -
                  -
                -
                  -
                      -
                  -
                      38
                       -
                 -
                  -
                -
      282,331
       (333,938)
                 -
             -
              -
                             -
             (51,607)
  
Shares issued for cash
            -
               -
                -
                  -
                -
                  -
                      -
                  -
                        3
                       -
                 -
                  -
               -
      101,752
                   -
                  -
           -
                  -
                             -
      101,752
Shares issued as compensation
            -
               -
                -
                  -
                -
                  -
                      -
                  -
                        3
                       -
                 -
                  -
               -
        70,600
                    -
                -
       -
                  -
                           -
              70,600
Net loss
            -
               -
                -
                  -
                -
                  -
                      -
                  -
                         -
                       -
                 -
                  -
                 -
                -
       (142,335)
                 -
           -
                  -
                        -
       (142,335)




















Balance, December 31, 1988
            -
               -
                -
                  -
                -
                  -
                      -
                  -
                      44
                       -
                 -
                  -
                -
    454,683
       (476,273)
                 -
         -
                  -
                            -
              (21,590)
Shares issued for cash
            -
               -
                -
                  -
                -
                  -
                      -
                  -
                        4
                       -
                 -
                  -
                 -
        2,000
                    -
                 -
           -
                  -
                         -
                 2,000
Shares issued as compensation
            -
               -
                -
                  -
                -
                  -
                      -
                  -
                      36
                       -
                 -
                  -
                 -
       18,000
                    -
                 -
           -
                  -
                         -
               18,000
Net loss
            -
               -
                -
                  -
                -
                  -
                      -
                  -
                         -
                       -
                 -
                  -
                 -
                 -
         (31,945)
                 -
           -
                  -
                         -
             (31,945)




















Balance, December 31, 1989
            -
               -
                -
                  -
                -
                  -
                      -
                  -
                      84
                       -
                 -
                  -
                 -
      474,683
       (508,218)
                 -
           -
                  -
                         -
             (33,535)
Shares issued for cash
            -
               -
                -
                  -
                -
                  -
                      -
                  -
                        2
                       -
                 -
                  -
                 -
        59,250
                   -
                 -
           -
                  -
                        -
                59,250
Shares issued as compensation
            -
               -
                -
                  -
                -
                  -
                      -
                  -
                        6
                       -
                 -
                  -
                 -
        32,400
                   -
                  -
           -
                  -
                            -
             32,400
Net income
            -
               -
                -
                  -
                -
                  -
                      -
                  -
                         -
                       -
                 -
                  -
                 -
                  -
       133,894
                 -
           -
                  -
                            -
              133,894
Balance, December 31, 1990
            -
               -
                -
                  -
                -
                  -
                      -
                  -
                      92
                       -
                 -
                  -
                 -
      566,333
      (374,324)
                 -
           -
                  -
                           -
              192,009
Shares issued for cash
        350
               -
                -
                  -
                -
                  -
                      -
                  -
                        1
                       -
                 -
                  -
                 -
      273,686
                  -
                 -
            -
                  -
                         -
             273,686
Shares issued as compensation
            -
               -
                -
                  -
                -
                  -
                      -
                  -
                        4
                       -
                 -
                  -
                 -
        64,884
                  -
                 -
            -
                  -
                         -
               64,884
Conversion of stock
            -
               -
                -
                  -
                -
                  -
                      -
                  -
                       (6)
                       -
       60,000
               60
                 -
               (6)
                  -
                 -
           -
                  -
                         -
                      54
Net loss
            -
               -
                -
                  -
                -
                  -
                      -
                  -
                         -
                       -
                 -
                  -
                 -
                  -
    (346,316)
                 -
            -
                  -
                            -
           (346,316)
Balance, December 31, 1991
        350
               -
                -
                  -
                -
                  -
                      -
                  -
                      91
                       -
       60,000
               60
                -
      904,897
    (720,640)
                 -
           -
                  -
                            -
             184,317
Shares issued for cash
            -
               -
                -
                  -
                -
                  -
                      -
                  -
                      20
                       -
                 -
                  -
                -
        16,000
                    -
                 -
           -
                  -
                             -
               16,000
Shares issued as compensation
            -
               -
                -
                  -
                -
                  -
                      -
                  -
                        5
                       -
                 -
                  -
                -
        15,520
                    -
                 -
           -
                  -
                             -
               15,520
Conversion of warrants
            -
               -
                -
                  -
                -
                  -
                      -
                  -
                        6
                       -
                 -
                  -
                -
        15,000
                    -
                 -
          -
                  -
                           -
               15,000





See report of independent registered public accounting firm
and notes to the consolidated financial statements.
F-6




MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT



Class A
Preferred Stock
Class B
Preferred Stock
Class C
Preferred Stock
Class D
Preferred Stock
Class A
Common Stock
Class B
Common Stock
Warrants Subscribed
Additional
Paid-in
Capital
Deficit
Accumulated
During the
Development
Stage
Notes
Receivable-
Common
Stock
Treasury Stock
Accumulated
Other
Comprehensive
Loss
Total
Stockholders'
Equity (Deficit)
Shares
Amount
 Shares 
 Amount 
 Shares 
 Amount 
 Shares 
 Amount 
 Shares 
 Amount 
 Shares 
 Amount 
 Shares 
 Amount 
Sale of Class B common stock
            -
               -
                -
                  -
             -
               -
-
               -
                      -
                   -
    60,000
               -
                  -
          14,940
                      -
                   -
             -
               -
                              -
                 14,940
Issuance of stock to 
            -
               -
                -
                  -
             -
               -
                   -
               -
                           -
  unconsolidated subsidiary
            -
               -
                -
                  -
             -
               -
                   -
               -
                     5
                   -
              -
               -
                  -
          71,664
                      -
                   -
             -
               -
                              -
                 71,664
Conversion of stock
            -
               -
                -
                  -
             -
               -
                   -
               -
                     6
                    -
  (60,000)
               -
                  -
                   6
                      -
                   -
             -
               -
                              -
                          6
Cancellation of shares
            -
               -
                -
                  -
             -
               -
                   -
               -
                    (7)
                    -
              -
               -
                  -
                    -
                     -
                   -
             -
               -
                              -
                           -
Net loss
            -
               -
                -
                  -
             -
               -
                   -
               -
                      -
                    -
              -
               -
                  -
                    -
         (154,986)
                   -
             -
               -
                              -
             (154,986)




















Balance, December 31, 1992
        350
               -
                -
                  -
             -
               -
                   -
               -
                 126
                    -
    60,000
            60
                  -
     1,038,027
        (875,626)
                   -
            -
               -
                              -
               162,461
  
Shares issued for cash
            -
               -
                -
                  -
             -
               -
                  -
               -
                      -
                    -
              -
               -
                  -
                    -
                      -
                           -
Shares issued for license agreement
         -
            -
                -
                  -
             -
               -
                   -
             -
                   13
                    -
              -
               -
                  -
            6,250
                      -
                   -
         -
           -
                          -
               6,250
Shares issued as compensation
            -
               -
                -
                  -
             -
               -
                   -
               -
                   67
                    -
              -
               -
                 -
         13,913
                     -
                  -
            -
              -
                             -
                13,913
Warrant conversion
            -
               -
                -
                  -
             -
               -
                   -
              -
                   56
                    -
              -
               -
                 -
       304,999
                     -
                 -
            -
              -
                             -
              304,999
Cancellation of shares
            -
               -
                -
                  -
             -
               -
                   -
               -
                  (32)
                    -
              -
               -
                 -
         (7,569)
                     -
                  -
            -
              -
                             -
                (7,569)
Net loss
            -
               -
                -
                  -
             -
               -
                   -
               -
                      -
                    -
              -
              -
                 -
                   -
        (929,900)
                  -
            -
              -
                             -
            (929,900)




















Balance, December 31, 1993
        350
               -
                -
                  -
             -
               -
                   -
               -
                 230
                    -
    60,000
            60
                 -
    1,355,620
     (1,805,526)
                  -
            -
              -
                             -
             (449,846)
  
Adjustment to give effect to 
            -
               -
                -
                  -
             -
               -
                   -
               -
  recapitalization on February 1, 1994
         -
            -
            -
               -
       -
         -
             -
         -
          31
         -
    -
      -
        -
385,424
              -
           -
      -
        -
                       -
     385,424
Shares issued for cash
            -
               -
                -
                  -
             -
               -
                   -
               -
              1,486
                   2
              -
               -
                 -
         24,784
                    -
                  -
            -
              -
                             -
                24,786
Shares issued as compensation
            -
               -
                -
                  -
             -
               -
                   -
               -
                 223
                    -
              -
               -
                 -
              223
                     -
                  -
            -
              -
                             -
                     223
Issuance of shares for the
            -
               -
                -
                  -
             -
               -
                   -
               -
  modification of agreements 
            -
               -
                -
                  -
             -
               -
                   -
               -
                   34
                    -
              -
              -
                 -
                   -
                     -
                  -
            -
              -
                             -
                          -
Net loss
            -
               -
                -
                  -
             -
               -
                   -
               -
                      -
                    -
              -
              -
                 -
                   -
        (377,063)
                  -
            -
              -
                             -
             (377,063)
Balance, December 31, 1994
        350
               -
                -
                  -
             -
               -
                   -
               -
              2,004
                   2
    60,000
           60
                 -
    1,766,051
     (2,182,589)
                  -
            -
              -
                             -
            (416,476)
  
Issuance of shares for the 
            -
               -
                -
                  -
             -
               -
                   -
               -
  modification of agreements
            -
               -
                -
                  -
              -
               -
                -
               -
                 153
           -
              -
                 -
              153
                     -
                  -
            -
              -
                             -
                      153
Net loss
            -
               -
                -
                  -
             -
               -
                -
               -
                      -
 
             -
              -
                 -
                   -
        (197,546)
                  -
            -
              -
                             -
            (197,546)
Balance, December 31, 1995
        350
               -
                -
                  -
             -
               -
                  -
               -
              2,157
                   2
    60,000
           60
                 -
    1,766,204
     (2,380,135)
                  -
            -
              -
                             -
            (613,869)
  
Shares issued as compensation
            -
               -
                -
                  -
             -
               -
                   -
               -
                 165
                    -
              -
              -
                 -
         16,466
                    -
                  -
            -
              -
                             -
                 16,466
Shares issued for cash
            -
               -
                -
                  -
              -
               -
                 -
               -
                   70
                    -
              -
              -
                 -
       174,040
                     -
                  -
            -
              -
                             -
              174,040
Issuance of shares for the 
  modification of agreements
            -
               -
                -
                  -
             -
               -
                  -
              -
               250
                   -
             -
              -
                 -
                   -
                     -
                  -
            -
              -
                             -
                          -
Cancellation of shares held in 
  treasury
            -
               -
                -
                  -
             -
               -
                  -
              -
               (62)
                   -
             -
              -
                 -
     (154,600)
                     -
                  -
            -
              -
                             -
            (154,600)
Net loss
            -
               -
                -
                  -
             -
               -
                  -
              -
                     -
                   -
             -
              -
                 -
                   -
        (450,734)
                  -
            -
              -
                             -
            (450,734)




















Balance, December 31, 1996
        350
               -
                -
                  -
             -
              -
                  -
              -
             2,580
                  2
   60,000
           60
                -
    1,802,110
     (2,830,869)
                  -
           -
              -
                             -
         (1,028,697)
  
Shares issued for cash
            -
               -
                -
                  -
             -
              -
                  -
              -
                100
                   -
             -
              -
                 -
       100,000
                     -
                  -
            -
              -
                             -
              100,000
Conversion of indebtedness
            -
               -
                -
                  -
             -
               -
                  -
              -
                800
                  1
             -
              -
                 -
       165,999
                     -
                  -
            -
              -
                             -
              166,000
Class A common stock issued for
  cancellation of $372,000 accrued
  wages due officer
            -
               -
                -
                  -
             -
               -
                 -
              -
             1,500
                  2
             -
              -
                 -
       371,998
                     -
                  -
            -
              -
                             -
              372,000
Shares issued as compensation
            -
               -
                -
                  -
             -
               -
                 -
              -
                247
                   -
             -
              -
                 -
           2,471
                     -
                  -
            -
              -
                             -
                   2,471
Adjustment to give effect to 
  recapitalization on March 9, 1997
            -
               -
                -
                  -
            -
               -
                  -
              -
                560
                  1
             -
              -
                 -
                (1)
                     -
                  -
            -
              -
                             -
                          -
Net loss
            -
               -
                -
                  -
            -
               -
                  -
              -
                     -
                -
             -
              -
                 -
                   -
        (133,578)
                  -
            -
              -
                             -
            (133,578)
Balance, December 31, 1997
        350
               -
                -
                  -
            -
              -
                  -
              -
             5,787
               6
   60,000
           60
                 -
    2,442,577
     (2,964,447)
                  -
            -
              -
                             -
            (521,804)
  
Shares issued for cancellation of 
  indebtedness
            -
               -
                -
                  -
            -
              -
                  -
              -
              2,430
                  2
             -
              -
                 -
       169,998
                   -
                 -
            -
              -
                             -
              170,000
Conversion of options
            -
               -
                -
                  -
            -
              -
                  -
              -
                500
                  1
             -
              -
                 -
       124,999
                     -
                  -
            -
              -
                             -
              125,000
Shares issued as compensation
            -
               -
                -
                  -
            -
              -
                 -
              -
             1,122
                  1
             -
              -
                 -
       112,161
                     -
                  -
            -
              -
                             -
              112,162
Shares issued for cancellation of 
  redeemable preferred stock
            -
               -
                -
                  -
            -
              -
                  -
              -
                  50
                   -
             -
              -
                 -
       150,000
                     -
                  -
            -
              -
                             -
             150,000
Shares returned to treasury and 
  cancelled
            -
               -
                -
                  -
            -
              -
                  -
              -
               (560)
                (1)
             -
              -
                 -
                  1
                     -
                  -
            -
              -
                            -
                       -






See report of independent registered public accounting firm
and notes to the consolidated financial statements.
F-7




MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT



Class A
Preferred Stock
Class B
Preferred Stock
Class C
Preferred Stock
Class D
Preferred Stock
Class A
Common Stock
Class B
Common Stock
Warrants Subscribed
Additional
Paid-in
Capital
Deficit
Accumulated
During the
Development
Stage
Notes
Receivable-
Common
Stock
Treasury Stock
Accumulated
Other
Comprehensive
Loss
Total
Stockholders'
Equity (Deficit)
Shares
Amount
 Shares 
 Amount 
 Shares 
 Amount 
 Shares 
 Amount 
 Shares 
 Amount 
 Shares 
 Amount 
 Shares 
 Amount 
Modification of royalty agreement
            -
               -
                -
                  -
                -
                  -
                     -
                  -
                   733
                     1
                -
                 -
                    -
              7,331
                        -
                     -
               -
                 -
                                -
                     7,332
Issuance of warrants to officer
            -
               -
                -
                  -
                -
                  -
                     -
                  -
                        -
                      -
                -
                 -
                    -
            27,567
                        -
                     -
               -
                 -
                                -
                   27,567
Net loss
            -
               -
                -
                  -
                -
                  -
                     -
                  -
                        -
                      -
                -
                 -
                    -
                      -
           (549,187)
                     -
               -
                 -
                                -
               (549,187)
Balance, December 31, 1998
      350
            -
             -
               -
            -
             -
              -
               -
              10,062
                   10
      60,000
              60
                    -
       3,034,634
        (3,513,634)
                     -
               -
                 -
                                -
             (478,930)
  
Shares issued for cancellation
  of indebtedness
            -
               -
                -
                  -
                -
                  -
                     -
                  -
                2,175
                     2
                -
                 -
                    -
          166,665
                       -
                     -
               -
                 -
                                -
               166,667
Shares issued as compensation
         -
            -
             -
               -
             -
               -
                  -
               -
         1,255
                  1
             -
              -
                 -
          95,098
                        -
                     -
               -
                 -
                                -
                  95,099
Shares issued for modification of 
  licensing agreement
            -
               -
                -
                  -
                -
                  -
                     -
                  -
                 672
                   1
              -
               -
                  -
                 (1)
                      -
                   -
             -
               -
                              -
                           -
Shares issued for cash
            -
               -
                -
                  -
                -
                  -
                     -
                  -
                 433
                    -
              -
               -
                  -
        173,540
                      -
                   -
             -
               -
                              -
               173,540
Net loss
            -
               -
                -
                  -
                -
                  -
                     -
                  -
                      -
                    -
              -
               -
                 -
                    -
         (539,283)
                   -
             -
               -
                              -
             (539,283)




















Balance, December 31, 1999
        350
               -
                -
                  -
                -
                  -
                     -
                  -
            14,597
                 14
    60,000
            60
                  -
     3,469,936
      (4,052,917)
                   -
             -
               -
                              -
             (582,907)
  
Shares issued as compensation-
  as restated
            -
               -