UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      D.C. 20549










FORM
      10-QSB










(MARK
      ONE)





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





FOR
      THE
      QUARTERLY PERIOD ENDED: SEPTEMBER 30, 2006





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




FOR
      THE
      TRANSITION PERIOD FROM ____________ TO ____________





COMMISSION
      FILE NUMBER 0-29204










GLOBAL
      MATRECHS, INC.


(Exact
      name of small business issuer as specified in its charter)





**Delaware**
            **58-2153309**(State
                or other jurisdiction of incorporation or organization)
            (IRS
                Employer Identification No.)





**90
      Grove Street**


**Suite
      201**


**Ridgefield,
      CT 06877**


(Address
      of principal executive offices)





**(203)
      431-6665**


(Issuer's
      telephone number)










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





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).       Yes  ̈ No x





As
      of
      November 10, 2006, there were 31,445,368 shares of our common stock, par value
      $0.0001 per share, outstanding.





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










Global
      Matrechs, Inc.





Form
      10-QSB





Quarterly
      Report





September
      30, 2006





**Table
      of Contents**





PART
                I.
            FINANCIAL
                INFORMATION
            1Item
                1.
            Financial
                Statements
            1Balance
                Sheet
            1Statements
                of Operations
            2Statements
                of Cash Flows
            3Notes
                to Unaudited Consolidated Financial Statements
            4Item
                2.
            Management's
                Discussion and Analysis of Financial Condition and Results of
                Operations
            8Item
                3.
            Controls
                and Procedures
            23PART
                II.
            OTHER
                INFORMATION
            24Item
                1.
            Legal
                Proceedings
            24Item
                5.
            Other
                Information
            24Item
                6.
            Exhibits
            25







**PART
      I. FINANCIAL INFORMATION**





**ITEM
      1. FINANCIAL STATEMENTS**




GLOBAL
      MATRECHS, INC.


BALANCE
      SHEET


AS
      OF
      SEPTEMBER 30, 2006





ASSETS
            
            September
                30,2006(unaudited)CURRENT
                ASSETS:Cash
                and cash equivalents
            
            
            1,636Investment
                in available for sale marketable securities
            
            
            95,555Accounts
                Receivable
            
            
            38,227Note
                Receivable
            
            
            50,000Inventory
            
            
            17,154Prepaid
                Expenses
            
            
            43,670TOTAL
                CURRENT ASSETS
            
            
            246,242Note
                receivable
            
            
            255,625Investment
                at cost
            
            
            51,949TOTAL
                ASSETS
            
            
            553,816LIABILITIES
                AND STOCKHOLDERS' DEFICITCURRENT
                LIABILITIES:Accounts
                payable and accrued expenses
            
            
            1,002,269Note
                payable
            
            
            375,000Convertible
                notes payable
            
            
            2,711,994Derivative
                liability
            
            
            1,952TOTAL
                CURRENT LIABILITIES
            
            
            4,091,215Convertible
                preferred stock
            
            
            843,000STOCKHOLDERS'
                DEFICIT:Preferred
                stock, Series H, $.01 par value,13,500
                shares authorized, 8,662 sharesissued
                and outstanding at September 30, 2006,convertible,
                participating, $8,662,000liquidation
                value at September 30,2006
            
            
            86Preferred
                stock, Series I, $.01 par value,490.5
                shares authorized, 490.5 sharesissued
                and outstanding at September 30, 2006,convertible,
                participating, $49,050liquidation
                value at September 30,2006
            
            
            5Common
                stock, $.0001 par value, 900,000,000 shares authorized,24,775,191
                shares issued and outstanding at September 30, 2006
            
            
            2,478Additional
                paid-in capital
            
            
            33,073,484Accumulated
                deficit
            
            
            (37,323,414
            )Accumulated
                other comprehensive loss
            
            
            (133,038
            )TOTAL
                STOCKHOLDERS' DEFICIT
            
            
            (4,380,399
            )TOTAL
                LIABILITIES AND STOCKHOLDERS' DEFICIT
            
            
            553,816




The
      accompanying notes are an integral part of these financial statements.


1





GLOBAL
      MATRECHS, INC.


STATEMENTS
      OF OPERATIONS


FOR
      THE
      THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005




Three
                Months Ended
            
            Nine
                Months EndedSeptember
                30,
            
            September
                30,2006
            
            2005
            
            2006
            
            2005(Unaudited)
            
            (Unaudited)
            
            (Unaudited)
            
            (Unaudited)**Revenues**
            
            
            36,096
            
            
            125
            
            
            36,381
            
            
            125**Cost
                of Revenues**
            
            
            22,145
            
            
            30
            
            
            22,145
            
            
            30**Gross
                Profit**
            
            
            13,951
            
            
            95
            
            
            14,236
            
            
            95**Operating
                expenses:**Selling,
                general and administrative
            
            
            217,424
            
            
            533,718
            
            
            1,119,323
            
            
            1,246,159Depreciation
                and amortization
            
            
            -
            
            
            49,311
            
            
            -
            
            
            147,933**Total
                operating expenses**
            
            
            217,424
            
            
            583,029
            
            
            1,119,323
            
            
            1,394,092**Loss
                from continuing operations**
            
            
            (203,473
            )
            
            (582,934
            )
            
            (1,105,087
            )
            
            (1,393,997
            )**Other
                income (expenses)**Interest
                (expense) recovery
            
            
            (350,164
            )
            
            (923,383
            )
            
            (215,860
            )
            
            (3,979,330
            )Change
                in fair value of derivative instruments
            
            
            277,163
            
            
            1,125,614
            
            
            454,979
            
            
            1,825,033Interest
                income
            
            
            3,438
            
            
            70
            
            
            14,109
            
            
            4,520**Total
                other income (expenses)**
            
            
            (69,563
            )
            
            202,301
            
            
            253,228
            
            
            (2,149,777
            )**Net
                income (loss) from continuing operations**
            
            
            (273,036
            )
            
            (380,633
            )
            
            (851,859
            )
            
            (3,543,774
            )**Discontinued
                operations:****Net
                loss from discontinued operations**
            
            
            0
            
            
            (135,456
            )
            
            0
            
            
            (332,731
            )Net
                income (loss) applicable to common shareholders
            
            
            (273,036
            )
            
            (516,089
            )
            
            (851,859
            )
            
            (3,876,505
            )Comprehensive
                loss:Unrealized
                gain (loss) on available for sale marketable securities
            
            
            54,603
            
            
            0
            
            
            (13,111
            )
            
            0Total
                comprehensive income (loss)
            
            
            (218,433
            )
            
            (516,089
            )
            
            (864,970
            )
            
            (3,876,505
            )Net
                (loss) income per share - basicNet
                (loss) income from continuing operations
            
            
            ($0.01
            )
            
            ($0.08
            )
            
            ($0.05
            )
            
            ($0.94
            )Net
                (loss) income from discontinued operations
            
            
            -
            
            
            ($0.03
            )
            
            -
            
            
            ($0.09
            )($0.01
            )
            
            ($0.11
            )
            
            ($0.05
            )
            
            ($1.03
            )Weighted
                number of shares outstanding -basic
            
            
            21,589,148
            
            
            4,596,717
            
            
            16,055,837
            
            
            3,751,236





The
      accompanying notes are an integral part of these financial
      statements.


2


GLOBAL
      MATRECHS, INC.


STATEMENTS
      OF CASH FLOWS


FOR
      THE
      NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005





Nine
                Months EndedSeptember
                30,2006
            
            2005(Unaudited)
            
            (Unaudited)**CASH
                FLOWS FROM OPERATING ACTIVITIES:****Net
                Loss**
            
            
            (851,859
            )
            
            (3,543,774
            )**Adjustments
                to reconcile net income (loss) to cash used in operating
                activities:**Amortization
                of intangibles
            
            
            -
            
            
            147,933Change
                in the fair value of derivative instruments
            
            
            (444,422
            )
            
            (1,825,033
            )Excess
                warrant value on convertible loans
            
            
            -
            
            
            3,950,976Common
                Stock issued in exchange for services rendered
            
            
            38,750
            
            
            47,052Amortization
                of beneficial conversion feature, net of conversions
            
            
            782,066
            
            
            0**Change
                in operating assets and liabilities:**Accounts
                receivable
            
            
            (38,227
            )
            
            -Inventory
            
            
            11,436
            
            
            (28,590
            )Prepaid
                expenses
            
            
            (23,625
            )
            
            177,028Notes
                receivable
            
            
            (5,625
            )
            
            -Accounts
                payable and accrued expenses
            
            
            (403,084
            )
            
            186,854**Net
                cash used in operating activities**
            
            
            (934,590
            )
            
            (887,554
            )**Net
                cash used in discontinued operating activities (including loss
                from****from
                operations of $332,731)**
            
            
            -
            
            
            (410,224
            )**Net
                cash used in operating activities**
            
            
            **(934,590**
            **)**
            
            **(1,297,778**
            **)****CASH
                FLOW FROM INVESTING ACTIVITIES:**Acquisition
                of property and equipment
            
            
            -
            
            
            -Proceeds
                from sale of property and equipment
            
            
            -
            
            
            -Repayment
                of (advance to) Tulix
            
            
            -
            
            
            72,858**Net
                cash provided by investing activities**
            
            
            **0**
            
            
            **72,858****Ned
                cash provided by discontinued financing
                activities**
            
            
            -
            
            
            5,000**CASH
                FLOW FROM FINANCING ACTIVITIES:**Proceeds
                from warrant exercise
            
            
            5,750
            
            
            -Proceeds
                from equity line
            
            
            637,483
            
            
            -New
                Promissory Note Borrowing
            
            
            175,000
            
            
            -Proceeds
                from issuance of convertible loans
            
            
            50,000
            
            
            1,220,000**Net
                cash provided by continuing financing activities**
            
            
            868,233
            
            
            1,220,000**Ned
                cash used in discontinued financing activities**
            
            
            -
            
            
            (93,776
            )**Net
                cash provided by financing activities**
            
            
            **868,233**
            
            
            **1,126,224****NET
                DECREASE IN CASH AND CASH EQUIVALENTS**
            
            
            (66,357
            )
            
            (93,696
            )**CASH
                AND CASH EQUIVALENTS at beginning of period**
            
            
            67,993
            
            
            131,470**CASH
                AND CASH EQUIVALENTS at end of period**
            
            
            **1,636**
            
            
            **37,774**Non-cash
                investing and financing activities:Unrealized
                loss on securities held for sale
            
            
            13,111
            
            
            -Conversion
                of preferred shares into7,479,409
                and 2,593,556 sharesof
                common stock for the nine months ended September 30, 2006 and 2005,
                respectively
            
            
            3,159,168
            
            
            1,870,510Issuance
                of 601,136 and 58,758 shares of common stock for servicesrendered
                for the nine months ended September 30, 2006 and 2005,
                respectively
            
            
            38,750
            
            
            47,052





The
      accompanying notes are an integral part of these financial statements.


3


GLOBAL
      MATRECHS, INC.


NOTES
      TO
      FINANCIAL STATEMENTS


(UNAUDITED)





**1. 
      BASIS OF PRESENTATION**





The
      accompanying unaudited consolidated financial statements of Global Matrechs,
      Inc. (the “Company”, “we” or “us”), have been prepared in accordance with
      accounting principles generally accepted in the United States (“GAAP”) for
      interim financial information and with the instructions to Form 10-QSB and
      Rule
      310(b) of Regulation S-B. Accordingly, they do not include all of the
      information and footnotes required by GAAP for complete financial statements.
      In
      the opinion of management, all adjustments (consisting of normal recurring
      accruals) considered necessary for a fair presentation have been included.
      Operating results for the quarter ended September 30, 2006 are not necessarily
      indicative of the results that may be expected for the calendar year ending
      December 31, 2006.





**2. 
      GOING CONCERN MATTERS**





As
      reflected in the accompanying financial statements, the Company has incurred
      significant losses since its incorporation resulting in an accumulated deficit
      as of September 30, 2006 of approximately $37,323,414. The Company’s financial
      statements are prepared using generally accepted accounting principles
      applicable to a going concern, which contemplate the realization of assets
      and
      liquidation of liabilities in the normal course of business. The Company
      continues to experience negative cash flows from operations and is dependent
      upon continued financing from investors to sustain its activities. During 2005,
      the Company sold its former wholly-owned subsidiary, True To Form, Ltd. (“True
      To Form”, “TTF”), which subsidiary represented all significant revenues
      generated by the Company in 2005. These factors raise substantial doubt about
      the Company’s ability to continue as a going concern. Management is planning to
      obtain additional capital principally through the sale of debt and equity
      securities. The realization of assets and satisfaction of liabilities in the
      normal course of business is dependent upon the Company obtaining additional
      equity capital and ultimately obtaining profitable operations. However, no
      assurances can be given that the Company will be successful in these activities.
      Should any of these events not occur, the accompanying financial statements
      will
      be materially affected. The financial statements do not include any adjustments
      that might be necessary if the Company is unable to continue as a going
      concern.





**3.
       STOCK BASED COMPENSATION**





The
      Company adopted SFAS 123(R) on January 1, 2006 using the modified prospective
      method under which compensation cost is recognized on or after the effective
      date for the portion of the outstanding awards for which services have not
      been
      rendered based upon the fair value of the awards calculated under SFAS
      123. The
      Company accounts for stock options and stock issued to non-employees for goods
      or services in accordance with the fair value method of SFAS No. 123. The
      compensation cost expensed under the provisions of SFAS 123(R), during the
      nine
      months ended September 30, 2006 was $10,557.   In addition, the fair
      value of options for the nine months ended September 30, 2006 decreased by
      $19,314.  No restatement has been made for the periods ended December 31,
      2005 and prior.





Prior
      to
      January 1, 2006, the Company had adopted the disclosure requirement of Statement
      of Financial Accounting Standards No. 148 (SFAS 148), “Accounting for
      Stock-Based Compensation-Transition and Disclosure” effective December 15, 2002.
      SFAS 148 amends Statement of Financial Accounting Standards No. 123  (SFAS
      123), “Accounting for Stock Based Compensation,” to provide alternative methods
      of transition for a voluntary change to the fair value based method of
      accounting for stock-based compensation and also amends the disclosure
      requirements of SFAS 123 to require prominent disclosure in both annual and
      interim financial statements about the methods of accounting for stock-based
      employee compensation and the effect of the method used to report results.
      No
      compensation expense was recorded because all options granted had an exercise
      price equal to the market value of the underlying stock on the grant date.




Stock
      option pricing assumptions




Nine
                months ended September 302006
            
            2005Expected
                volatility
            
            
            200
            %
            
            200
            %Expected
                dividends
            
            
            —
            
            
            —Risk-free
                rate of return (weighted average)
            
            
            4.25
            %
            
            4.25
            %Weighted
                average grant-date fair value
            
            $
            0.33
            
            $
            0.71





4




Expected
      volatility is based on the historical volatility of the Company's stock price.
      No dividend payouts were assumed, because the Company has operated with
      significant net losses . The risk-free rate of return reflects the average
      of
      the 10-year treasury note during the period the options were granted.





**4. 
      TAXES**





There
      was
      no provision for cash payment of income taxes for the three months ended
      September 30, 2006, because the Company anticipates a net taxable loss for
      the
      year ending December 31, 2006.





**5. 
      CONVERTIBLE PREFERRED STOCK**





In
      connection with private placements of the Company's Series B, C, D and E
      Convertible Preferred Stock, the Company was obligated to file and have declared
      effective by the Securities and Exchange Commission, within a specified time
      period, a registration statement with respect to a minimum number of shares
      of
      common stock issuable upon conversion of the Series B, C, D and E Convertible
      Preferred Stock. As of September 30, 2006, such registration statement has
      not
      been declared effective although the shares are eligible for sale under Rule
      144. As of March 14, 2003, the holders of these series waived all penalties
      related to the registration, along with mandatory conversion dates.





Through
      August 14, 2004, the terms of the Company's Series B, C, D, and E Convertible
      Preferred Stock provided for a guaranteed return on unconverted shares of 5%
      for
      Series B, 6% for Series C and D, and 8% for Series E.





**6. 
      PRIVATE EQUITY CREDIT AGREEMENT**





**Summary.** On
      January 10, 2006, we entered into the Private Equity Credit Agreement with
      Brittany Capital Management Limited, a limited liability company organized
      and
      existing under the laws of The Bahamas (“Brittany”). Under the Private Equity
      Credit Agreement, we may draw up to $15 million from time to time, at our
      discretion, in exchange for shares of our common stock, subject to conditions
      outside of the control of Brittany further described below.





On
      January 18, 2006, we filed a registration Statement on Form SB-2 (File No.
      333-131106) relating to the resale of up to 100,000,000 shares of our common
      stock that may be issued to Brittany under a Private Equity Credit Agreement.
      This Registration Statement (File No. 333-131106) was declared effective by
      the
      Securities and Exchange Commission (“SEC”) on February 2, 2006. During the
      quarter ended June 30, 2006, the Company drew down $219,124 under this facility
      and has drawn down $587,483 during the first six months of the fiscal year
      2006.
      As of June 30, 2006, we had issued 99,999,333 shares to Brittany under the
      Private Equity Credit Agreement. During the quarter ended September 30, 2006,
      the Company did not have any shares that could be issued under the Private
      Equity Credit Agreement. On June 27, 2006, the Company filed a new Registration
      Statement on Form SB-2 (File No. 333-135377) relating to the resale of up to
      (i)
      195,000,000 shares of our common stock by Brittany, which shares may from time
      to time be issued pursuant to the Private Equity Credit Agreement, and (ii)
      63,636 shares of our common stock issued to Econ Corporate Services, Inc.
      Following comments from the SEC on July 28, 2006, the Company withdrew its
      registration statement (File No. 333-135377) along with any pre-effective
      amendments and exhibits. On September 13, 2006, the Company cancelled its then
      current Private Equity Credit Agreement with Brittany and on September 14,
      2006,
      the Company entered into a new Private Equity Credit Agreement with Brittany. Under
      the
      new Private Equity Credit Agreement, we may draw up to an aggregate of $15
      million, from time to time at our discretion, in exchange for shares of our
      common stock. Each draw under the new Private Equity Credit Agreement is
      structured as a put option, wherein we require Brittany to purchase a number
      of
      shares of our common stock after a discount to the market price is applied
      over
      the course of a commitment period extending 36 months after the effective date
      of the registration statement that we
      are required to file to cover such shares. On October 5, 2006, the Company
      filed
      a new Registration Statement (File No. 333-137833) relating to the resale of
      up
      to (i) 7,800,000 shares to Brittany and (ii) 63,636 shares of our common stock
      issued to Econ Corporate Services, Inc. The Registration Statement (File No.
      333-137833) was declared effective by the SEC on October 27, 2006 and based
      upon
      the closing price of our stock of $0.018 on September 30, 2006, the Company
      would only be able to drawn down an additional $140,400 under the Private Equity
      Credit Agreement. Based upon the closing price of our stock of $0.018 on
      September 30, 2006, we would have to issue to Brittany approximately 833,333,333
      shares of our common stock in order to draw down the $15 million available
      to us
      under the new Private Equity Credit Agreement.





**Put
      Shares.** ****Each
      draw under the new Private Equity Credit Agreement is structured as a put
      option, wherein we require Brittany to purchase a number of shares of our common
      stock after a discount to the market price is applied. For a given put, we
      must
      deliver a notice to Brittany indicating the dollar amount we wish to draw down.
      Within five trading days after delivery of this notice, Brittany must deliver
      this amount in two equal installments, one each on the fifth and tenth trading
      day following the delivery of the notice. In exchange, we must issue to
      Brittany, in the case of the first installment, the number of shares of common
      stock obtained by dividing the amount of the installment by 92% of the average
      of the closing bid prices on the three trading days immediately preceding the
      installment date, and in the case of the second installment, the number of
      shares obtained by dividing the amount of the installment by 92% of the average
      of the three lowest closing bid prices during the ten trading day period
      immediately preceding the installment date. We refer to the shares we sell
      under
      the agreement as “put shares.” The issuance of put shares to Brittany are to
      take place from time to time, at our discretion, over the course of a commitment
      period extending 36 months after the effective date of the registration
      statement covering the shares we may issue under the new Private Equity Credit
      Agreement.




5




We
      are
      required to draw down a minimum of $100,000. If we draw a lesser amount, we
      must
      pay Brittany an amount equal to eight percent of the difference between that
      amount and the minimum. Based on our current assessment of our financing needs,
      we intend to draw in excess of the one $100,000 minimum.




**Blackout
      Shares.** If we
      suspend sales of common stock pursuant to the registration statement covering
      shares issuable under the equity line within 15 trading days of a sale of common
      stock to Brittany and our stock price declines during the suspension period,
      we
      will be required to issue that number of additional shares of our common stock
      which, when combined with the shares purchased during the 15 trading days
      immediately preceding the suspension, will equal the number of shares Brittany
      would have received had the purchase been made at the conclusion of the
      suspension period (at the lower per share price). Any obligation to deliver
      blackout shares arising under the new Private Equity Credit Agreement would
      be
      irrevocable, and Brittany would have no discretion regarding whether or not
      to
      receive them.




**Fees** .
      We are
      required to pay Southridge Investment Group, LLC (formerly Greenfield Capital
      Partners), a registered broker-dealer, a finder’s fee, in cash, equal to 1% of
      the amount of each draw down from the equity line as consideration for services
      related to the establishment of the new Private Equity Credit
      Agreement.




**Number
      of shares issuable under the new Private Equity Credit Agreement.** We
      cannot
      predict the actual number of shares of common stock that may be issued under
      the
      new Private Equity Credit Agreement, in part, because the purchase price of
      the
      shares will fluctuate based on prevailing market conditions and we have not
      determined the total amount of cash advances we intend to draw. However, for
      illustrative purposes, we have calculated the number of shares we would have
      to
      issue in connection with a hypothetical draw amount of $50,000 based on the
      assumptions set forth below:





*Authorized
      Shares of Common Stock* . At the
      market price of our common stock as of November 10, 2006, it would require
      approximately 1,666,666,666 shares to draw down the full $15,000,000 available
      under the Private Equity Credit Agreement as of that date. However, based upon
      comments from the SEC, the Company withdrew its registration statement (File
      No.
      333-135377) along with any pre-effective amendments and exhibits. On September
      13, 2006 the Company cancelled it’s then current Equity Line Agreement with
      Brittany Capital Management Ltd and on September 14, 2006, the Company entered
      into a new Private Equity Credit Agreement with Brittany Capital Management
      Ltd a
      limited
      liability company organized and existing under the laws of The Bahamas. Under
      the Private Equity Credit Agreement, we may draw up to an aggregate $15 million,
      from time to time at our discretion, in exchange for shares of our common stock.
      Each draw under the Private Equity Credit Agreement is structured as a put
      option, wherein we require Brittany to purchase a number of shares of our common
      stock after a discount to the market price is applied over the course of a
      commitment period extending 36 months after the effective date of the
      registration statement of which this prospectus forms a part . On
      October 5, 2006, the Company filed a new Registration Statement (File No.
      333-137833) relating to the resale of up to (i) 7,800,000 shares to Brittany
      Capital Management Ltd and (ii) 63,636 shares of our common stock issued to
      Econ
      Corporate Services, Inc . The Registration Statement (File No. 333-137833)
      was
      declared effective by the SEC on October 27, 2006 and based upon the closing
      price of our stock of $0.018 on September 30, 2006, the Company would only
      be
      able to drawn down an additional $140,400 under the Private Equity Credit
      Agreement.




**Shares
      Issuable Under new Private Equity Credit Agreement for $50,000 Draw at Various
      Market Prices**




**Hypothetical**
              **Market
                Price**
            
            **Discounted**
              **Market****Price**
            
            **Shares
                to be issued**$
            0.20
            
            $
            0.184
            
            
            271,739$
            0.10
            
            $
            0.092
            
            
            549,478$
            0.05
            
            $
            0.046
            
            
            1,086,957$
            0.02
            
            $
            0.0184
            
            
            2,717,391$
            0.01
            
            $
            0.0092
            
            
            5,434,783$
            0.0075
            
            $
            0.0069
            
            
            7,246,377





6





**Dilution.** The
      issuance and sale of shares under the new Private Equity Credit Agreement will
      have a significant dilutive impact on our stockholders for the following
      reasons:




· As
      described above, the lower our stock price is, the more shares we would have
      to
      issue for a given draw down amount, and the more shares we issue, the greater
      the extent of dilution to the ownership interest of our current stockholders.
      To
      illustrate, if we issue and sell all of the shares being offered under our
      current registration statement, they would represent approximately 20% of our
      outstanding common stock after giving effect to such issuance.




· Because
      the shares we may issue under the new Private Equity Credit Agreement are
      discounted, the issuance of these shares will also have a financially dilutive
      impact on our current stockholders.




· Brittany’s sale of material amounts of our common stock into the market may
      result in significant downward pressure on the price of the common stock as
      the
      supply of freely tradable shares increases. Furthermore, this downward pressure
      may encourage short sales, which could further depress the price of our common
      stock.




**7.** **DEVELOPMENTS
      DURING THE QUARTER**





On
      July
      12, 2006, a Special Meeting of the Board of Directors was held and it was
      resolved that the Company: (i) issue 450,000 shares of common stock to
      Consulting for Strategic Growth1, Inc. for services rendered during July, August
      and September; (ii) grant non-qualified stock options to each member of the
      Board of Directors, with an exercise price to $0.05 as follows; 250,000 to
      Mr.
      K.I.F Gothner, 100,000 to Mr. Tom Folsom and 1,000,000 to Mr. Michael Sheppard;
      (iii) issue non-qualified stock options to the Chief Technology Consultant
      for
      the purchase of 186,063 shares of common stock at an exercise price of $0.05;
      and (iv) grant to each member of the Board of Directors non-qualified stock
      options for the purchase of 250,000 shares of common stock on each of September
      30, 2006 and December 29, 2006 at an exercise price per share equal to the
      then
      current market price of the Company’s common stock.





On
      July
      13, 2006, the Company executed a promissory note agreement with Aberdeen Avenue
      LLC, one of our existing investors, under which it borrowed an additional
      $150,000 under the following terms and conditions: the promissory note is
      repayable on or before November 30, 2006 for $180,000.





On
      September 13, 2006, the Company executed a promissory note agreement with
      Southridge Partners LP, one of our existing investors, under which the Company
      borrowed an additional $50,000 under the following terms: the promissory note
      is
      a 2% Convertible Promissory Note due March 31, 2007.





**8.** **SUBSEQUENT
      EVENTS**





On
      October 5, 2006, the Company filed a new Registration Statement (File No.
      333-137833) relating to the resale of up to (i) 7,800,000 shares to Brittany
      and
      (ii) 63,636 shares of our common stock issued to Econ Corporate Services, Inc.
      On October 27, 2006, the Company’s Registration Statement (File No. 333-137833)
      was declared effective.





On
      October 19, 2006, the Company executed a $30,000, 2% Convertible Promissory
      Note
      Agreement with Southridge Partners LP, one of our existing investors. The
      promissory note is repayable on or before April 30, 2007 (the “Maturity Date”).
      Prior to the Maturity Date, all or a portion of the outstanding principal and
      interest on the note may be converted into a number of shares of the Company’s
      common stock equal to a fraction, the numerator of which shall be the amount
      of
      principal and interest being so converted and the denominator of which shall
      be
      equal to the conversion price. The conversion price is equal to eighty-percent
      (80%) of the average of the seven lowest closing bid prices for the ten trading
      days immediately preceding the date of conversion.





On
      October 19, 2006, the Company received a pilot order for our product NuCapTM from
      the Australian Nuclear Science and Technology (ANSTO).





On
      October 20, 2006, the Board of Directors approved a stock option grant of
      350,000 shares to Future Now Capital Markets Group, Inc (“FNCMGI”) for services
      rendered.


7


**ITEM
      2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND** **RESULTS
      OF OPERATIONS**




***Special
      Note Regarding Forward-Looking Statements***




Except
      for historical facts, the statements in this quarterly report are
      forward-looking statements. Forward-looking statements are merely our current
      predictions of future events. These statements are inherently uncertain, and
      actual events could differ materially from our predictions. Important factors
      that could cause actual events to vary from our predictions include those
      discussed under the heading “Factors That May Affect Future Performance” in this
      section. We assume no obligation to update our forward-looking statements to
      reflect new information or developments or any other reason, or reflect any
      events or circumstances after the date of this quarterly report or the date
      of
      any applicable amendment to this quarterly report. We urge readers to review
      carefully the risk factors described in this quarterly report and the other
      documents that we file with the Securities and Exchange Commission. These
      documents can be read at *www.sec.gov* .





**Our
      Business**




We
      are
      the successor to a variety of businesses dating back to 1994. We have undergone
      material changes to our business and our financial structure during the period
      covered by the financial statements included in this report.




Prior
      to
      May 31, 2004, we derived revenue from professional web development
      services, software licensing, application development, insurance and securities
      sales commissions, hosting fees and transactions fees. On May 31, 2004, we
      sold substantially all of our assets used in the operation of our hosting and
      web site maintenance business. We have kept a 15% interest in the surviving
      entity. As a result of this sale, our business consisted exclusively of the
      marketing of technologies licensed from Eurotech, Ltd under a licensing
      agreement dated May 22, 2003.




On
      December 31, 2004, we completed the acquisition of True To Form, Limited (“True
      To Form”), a maker of specialized lighting products for a range of markets from
      its sole shareholder, Mark J. Allen, who was at the time also a member of our
      Board of Directors. Mr. Allen continued as the President of True To Form and
      served as an Executive Vice President of Global Matrechs. Upon acquiring True
      to
      Form, it became our primary source of operating revenue. However, during the
      first three quarters of 2005, it was unprofitable.




On
      December 29, 2005, we completed the transfer of all of the issued and
      outstanding capital stock of True To Form back to Mr. Allen pursuant to the
      terms of a Stock Purchase Agreement between him, True To Form, and us. As a
      result of this sale, we no longer hold any equity interest in True To Form.
      The
      consideration was determined on the basis of these negotiations and consisted
      of:




· the issuance by True To Form to us of a promissory note described
      below in the initial principal amount of $250,000, which accrues interest at
      an
      annual rate of the prime rate plus 1% as reported by a nationally recognized
      commercial bank and has a maturity date of January 1, 2011;




· the cancellation of our guaranty of the amounts owed under a
      promissory note issued by True To Form to Mr. Allen in connection with our
      acquisition of True To Form; and




· the surrender by Mr. Allen of the 10,000,000 shares of our common
      stock that were issued to him as partial consideration for our purchase of
      True
      To Form on December 31, 2004 and the cancellation of all other equity interest
      in Global Matrechs held by Mr. Allen. The 10,000,000 shares of common stock
      has
      a fair value of $71,000.




In
      addition, we agreed to the cancellation of amounts owed under a note issued
      by
      us to True To Form for working capital purposes in the aggregate amount of
      $280,000 and Mr. Allen resigned from his positions as Executive Vice President
      and Director of Global Matrechs.





As
      a
      result of the sale of True To Form, we have once again narrowed the focus of
      our
      business to marketing the technologies we currently license from Eurotech,
      including the following technologies:





·  **NUCAP(TM)** ,
      formerly called EKOR(TM), a silicon based elastomer developed jointly by
      scientists at the I.V. Kurchatov Institute and members of the Euro-Asian
      Physical Society, both based in Moscow, Russia for the purposes of long term
      isolation of radioactive or otherwise hazardous materials.




8




·  **HNIPU** ,
      a
      hybrid polyurethane with uses in a number of industrial application contexts
      such as manufacturing automotive components, paints, foams, plastics and truck
      bed liners; aerospace sealants, industrial adhesives, coatings, flooring, glues;
      industrial equipment and machinery; and consumer goods such as appliances,
      footwear, furniture and plastic products.




We
      also
      license several other technologies relating to hazardous materials handling,
      electromagnetic radiography, and chemical processing. We are currently seeking
      manufacturing partners for these products.




We
      have
      received some small commercial orders, but to date, derived no significant
      revenue from the technologies we license from Eurotech. The development and
      commercialization of NuCap(TM), HNIPU and the other technologies we license
      will
      depend largely on the success of our marketing efforts and our ability to
      identify manufacturing partners, and we cannot be certain that we will be able
      to conduct our activities in a way that builds interest in these products,
      or
      that any interest we do build will result in revenue to us. Furthermore, even
      if
      these licensed technologies do become a source of revenue for us, there is
      no
      guarantee such revenue will be sufficient to offset our administrative costs.
      Although the exclusive focus of our business is on the marketing of these
      licensed technologies, there can be no assurance that these efforts will
      succeed.





**Critical
      Accounting Policies**





Our
      consolidated financial statements are prepared in accordance with accounting
      principles generally accepted in the United States. These accounting principles
      require us to make certain estimates, judgments and assumptions. We believe
      that
      the estimates, judgments and assumptions upon which we rely are reasonable
      based
      upon information available to us at the time that these estimates, judgments
      and
      assumptions are made. These estimates, judgments and assumptions can affect
      the
      reported amounts of assets and liabilities as of the date of the financial
      statements, as well as the reported amounts of revenues and expenses during
      the
      periods presented. Those estimates and judgments are based on management's
      historical experience, the terms of existing agreements, our observance of
      trends in the industry, information that we obtain from our customers and
      outside sources, and on various other assumptions that management believes
      to be
      reasonable and appropriate under the circumstances, the results of which form
      the basis for making judgments about the carrying values of assets and
      liabilities that are not readily apparent from other sources. To the extent
      there are material differences between these estimates, judgments or assumptions
      and actual results, our financial statements will be affected.





The
      significant accounting policy that we believe is most critical in fully
      understanding and evaluating our reported financial results is our policy
      regarding revenue recognition, which is discussed in detail in our Annual Report
      on Form 10-KSB filed with the Securities and Exchange Commission. We have
      reviewed and determined that our revenue recognition policy remains our critical
      accounting policy
      for the three-month period ended September 30, 2006. We did not make any changes
      to this policy during this period.





**Developments
      During the Quarter**





July
      12,
      2006, a Special Meeting of the Board of Directors was held and it was resolved
      that that the Company: (i) issue 450,000 shares of common stock to Consulting
      for Strategic Growth1, Inc. for services rendered during July, August and
      September, (ii) grant non-qualified stock options to each member of the Board
      of
      Directors, with an exercise price to $0.05 as follows: 250,000 to Mr. K.I.F
      Gothner; 100,000 to Mr. Tom Folsom and 1,000,000 to Mr. Michael Sheppard; (iii)
      issue non-qualified stock options to the Chief Technology Consultant of the
      Company for the purchase of 186,063 shares of common stock at an exercise price
      of $0.05; and (iv) grant to each member of the Board of Directors non-qualified
      stock options for the purchase of 250,000 shares of common stock on each of
      September 30, 2006 and December 29, 2006 at an exercise price per share equal
      to
      the then current market price of the Company’s common stock.





On
      July
      13, 2006, the Company executed a promissory note agreement with Aberdeen Avenue
      LLC, one of our existing investors under which we borrowed an additional
      $150,000 under the following terms and conditions: the promissory note is
      repayable on or before November 30, 2006 for $180,000.





On
      August
      25, 2006, an order for NuCapTM was placed with the Company by Bechtel Jacobs
      Company, LLC, the integrating management contractor for the Oak Ridge facility,
      and was promptly delivered by Dow Corning Corporation, Global Matrechs'
      exclusive U.S. manufacturer of NuCap. The multiple-drum order was immediately
      applied to work on the Melton Valley Completion Project. The macro-encapsulation
      of containers for radioactive material was finished on September 8, 2006, with
      the option for continued use in other segments of the Project. These additional
      projects were completed by September 18, 2006.




9





On
      September 13, 2006, the Company executed a promissory note agreement with
      Southridge Partners LP, one of our existing investors under which the Company
      borrowed an additional $50,000. The
      promissory note is repayable on or before March 31, 2007 (the “Maturity Date”).
      Prior to the Maturity Date, all or a portion of the outstanding principal and
      interest on the note may be converted into a number of shares of the Company’s
      common stock equal to a fraction, the numerator of which shall be the amount
      of
      principal and interest being so converted and the denominator of which shall
      be
      equal to the conversion price. The conversion price is equal to eighty-percent
      (80%) of the average of the five lowest closing bid prices for the ten trading
      days immediately preceding the date of conversion.





On
      September 14, 2006, the Company and Brittany agreed to terminate the parties’
Private Equity Credit Agreement and Registration Rights Agreement, dated January
      10, 2006, and enter into a new Private Equity Credit Agreement and Registration
      Rights Agreement with terms substantially similar to the prior agreements.
      The
      reasons for terminating the prior agreements included the parties’ decision to
      decrease the number of shares which were required to be registered pursuant
      to
      the prior Registration Rights Agreement and to change certain mechanics relating
      to the exercise of put options.





**Results
      of Operations during three months ended September 30, 2006 and
      2005**





*Net
      Sales* .
      Net
      sales increased in the quarter ended September 30, 2006 to $36,096 from the
      quarter ended September 30, 2005 which was $125. The increase in the sales
      related to new product orders and deliveries. An
      order
      for NuCapTM was placed by Bechtel Jacobs Company, LLC, the integrating management
      contractor for the Oak Ridge facility, with the Company and was promptly
      delivered by Dow Corning Corporation, Global Matrechs' exclusive U.S.
      manufacturer of NuCap. The multiple-drum order was immediately applied to work
      on the Melton Valley Completion Project. The macro-encapsulation of containers
      for radioactive material was finished on September 8, 2006, with the option
      for
      continued use in other segments of the Project. These additional projects were
      completed by September 18, 2006.





*General
      and Administrative* .
      General
      and administrative expense includes salaries for administrative personnel,
      insurance and other administrative expenses, as well as expenses associated
      with
      maintaining our records and SEC reporting. General and administrative expenses
      decreased to $217,424 for the quarter ended September 30, 2006 from $533,718
      for
      the quarter ended September 30, 2005. This decrease was primarily due to lower
      legal and professional fees.





*Depreciation
      and Amortization* .
      No
      amortization or depreciation was recorded for the quarter end September 30,
      2006
      as compared to $49,311 for the quarter end September 30, 2005. The decrease
      was
      due to the write off of all intangible assets as of December 31, 2005.




*Interest
      Expense.* Interest
      expense for the quarter ended September 30, 2006 decreased to $350,164 from
      $923,383 for the quarter ended September 30, 2005. For the quarter ended
      September 30, 2006 and 2005 it consisted of $282,631 and $911,146, respectively,
      of interest in connection with the beneficial conversion features and
      amortization of warrant features related to convertible notes, and $63,956
      and
      $12,237, respectively, in accrued interest expense on other borrowings. 
Amortization of debt discount and the beneficial conversion feature for the
      three months ended September 30, 2006 and 2005 was $227,092 and $59,116,
      respectively.





*Other
      (Income) Expenses* .
      Other
      (income) expenses for the quarter ended September 30, 2006 consisted of
      ($277,163) versus ($1,125,614) for the comparable period in 2005. The income
      was
      the result of the change in the fair value of our derivative
      instruments.





*Interest
      Income* .
      Interest income in the quarter ended September 30, 2006 consisted of $3,438
      versus $70 for the comparable period in 2005 and reflects interest earned on
      notes receivable as well as money market bank interest.





**Results
      of Operations during nine months ended September 30, 2006 and
      2005**





*Net
      Sales* .
      Net
      sales increased for the nine months ended September 30, 2006 to $36,381 from
      the
      nine month period ended September 30, 2005 which was $125. The increase reflects
      the increased sales of the Company’s primary products because of added sales
      efforts and marketing of NuCapTM.





*General
      and Administrative* .
      General
      and administrative expense includes salaries for administrative personnel,
      insurance and other administrative expenses, as well as expenses associated
      with
      maintaining our records and SEC reporting. General and administrative expenses
      decreased to $1,119,323 for the nine months ended September 30, 2006 from
      $1,246,159 for the nine months ended September 30, 2005. This decrease was
      primarily due to slightly lower legal and professional fees.




10





*Depreciation
      and Amortization* .
      No
      amortization or depreciation was recorded for the nine months ended September
      30, 2006 as compared to $147,933 for the nine months ended September 30, 2005.
      The decrease was due to the write off of all intangible assets as of December
      31, 2005.




*Interest
      Expense.* Interest
      expense for the nine months ended September 30, 2006 was $215,860 compared
      to
      September 30, 2005 expense of $3,979,330. The nine months ended September 30,
      2006 included a reversal of $698,000 in penalties related to certain notes
      payable that were amended during the quarter. Such amount has been reflected
      against interest expense as such was originally recorded as interest expense.
      For the nine months ended September 30, 2006 and 2005 it consisted of $600,836
      and $3,967,093, respectively, of interest in connection with the beneficial
      conversion features and amortization of warrant features related to convertible
      notes, and $64,847 and $12,237, respectively, in accrued interest expense on
      other borrowings.  Amortization of debt discount and the beneficial
      conversion feature for the nine months ended September 30, 2006 and 2005 was
      $671,665 and $177,348, respectively.





*Other
      (Income) Expenses* .
      Other
      (income) expenses for the nine months ended September 30, 2006 consisted of
      ($454,979) versus ($1,825,033) for the same period ended September 30,
      2005.





*Interest
      Income* .
      Interest income for the nine months ended September 30, 2006 consisted of
      $14,109 versus $4,520 for the comparable period in 2005 and reflects interest
      earned on notes receivable and well as money market bank interest.





**Liquidity
      and Capital Resources**





Our
      sources of capital are extremely limited. We have incurred operating losses
      since inception and as of September 30, 2006, we had an accumulated deficit
      of
      $37,323,414 and a working capital deficit of $3,844,973.





***Cash
      Provided by Financing Activities***





During
      the nine months ended September 30, 2006, we financed our business primarily
      by
      drawing down on our equity line and issuing convertible and other promissory
      notes. Cash provided by financing activities for the nine months ended September
      30, 2006 was $868,233, compared to $1,220,000 for the same period in 2005. 
Of the amount received for the nine months ended September 30, 2006, $637,483
      represents proceeds from draws under the equity line established January 10,
      2006 and $225,000 in convertible and other promissory notes and $5,750 related
      to the proceeds of a warrant exercise.





**Promissory
      & Convertible Notes** .





On
      July
      13, 2006, the Company executed a promissory note agreement with Aberdeen Avenue
      LLC, one of our existing investors under which it borrowed an additional
      $150,000 under the following terms and conditions: the promissory note is
      repayable on or before November 30, 2006 for $180,000.





On
      September 13, 2006, the Company executed a promissory note agreement with
      Southridge Partners LP, one of our existing investors, under which the Company
      borrowed an additional $50,000. The
      promissory note is repayable on or before March 31, 2007 (the “Maturity Date”).
      Prior to the Maturity Date, all or a portion of the outstanding principal and
      interest on the note may be converted into a number of shares of the Company’s
      common stock equal to a fraction, the numerator of which shall be the amount
      of
      principal and interest being so converted and the denominator of which shall
      be
      equal to the conversion price. The conversion price is equal to eighty-percent
      (80%) of the average of the five lowest closing bid prices for the ten trading
      days immediately preceding the date of conversion.




On
      October 19, 2006, the Company executed a $30,000 2% convertible Promissory
      Note
      Agreement with Southridge Partners LP, one of our existing investors. The
      promissory note is repayable on or before April 30, 2007 (the “Maturity Date”).
      Prior to the Maturity Date, all or a portion of the outstanding principal and
      interest on the note may be converted into a number of shares of the Company’s
      common stock equal to a fraction, the numerator of which shall be the amount
      of
      principal and interest being so converted and the denominator of which shall
      be
      equal to the conversion price. The conversion price is equal to eighty-percent
      (80%) of the average of the seven lowest closing bid prices for the ten trading
      days immediately preceding the date of conversion.





**Private
      Equity Credit Line**





**Summary.** On
      January 10, 2006, we entered into the Private Equity Credit Agreement with
      Brittany. Under the Private Equity Credit Agreement, we may draw up to $15
      million from time to time, at our discretion, in exchange for shares of our
      common stock, subject to conditions outside of the control of Brittany further
      described below.




11





On
      January 18, 2006, we filed a registration Statement on Form SB-2 (File No.
      333-131106) relating to the resale of up to 100,000,000 shares of our common
      stock that may be issued to Brittany under a Private Equity Credit Agreement.
      This Registration Statement (File No. 333-131106) was declared effective by
      the
      Securities and Exchange Commission (“SEC”) on February 2, 2006. During the
      quarter ended June 30, 2006, the Company drew down $219,124 under this facility
      and has drawn down $587,483 during the first six months of the fiscal year
      2006.
      As of June 30, 2006, we had issued 99,999,333 shares to Brittany under the
      Private Equity Credit Agreement. During the quarter ended September 30, 2006,
      the Company did not have any shares that could be issued under the Private
      Equity Credit Agreement. On June 27, 2006, the Company filed a new Registration
      Statement on Form SB-2 (File No. 333-135377) relating to the resale of up to
      (i)
      195,000,000 shares of our common stock by Brittany, which shares may from time
      to time be issued pursuant to the Private Equity Credit Agreement, and (ii)
      63,636 shares of our common stock issued to Econ Corporate Services, Inc.
      Following comments from the SEC on July 28, 2006, the Company withdrew its
      registration statement (File No. 333-135377) along with any pre-effective
      amendments and exhibits. On September 13, 2006, the Company cancelled its then
      current Private Equity Credit Agreement with Brittany and on September 14,
      2006,
      the Company entered into a new Private Equity Credit Agreement with Brittany. Under
      the
      new Private Equity Credit Agreement, we may draw up to an aggregate of $15
      million, from time to time at our discretion, in exchange for shares of our
      common stock. Each draw under the new Private Equity Credit Agreement is
      structured as a put option, wherein we require Brittany to purchase a number
      of
      shares of our common stock after a discount to the market price is applied
      over
      the course of a commitment period extending 36 months after the effective date
      of the registration statement that we
      are required to file to cover such shares. On October 5, 2006, the Company
      filed
      a new Registration Statement (File No. 333-137833) relating to the resale of
      up
      to (i) 7,800,000 shares to Brittany and (ii) 63,636 shares of our common stock
      issued to Econ Corporate Services, Inc. The Registration Statement (File No.
      333-137833) was declared effective by the SEC on October 27, 2006 and based
      upon
      the closing price of our stock of $0.018 on September 30, 2006, the Company
      would only be able to drawn down an additional $140,400 under the Private Equity
      Credit Agreement. Based upon the closing price of our stock of $0.018 on
      September 30, 2006, we would have to issue to Brittany approximately 833,333,333
      shares of our common stock in order to draw down the $15 million available
      to us
      under the new Private Equity Credit Agreement.





**Put
      Shares.** **** Each
      draw under the new Private Equity Credit Agreement is structured as a put
      option, wherein we require Brittany to purchase a number of shares of our common
      stock after a discount to the market price is applied. For a given put, we
      must
      deliver a notice to Brittany indicating the dollar amount we wish to draw down.
      Within five trading days after delivery of this notice, Brittany must deliver
      this amount in two equal installments, one each on the fifth and tenth trading
      day following the delivery of the notice. In exchange, we must issue to
      Brittany, in the case of the first installment, the number of shares of common
      stock obtained by dividing the amount of the installment by 92% of the average
      of the closing bid prices on the three trading days immediately preceding the
      installment date, and in the case of the second installment, the number of
      shares obtained by dividing the amount of the installment by 92% of the average
      of the three lowest closing bid prices during the ten trading day period
      immediately preceding the installment date. We refer to the shares we sell
      under
      the agreement as “put shares.” The issuance of put shares to Brittany are to
      take place from time to time, at our discretion, over the course of a commitment
      period extending 36 months after the effective date of the registration
      statement covering the shares we may issue under the new Private Equity Credit
      Agreement.




We
      are
      required to draw down a minimum of $100,000. If we draw a lesser amount, we
      must
      pay Brittany an amount equal to eight percent of the difference between that
      amount and the minimum. Based on our current assessment of our financing needs,
      we intend to draw in excess of the one $100,000 minimum.





**Blackout
      Shares.** If we
      suspend sales of common stock pursuant to the registration statement covering
      shares issuable under the equity line within 15 trading days of a sale of common
      stock to Brittany and our stock price declines during the suspension period,
      we
      will be required to issue that number of additional shares of our common stock
      which, when combined with the shares purchased during the 15 trading days
      immediately preceding the suspension, will equal the number of shares Brittany
      would have received had the purchase been made at the conclusion of the
      suspension period (at the lower per share price). Any obligation to deliver
      blackout shares arising under the new Private Equity Credit Agreement would
      be
      irrevocable, and Brittany would have no discretion regarding whether or not
      to
      receive them.




**Fees** .
      We are
      required to pay Southridge Investment Group, LLC (formerly Greenfield Capital
      Partners), a registered broker-dealer, a finder’s fee, in cash, equal to 1% of
      the amount of each draw down from the equity line as consideration for services
      related to the establishment of the new Private Equity Credit
      Agreement.




**Number
      of shares issuable under the new Private Equity Credit Agreement.** We
      cannot
      predict the actual number of shares of common stock that may be issued under
      the
      new Private Equity Credit Agreement, in part, because the purchase price of
      the
      shares will fluctuate based on prevailing market conditions and we have not
      determined the total amount of cash advances we intend to draw. However, for
      illustrative purposes, we have calculated the number of shares we would have
      to
      issue in connection with a hypothetical draw amount of $50,000 based on the
      assumptions set forth below:




12





**Shares
      Issuable Under Private Equity Credit Agreement for $50,000 Draw at Various
      Market Prices**


**Hypothetical**
                **Market
                  Price**
              
              **Discounted**
                **Market****Price**
              
              **Shares
                  to be issued**$
              0.20
              
              $
              0.184
              
              
              271,739$
              0.10
              
              $
              0.092
              
              
              549,478$
              0.05
              
              $
              0.046
              
              
              1,086,957$
              0.02
              
              $
              0.0184
              
              
              2,717,391$
              0.01
              
              $
              0.0092
              
              
              5,434,783$
              0.0075
              
              $
              0.0069
              
              
              7,246,377


**Dilution.** The
      issuance and sale of shares under the Private Equity Credit Agreement will
      have
      a significant dilutive impact on our stockholders for the following
      reasons:




· As
      described above, the lower our stock price is, the more shares we would have
      to
      issue for a given draw down amount, and the more shares we issue, the greater
      the extent of dilution to the ownership interest of our current stockholders.
      To
      illustrate, if we issue and sell all of the shares being offered under our
      current registration statement, they would represent approximately 20% of our
      outstanding common stock after giving effect to such issuance.




· Because
      the shares we may issue under the Private Equity Credit Agreement are
      discounted, the issuance of these shares will also have a financially dilutive
      impact on our current stockholders.




· The
      Brittany’s sale of material amounts of our common stock into the market may
      result in significant downward pressure on the price of the common stock as
      the
      supply of freely tradable shares increases. Furthermore, this downward pressure
      may encourage short sales, which could further depress on the price of the
      common stock.




**Financing
      Activities in 2006**





During
      2006, we financed our business by drawing down on our equity line and through
      the issuance of convertible and other promissory notes.





*Promissory
      Note with Southridge Partners, LP.*





On
      June
      20, 2006, we entered into a $25,000 nonnegotiable promissory note with
      Southridge Partners, LP, one of our existing investors, whereby we agreed to
      pay
      $30,000 on or before December 31, 2006.





On
      September 13, 2006, the Company executed a promissory note agreement with
      Southridge Partners LP, one of our existing investors, under which the Company
      borrowed an additional $50,000. The
      promissory note is repayable on or before March 31, 2007 (the “Maturity Date”).
      Prior to the Maturity Date, all or a portion of the outstanding principal and
      interest on the note may be converted into a number of shares of the Company’s
      common stock equal to a fraction, the numerator of which shall be the amount
      of
      principal and interest being so converted and the denominator of which shall
      be
      equal to the conversion price. The conversion price is equal to eighty-percent
      (80%) of the average of the five lowest closing bid prices for the ten trading
      days immediately preceding the date of conversion.




On
      October 19, 2006, the Company executed a $30,000 2% convertible Promissory
      Note
      Agreement with Southridge Partners LP, one of our existing investors. The
      promissory note is repayable on or before April 30, 2007 (the “Maturity Date”).
      Prior to the Maturity Date, all or a portion of the outstanding principal and
      interest on the note may be converted into a number of shares of the Company’s
      common stock equal to a fraction, the numerator of which shall be the amount
      of
      principal and interest being so converted and the denominator of which shall
      be
      equal to the conversion price. The conversion price is equal to eighty-percent
      (80%) of the average of the seven lowest closing bid prices for the ten trading
      days immediately preceding the date of conversion.





**Financing
      Activities in 2005**




During
      2005, we financed our business by drawing down on our equity line and through
      issuances of convertible debt.




13




*Private
      Placements with Southridge Partners LP.*





On
      January 31, 2005, we entered into a Second Securities Purchase Agreement with
      Southridge Partners LP, one of our existing investors, whereby we agreed to
      sell
      a convertible promissory note in the principal amount of $250,000 and warrant
      to
      purchase up to 10,000,000 shares of our common stock to Southridge in exchange
      for its $250,000 investment. The note is convertible, at the option of the
      holder, into shares of our common stock at a conversion price of $0.02 per
      share. Southridge may require us to repurchase some or all of its note if the
      market price of our common stock falls below $0.03 per share for ten (10)
      consecutive trading days, at a repurchase price
      equal to 140% of the principal amount of the note. In the event we default
      under
      the terms of the note, the entire outstanding principal (and any outstanding
      interest accrued thereon) shall become immediately due and payable, and the
      interest rate will rise to 18% per annum.





Under
      the
      terms of the purchase agreement, Southridge had the option, and at any time
      prior to July 1, 2005, to purchase an additional note in the principal amount
      of
      up to $1,500,000, and otherwise on substantially the same terms as the note
      issued on January 31, 2005. During the nine months ended September 30, 2005,
      Southridge exercised this option on March 2, April 11, and May 2, 2005,
      purchasing notes in the aggregate principal amount of $425,000 and warrants
      to
      purchase up to 17,000,000 shares of our common stock. All of these transactions
      were exempt from registration pursuant to the provisions of Section 4(2) of
      the
      Securities Act, as amended. On July 8, 2005, we and Southridge Partners LP
      terminated its option to purchase additional notes.





We
      have
      secured the payment of the notes with a subordinated security interest in our
      accounts, general intangibles, inventories, and other collateral. In addition,
      in the event we propose to register securities under the Securities Act of
      1933,
      as amended, we are required to notify Southridge in advance of such registration
      and, at its request (subject to limited exceptions), include the shares of
      our
      common stock underlying the note and warrant on the registration statement
      filed
      in connection with such registration (and assume any expenses associated
      therewith). The warrant has an expiration date of January 31, 2010. It contains
      a cashless exercise provision whereby the holder may pay the exercise price
      associated with any exercise by having us withhold a number of shares otherwise
      issuable upon such exercise having a fair market value equal to the applicable
      aggregate exercise price. In the event such provision is used with respect
      to an
      exercise, we would receive no proceeds upon such exercise.





*Exchange
      Agreement with Woodward LLC.*




On
      January 31, 2005, we entered into an Exchange Agreement with Woodward LLC
      pursuant to which we acquired promissory notes, and have accordingly assumed
      all
      rights pertaining thereto, issued by Eurotech Ltd. The notes are currently
      in
      default and have an aggregate outstanding principal amount of $290,000. The
      notes carry a default annual interest rate of 18% and are past due in their
      entirety. In exchange for these notes, we issued to Woodward a promissory note
      in the principal amount of $250,000. Under the terms of the Exchange Agreement,
      in the event we propose to register securities under the Securities Act of
      1933,
      as amended, we are required to notify Woodward in advance of such registration
      and, at its request (subject to limited exceptions), include the shares of
      our
      common stock underlying the note on the registration statement filed in
      connection with such registration, and assume any expenses associated therewith.





*Private
      Placements with MacNab LLC.*





On
      June
      14, July 13, August 1, September 14, 2005, and October 3, 2005, we entered
      into
      Securities Purchase Agreements with MacNab LLC, each in substantially the same
      form, pursuant to which we sold nonnegotiable 2% secured convertible promissory
      notes in the aggregate principal amount of $595,000, and common stock purchase
      warrants to purchase up to 23,800,000 shares of our common stock, $.0001 par
      value per share, for an aggregate purchase price of $595,000. The notes and
      warrants are on substantially the same terms as the notes and warrants issued
      to
      Southridge, as described above. On May 17, 2006 these notes were assigned to
      Aberdeen Avenue LLC.





*Debt
      Issuance to Southridge Partners LP.*




On
      December 7, 2005, we issued a promissory note in the original principal amount
      of $200,000 to Southridge Partners LP. It accrues interest on the unpaid
      principal balance at a rate of 8% per year. The note originally had a maturity
      date of February 10, 2006, but on March 29, 2006, the maturity date was extended
      to December 20, 2006. In the event of a default, the annual interest rate will
      increase to 18% and Southridge may, at its option, demand immediate payment
      of
      all amounts due under the promissory note.




14





**Going
      Concern and Financing Requirements**





The
      report of our prior registered independent public accounting firm dated March
      27,2006 includes a going-concern qualification, which indicates an absence
      of
      obvious or reasonably assured sources of future funding that will be required
      by
      us to maintain ongoing operations. If we are unable to obtain additional
      funding, we may not be able to continue operations. To date, we have funded
      our
      operations through equity investments and issuances of debt. Additionally,
      we
      had an accumulated deficit of approximately $36,471,555 and $37,323,414 as
      of
      December 31, 2005 and September 30, 2006, respectively. This deficit indicates
      that we may be unable to meet our future obligations unless additional funding
      sources are obtained. There is no assurance that we will be able to raise any
      additional capital that we require to continue operations.




Our
      consolidated unaudited interim financial statements included with this Quarterly
      Report on Form 10-QSB have been prepared assuming that we will continue as
      a
      going concern. As shown in the accompanying consolidated unaudited financial
      statements, we had negative working capital of approximately
      $6,938,679.





In
      the
      event that we are unable to raise additional financing on acceptable terms,
      then
      we may have to scale back our plan of operations and operating expenditures
      or
      seek the protection of the bankruptcy courts. We anticipate that we will
      continue to incur losses until such time as the revenues we are able to generate
      revenue from sales and licensing of our products exceed our increased operating
      expenses. There can be no assurance that we will be able to generate
      revenue.





**Off-Balance
      Sheet Arrangements**




We
      have
      no off-balance sheet arrangements that have or are reasonably likely to have
      a
      current or future effect on our financial condition, changes in financial
      condition, revenues or expenses, results of operations, liquidity, capital
      expenditures or capital resources.




**Commitments
      and Contingencies**




***Facilities
      Leases***




As
      of
      September 30, 2006, the Company occupied approximately 550 square feet in one
      office building in Ridgefield, Connecticut on a lease that expires on September
      30, 2006. The
      Company is currently renting these facilities on a month to month basis. The
      Company also has an offsite office of which it also pays rent on a
      month-to-month basis. The total rent expense was $19,400 and $65,801, for the
      three and nine months ended September 30, 2006,
      respectively.





**Recently
      Issued Accounting Pronouncements**




In
      April
      2005, the Securities and Exchange Commission’s Office of the Chief Accountant
      and its Division of Corporation Finance has released Staff Accounting Bulletin
      (SAB) No. 107 to provide guidance regarding the application of FASB Statement
      No. 123 (revised 2004), Share-Based Payment.  Statement No. 123(R) covers a
      wide range of share-based compensation arrangements including share options,
      restricted share plans, performance-based awards, share appreciation rights,
      and
      employee share purchase plans.  SAB 107 provides interpretative guidance
      related to the interaction between Statement No. 123R and certain SEC rules
      and
      regulations, as well as the staff’s views regarding the valuation of share-based
      payment arrangements for public companies. SAB 107 also reminds public companies
      of the importance of including disclosures within filings made with the SEC
      relating to the accounting for share-based payment transactions, particularly
      during the transition to Statement No. 123R.




In
      May 2005, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standards No. 154, “Accounting Changes
      and Error Corrections-a replacement of APB Opinion No. 20 and FASB
      Statement No. 3” (“SFAS 154”).  This Statement replaces APB Opinion
      No. 20, Accounting Changes, and FASB Statement No. 3, Reporting
      Accounting Changes in Interim Financial Statements, and changes the requirements
      for the accounting for and reporting of a change in accounting principle. This
      Statement applies to all voluntary changes in accounting principle. It also
      applies to changes required by an accounting pronouncement in the unusual
      instance that the pronouncement does not include specific transition provisions.
      When a pronouncement includes specific transition provisions, those provisions
      should be followed.




APB
      Opinion No. 20  previously
      required that most voluntary changes in accounting principle be recognized
      by
      including in net income of the period of the change the cumulative effect of
      changing to the new accounting principle. This Statement requires retrospective
      application to prior periods’ financial statements of changes in accounting
      principle, unless it is impracticable to determine either the period-specific
      effects or the cumulative effect of the change. When it is impracticable to
      determine the period-specific effects of an accounting change on one or more
      individual prior periods presented, this Statement requires that the new
      accounting principle be applied to the balances of assets and liabilities as
      of
      the beginning of the earliest period for which retrospective application is
      practicable and that a corresponding adjustment be made to the opening balance
      of retained earnings (or other appropriate components of equity or net assets
      in
      the statement of financial position) for that period rather than being reported
      in an income statement. When it is impracticable to determine the cumulative
      effect of applying a change in accounting principle to all prior periods, this
      Statement requires that the new accounting principle be applied as if it were
      adopted prospectively from the earliest date practicable. This Statement shall
      be effective for accounting changes and corrections of errors made in fiscal
      years beginning after December 15, 2005. The Company does not believe that
      the adoption of SFAS 154 will have a significant effect on its financial
      statements.




15




Other
      accounting standards that have been issued or proposed by the FASB or other
      standards-setting bodies that do not require adoption until a future date are
      not expected to have a material impact on the consolidated financial statements
      upon adoption.




**Factors
      that May Affect Future Performance**




*An
      investment in our common stock involves a high degree of risk. You should
      carefully consider the following risk factors in evaluating our business. If
      any
      of these risks, or other risks not presently known to us or that we currently
      believe are not significant, develops into an actual event, then our business,
      financial condition and results of operations could be adversely affected.
      If
      that happens, the market price of our common stock could
      decline.*




***We
      have a history of operating losses, and there is no assurance we will achieve
      profitability in the future. If we cannot obtain additional capital required
      to
      fund our operations and finance our growth, our business will
      suffer.***





We
      have a
      history of operating losses. During the fiscal years ended December 31, 2005,
      and December 31, 2004, we recorded net losses available to common
      stockholders of $6,109,806 and $2,998,429, respectively. As of September
      30, 2006, we had an accumulated deficit of $37,323,414. If we continue to
      experience operating losses, an investment in our common stock is at risk of
      being lost. We cannot predict when, or if, we will ever achieve profitability.
      The continued development of our current technologies or acquisitions of new
      technologies will require additional capital. If we are unable to generate
      additional capital through our operations, we will be required to resort to
      financing activities. We may be unable to obtain additional funds in a timely
      manner or on acceptable terms, which would render us unable to fund our
      operations or expand our business.




If
      we are
      unable to obtain capital when needed, we may have to restructure our business
      or
      delay or abandon our development and expansion plans. Although we have been
      successful in the past in obtaining financing for working capital and capital
      expenditures, we will have ongoing capital needs as we expand our business.
      Our
      inability to obtain adequate financing will result in the need to curtail
      business operations. Our financial statements do not include any adjustments
      that might result from the outcome of this uncertainty. If we raise additional
      funds through the sale of equity or convertible securities,




· the ownership percentage of our common stock will be reduced;




· the value of our stock may be diluted;




· we may issue securities that have rights, preferences and privileges
      senior to our common stock; and




· the terms of any additional indebtedness may include restrictive
      financial and operating covenants that would limit our ability to compete and
      expand, thereby increasing the price of our stock.




***We
      have a going concern qualification in the report by
      our***  ***independent***  ***registered
      public accounting firm for our financial statements for the year ended December
      31, 2005, which may make capital raising difficult and may require us to scale
      back or cease operations.***




The
      report of our prior independent registered public accounting firm dated March
      27, 2006 includes a going-concern qualification, which indicates an absence
      of
      obvious or reasonably assured sources of future funding that will be required
      by
      us to maintain ongoing operations. Our ability to obtain additional funding
      will
      determine our ability to continue as a going concern. Accordingly, there is
      substantial doubt about our ability to continue as a going concern. Our
      financial statements do not include any adjustments that might result from
      the
      outcome of this uncertainty.




16




***The
      management of our finances and the quality and timeliness of our financial
      reporting may be adversely affected if we are unable to increase the size and
      capabilities of our internal administrative and finance function as our business
      grows.***




We
      have
      engaged an outside accounting firm (other than our independent registered public
      accounting firm) to provide financial management and accounting services on
      a
      temporary basis. If we are unable to retain sufficient financial management
      and
      accounting services on a cost-effective basis, our ability to effectively manage
      our finances and the quality and timeliness of our financial reporting could
      be
      adversely affected.




***We
      are currently dependent upon external financing (including our Private Equity
      Credit Agreement with Brittany Capital Management) to fund our operations and
      may not be able to access sufficient funds when needed. As a result, our
      business may suffer.***




Currently,
      we are dependent upon external financing to fund our operations. Our financing
      needs are expected to be provided, in large part, by our Private Equity Credit
      Agreement dated September 14, 2006, with Brittany Capital Management. We have
      registered the resale of 7,800,000 shares of common stock we may issue under
      this agreement pursuant to our current registration statement.





The
      number of shares we have to issue for a given draw down under the Private Equity
      Credit Agreement has an inverse relationship to our market price. Therefore,
      the
      lower our market price, the less we will be able to raise by issuing the
      7,800,000 registered shares to Brittany. In the event we have additional
      financing needs after we have exhausted the shares being registered under the
      registration statement, we will need to find alternative methods of financing
      our operations or registering additional shares to be issued under the Private
      Equity Credit Agreement.





In
      addition, our access to funds under the Private Equity Credit Agreement may
      be
      limited by the following factors:


*Maximum
      Put Amount* . The
      maximum amount of each put is equal to the lesser of (a) $100,000, or (b) 500%
      percent of the weighted average volume for the 20 trading days immediately
      preceding the put date.




*9.99%
      Cap* . Our
      Private Equity Credit Agreement provides that in no event shall the number
      of
      shares issuable to Brittany cause it to own in excess of 9.99% of the then
      outstanding shares of our common stock. Because of this maximum advance
      restriction, we may not be able to access sufficient funds when
      needed.




*Authorized
      Shares of Common Stock* . At the
      market price of our common stock as of November 10, 2006, it would require
      approximately 1,666,666,666 shares to draw down the full $15,000,000 available
      under the Private Equity Credit Agreement as of that date. However, based upon
      comments from the SEC, the Company withdrew its registration statement (File
      No.
      333-135377) along with any pre-effective amendments and exhibits. On September
      13, 2006 the Company cancelled it’s then current Equity Line Agreement with
      Brittany Capital Management Ltd and on September 14, 2006, the Company entered
      into a new Private Equity Credit Agreement with Brittany Capital Management
      Ltd a
      limited
      liability company organized and existing under the laws of The Bahamas. Under
      the Private Equity Credit Agreement, we may draw up to an aggregate $15 million,
      from time to time at our discretion, in exchange for shares of our common stock.
      Each draw under the Private Equity Credit Agreement is structured as a put
      option, wherein we require Brittany to purchase a number of shares of our common
      stock after a discount to the market price is applied over the course of a
      commitment period extending 36 months after the effective date of the
      registration statement of which this prospectus forms a part . On
      October 5, 2006 the Company filed a new Registration Statement (File No.
      333-137833) relating to the resale of up to (i) 7,800,000 shares to Brittany
      Capital Management Ltd and (ii) 63,636 shares of our common stock issued to
      Econ
      Corporate Services, Inc . The Registration Statement (File No. 333-137833)
      was
      declared effective by the SEC on October 27, 2006 and based upon the closing
      price of our stock of $0.018 on September 30, 2006, the Company would only
      be
      able to drawn down an additional $140,400 under the Private Equity Credit
      Agreement.




***We
      face intense competition, which could result in lower revenues and higher
      research and development expenditures and could adversely affect our results
      of
      operations.***




If
      we do
      not develop or acquire new and enhanced products, or if we are not able to
      invest adequately in our research and development activities, our business,
      financial condition and results of operations could be negatively impacted.
      Many
      of our competitors have significantly more cash and resources than we have.
      Our
      competitors may introduce products that are competitively priced, have increased
      performance or functionality, or incorporate technological advances that we
      have
      not yet developed or implemented. To remain competitive, we must continue to
      develop, market and sell new and enhanced systems and products at competitive
      prices, which will require significant research and development
      expenditures.




17




***If
      we cannot effectively manage our growth, our business may
      suffer.***




Recently,
      we have expanded our operations to pursue existing and potential new market
      opportunities. This growth has placed, and is expected to continue to place,
      a
      strain on our personnel, management, financial and other resources. To manage
      our growth effectively, we must, among other things:




· successfully attract, train, motivate and manage a larger number of
      employees for sales and customer support activities;




· control working capital requirements; and




· improve the efficiency of our operating, administrative, financial
      and accounting systems, procedures and controls.




If
      we
      fail to manage our growth properly, we may incur unnecessary expenses and the
      efficiency of our operations may decline.




***We
      may be unable to hire and retain the skilled personnel we need to expand our
      operations.***




To
      meet
      our growth objectives, we must attract and retain highly skilled technical,
      operational, managerial and sales and marketing personnel. If we fail to attract
      and retain the necessary personnel, we may be unable to achieve our business
      objectives and may lose our competitive position, which could lead to a
      significant decline in net sales. We face significant competition for these
      skilled professionals from other companies, research and academic institutions,
      government entities and other organizations.




***Our
      success depends on the services of our executive officers and key
      employees.***





We
      depend
      upon the continued services of our senior management and consultants for our
      continued success. The loss of any member of senior management or consultant
      could have a serious negative impact upon our business and operating results.
      We
      can provide no assurances that we will be able to retain our senior management
      or other key personnel.





***Our
      business may suffer if we cannot protect our proprietary
      technology.***




Our
      ability to compete depends significantly upon our trade secrets and our other
      proprietary technology. We have filed patents in connection with HNIPU and
      have
      a trade secret on NuCap(TM). These steps that we have taken to protect our
      technology may be inadequate to prevent others from using what we regard as
      our
      technology to compete with us. Existing trade secrets, copyright and trademark
      laws offer only limited protection. In addition, the laws of some foreign
      countries do not protect our proprietary technology to the same extent as the
      laws of the United States, which could increase the likelihood of
      misappropriation. Furthermore, other companies could independently develop
      similar or superior technology without violating our intellectual property
      rights. Any misappropriation of our technology or the development of competing
      technology could seriously harm our competitive position, which could lead
      to a
      substantial reduction in net sales.




If
      we
      resort to legal proceedings to enforce our intellectual property rights, the
      proceedings could be burdensome, disruptive and expensive, distract the
      attention of management, and there can be no assurance that we would
      prevail.




***Claims
      by others that we infringe their intellectual property rights could harm our
      business and financial condition.***





Our
      industries are characterized by the existence of a large number of patents
      and
      frequent claims and related litigation regarding patent and other intellectual
      property rights. We cannot be certain that our products do not and will not
      infringe issued patents, patents that may be issued in the future, or other
      intellectual property rights of others.




We
      do not
      conduct exhaustive patent searches to determine whether the technology used
      in
      our products infringes patents held by third parties. In addition, product
      development is inherently uncertain in a rapidly evolving technological
      environment in which there may be numerous patent applications pending, many
      of
      which are confidential when filed, with regard to similar
      technologies.




18




We
      may
      face claims by third parties that our products or technology infringe their
      patents or other intellectual property rights. Any claim of infringement could
      cause us to incur substantial costs defending against the claim, even if the
      claim is invalid, and could distract the attention of our management. If any
      of
      our products are found to violate third-party proprietary rights, we may be
      required to pay substantial damages. In addition, we may be required to
      re-engineer our products or obtain licenses from third parties to continue
      to
      offer our products. Any efforts to re-engineer our products or obtain licenses
      on commercially reasonable terms may not be successful, which would prevent
      us
      from selling our products, and, in any case, could substantially increase our
      costs and have a material adverse effect on our business, financial condition
      and results of operations.





***We
      believe that Brittany and other stockholders intend to sell their shares of
      common stock in the market, which sales may cause our stock price to
      decline***





Under
      the
      Private Equity Credit Agreement, Brittany Capital Management may sell in the
      public market up to 7,800,000 shares of common stock with our new Form SB-2
      (File No. 333-137833) which was filed on October 5, 2006 and became effective
      on
      October 27, 2006. Such sales may cause our stock price to decline.
      Specifically:





· Existing stockholders will experience substantial dilution if we
      draw down the maximum amount of shares of common stock registered (approximately
      20% of our outstanding shares after giving effect to the issuance, based on
      the
      shares outstanding as of November 10, 2006). The risk associated with the
      possible sale of a large number of shares issued under the equity line could
      cause some of our stockholders to sell their stock, thus causing the price
      of
      our stock to decline.




· Because Brittany is purchasing our shares at a discount, it will
      have an incentive to sell immediately so that it can realize a gain on the
      difference. If our common stock market price does decline, this could further
      accelerate sales of our common stock.




· To the extent Brittany sells its common stock, the common stock
      price may decrease due to the additional shares in the market. This could allow
      Brittany to sell greater amounts of common stock, the sales of which would
      further depress the stock price.




· Actual or anticipated downward pressure on our stock price due to
      actual or anticipated sales of stock under the Private Equity Credit Agreement
      could cause some institutions or individuals to engage in short sales of our
      common stock, which may itself cause the price of our stock to
      decline.




***Existing
      stockholders will experience significant dilution from our sale of shares under
      the Private Equity Credit Agreement, the conversion of notes and preferred
      stock, and the exercise of warrants.***




To
      date,
      we have funded our operations through equity investments and issuances of debt.
      Stockholders will experience substantial dilution as a result of our agreements
      with our investors. The number of shares issuable under some of these
      arrangements is indeterminate. The issuance and sale of common stock to our
      investors will reduce the ownership interest of our existing stockholders in
      our
      company, and may depress the value of our common stock. In addition, the
      subsequent resale by the investors of those shares may further reduce our share
      price.




***If
      the price of our stock continues to decline and we cannot prepay the notes
      we
      have issued, we will be in default and the holders of the notes will have the
      remedies available to creditors. Some or all of our assets could be liquidated,
      our operations may be disrupted and our business may
      suffer.***





If
      the
      market price of our common stock falls below $0.60 per share for 10 consecutive
      trading days, holders of the notes may require us to prepay (within 60 days
      of
      the receipt of a notice of such election) the principal outstanding at the
      time
      of such prepayment plus a premium equal to 140% of the principal amount being
      prepaid. If we cannot prepay the notes, we will be in default, and the holders
      of the notes will have the remedies available to creditors. All of our assets
      are subject to security agreements, and the holders of these
      notes, in the event of default, could foreclose and liquidate some or all of
      our
      assets. The claims of our creditors to our assets are senior to those of our
      stockholders. Accordingly, $708,000 is included in accounts payable and accrued
      expenses as a contingent liability in the event that the Note holders assert
      this prepayment penalty. As of November 10, 2006, only one of the note holders
      has made the assertion, in accordance with the note, during March 2006, the
      Company paid $10,000, representing 40% of the note, to the note holder. All
      other holders of these Notes waived this penalty.




19




***If
      an active and liquid market for our common stock does not develop, or is not
      sustained, it may be difficult for investors to resell their shares. As a
      result, they may not be able to sell their shares when they
      want.***




Our
      common stock is not traded on a registered securities exchange and we do not
      meet the initial listing criteria for any registered securities exchange or
      the
      NASDAQ Capital Market. It is quoted on the less recognized OTC Bulletin Board.
      This factor may impair an investor’s ability to sell his shares when he wants
      and/or could depress our stock price. As a result, an investor may find it
      difficult to dispose of, or to obtain accurate quotations of the price of,
      our
      securities because smaller quantities of shares could be bought and sold,
      transactions could be delayed and security analyst and news coverage of our
      company may be reduced. These factors could result in lower prices and larger
      spreads in the bids and ask prices for our shares. Due to the current price
      of
      our common stock, many brokerage firms may not be willing to effect transactions
      in our securities, particularly because of an SEC rule imposing additional
      sales
      requirements on broker-dealers who sell low-priced securities (generally those
      below $5.00 per share). These factors severely limit the liquidity of our common
      stock and likely have a material adverse effect on our market price and on
      our
      ability to raise additional capital. We cannot predict the extent to which
      investor interest in our stock, if any, will lead to an increase in our market
      price or the development of a more active trading market or how liquid that
      market might become.




***Our
      common stock is deemed to be a “penny stock,” which may make it more difficult
      for investors to sell these shares due to suitability and disclosure
      requirements.***




Due
      to
      the current price of our common stock, $0.009 as of November 10, 2006, many
      brokerage firms may not be willing to effect transactions in its securities,
      particularly because low-priced securities are subject to SEC rules (referred
      to
      as the “penny stock rules”) imposing additional sales requirements on
      broker-dealers who sell low-priced securities (generally those below $5.00
      per
      share). These disclosure requirements may have the effect of reducing the
      trading activity in the secondary market for Global Matrechs common stock as
      it
      is subject to these penny stock rules. These rules severely limit the liquidity,
      if any, of our common stock, and would likely have a material adverse effect
      on
      its market price and on our ability to raise additional capital.




The
      penny
      stock rules require a broker-dealer, prior to a transaction in a penny stock,
      to
      deliver a standardized risk disclosure document prepared by the Commission,
      that: (a) contains a description of the nature and level of risk in the market
      for penny stocks in both public offerings and secondary trading; (b) contains
      a
      description of the broker’s or dealer’s duties to the customer and of the rights
      and remedies available to the customer with respect to a violation to such
      duties or other requirements of Securities’ laws; (c) contains a brief, clear,
      narrative description of a dealer market, including bid and ask prices for
      penny
      stocks and the significance of the spread between the bid and ask price; (d)
      contains a toll-free telephone number for inquiries on disciplinary actions;
      (e)
      defines significant terms in the disclosure document or in the conduct of
      trading in penny stocks; and (f) contains such other information and is in
      such
      form, including language, type, size and format, as the SEC may require by
      rule
      or regulation.




In
      addition, the broker-dealer also must provide, prior to effecting any
      transaction in a penny stock, the customer with: (a) bid and offer quotations
      for the penny stock; (b) the compensation of the broker-dealer and its
      salesperson in the transaction; (c) the number of shares to which such bid
      and
      ask prices apply, or other comparable information relating to the depth and
      liquidity of the market for such stock; and (d) monthly account statements
      showing the market value of each penny stock held in the customer’s
      account.




Finally,
      the penny stock rules require that prior to a transaction in a penny stock
      not
      otherwise exempt from those rules, the broker-dealer must make a special written
      determination that the penny stock is a suitable investment for the purchaser
      and receive the purchaser’s written acknowledgment of the receipt of a risk
      disclosure statement, a written agreement to transactions involving penny
      stocks, and a signed and dated copy of a written suitability statement. These
      requirements may reduce the potential market for our common stock by reducing
      the number of potential investors, brokers and traders. This may make it more
      difficult for investors in our common stock to sell shares to third parties
      or
      to otherwise dispose of them. This could cause our stock price to
      decline.




We
      cannot
      predict the extent to which investor interest in our common stock or a business
      combination, if any, will lead to an increase in its market price or the
      development of an active trading market or how liquid that market, if any,
      might
      become.




20




***The
      market price of our common stock may be volatile.***




Our
      stock
      price has been volatile. From January 1, 2004 to November 10, 2006 the trading
      price of our common stock ranged from $3.00 to $0.0.008. Many factors may cause
      the market price of our common stock to fluctuate, including:




·  variations
      in our quarterly results of operations;




·  the
      introduction of new products by us or our competitors;




·  acquisitions
      or strategic alliances involving us or our competitors;




·  future
      sales of shares of common stock in the public market; and




·  market
      conditions in our industries and the economy as a whole.




In
      addition, the stock market has recently experienced extreme price and volume
      fluctuations. These fluctuations are often unrelated to the operating
      performance of particular companies. These broad market fluctuations may
      adversely affect the market price of our common stock. When the market price
      of
      a company’s stock drops significantly, stockholders often institute securities
      class action litigation against that company. Any litigation against us could
      cause us to incur substantial costs, divert the time and attention of our
      management and other resources or otherwise harm our business.




We
      can
      provide no assurance that the financing sources described above, or any other
      financing that we may obtain in the future (if we are able to obtain financing
      from any other sources, and we can provide no assurances that we will be able
      to
      obtain any such financing), will enable us to sustain our operations. The
      aforementioned factors raise substantial doubt about our ability to continue
      as
      a going concern. The financial statements included herein have been prepared
      assuming we are a going concern and do not include any adjustments that might
      result should we be unable to continue as a going concern.





***We
      have never paid dividends on our capital stock, and we do not anticipate paying
      dividends in the foreseeable future.***




We
      have
      not paid dividends on any of our classes of capital stock to date, and we
      currently intend to retain our future earnings, if any, to fund the development
      and growth of our business. As a result, capital appreciation, if any, of our
      common stock will be the sole source of gain for the foreseeable future. In
      addition, before we may pay any dividends with respect to our common stock,
      we
      must pay the holders of our preferred stock an equivalent dividend. If we
      determine that we are in the position to declare a dividend, the amount of
      the
      dividend we ultimately declare may be substantially reduced as the result of
      our
      obligations under the terms of our preferred stock.





***The
      sale of material amounts of common stock under our registration statement could
      encourage short sales by third parties and further depress the price of our
      common stock.***




The
      significant downward pressure on our stock price caused by the sale of a
      significant number of shares under the Private Equity Credit Agreement could
      cause our stock price to decline, thus allowing short sellers of our stock
      an
      opportunity to take advantage of any decrease in the value of our stock. The
      presence of short sellers in our common stock may further depress the price
      of
      our common stock.




***Our
      charter, bylaws and Delaware law may deter takeovers.***




Our
      certificate of incorporation, bylaws and Delaware law contain provisions that
      could have an anti-takeover effect and discourage, delay or prevent a change
      in
      control or an acquisition that many stockholders may find attractive. These
      provisions may also discourage proxy contests and make it more difficult for
      our
      stockholders to take some corporate actions, including the election of
      directors. These provisions relate to:




· the ability of our board of directors to issue preferred stock, and
      determine its terms, without a stockholder vote;




· the classification of our board of directors, which effectively
      prevents stockholders from electing a majority of the directors at any one
      annual meeting of stockholders;




· the limitation that directors may be removed only for cause by the
      affirmative vote of the holders of at least 75% of our shares of capital stock
      entitled to vote; and




· advance notice requirements for stockholder proposals and director
      nominations.




21




***We
      are not subject to the same corporate governance standards as listed companies.
      This may affect market confidence and company performance. As a result, our
      business could be harmed and the price of our stock could
      decrease.***





Registered
      exchanges and the NASDAQ National Market have adopted enhanced corporate
      governance requirements that apply to issuers that list their securities on
      those markets. These standards deal with the rights and responsibilities of
      a
      company’s management, its board, shareholders and various stakeholders. How well
      companies are run may affect market confidence as well as company performance.
      Our common stock is quoted on the OTC Bulletin Board, which does not have
      comparable requirements. As a result, our business and the price of our stock
      may be adversely affected.




For
      instance, we are not required to have any independent directors and we do not
      have independent directors. Therefore management has significant influence
      over
      decisions made by the Board on behalf of the stockholders.




In
      some
      circumstances, management may not have the same interests as the shareholders
      and conflicts of interest may arise. We do not have a policy to resolve
      conflicts of interest and we are not required to have one. Notwithstanding
      the
      exercise of their fiduciary duties as directors and executive officers and
      any
      other duties that they may have to us or our other stockholders in general,
      these persons may have interests different than our shareholders.




***Our
      administrative costs and expenses resulting from new regulations have increased,
      adversely affecting our financial condition and results of
      operations.***




We
      face
      new corporate governance requirements under the Sarbanes-Oxley Act of 2002
      and
      SEC rules adopted thereunder. These regulations increased our legal and
      financial compliance and made some activities more difficult, time-consuming
      and
      costly. Our expenses will continue to increase as we continue to implement
      these
      new regulations.




***New
      corporate governance requirements have made it more difficult to attract
      qualified directors. As a result, our business may be harmed and the price
      of
      our stock may be adversely affected.***




New
      corporate governance requirements have increased the role and responsibilities
      of directors and executive officers of public companies. These new requirements
      will make it more difficult and more expensive for us to obtain director and
      officer liability insurance. We may be required to accept reduced coverage
      or
      incur significantly higher costs to obtain coverage. As a result, it may be
      more
      difficult for us to attract and retain qualified individuals to serve as members
      of our board of directors.




***If
      we fail to maintain effective internal controls over financial reporting, the
      price of our common stock may be adversely affected.***




We
      are
      required to establish and maintain appropriate internal controls over financial
      reporting. Our internal controls over financial reporting may have weaknesses
      and conditions that need to be addressed, the disclosure of which may have
      an
      adverse impact on the price of our common stock. Failure to establish those
      controls, or any failure of those controls once established, could adversely
      impact our public disclosures regarding our business, financial condition or
      results of operations. In addition, management’s assessment of internal controls
      over financial reporting may identify weaknesses and conditions that need to
      be
      addressed in our internal controls over financial reporting or other matters
      that may raise concerns for investors. Any actual or perceived weaknesses and
      conditions that need to be addressed, disclosure of management’s assessment of
      our internal controls over financial reporting or disclosure of our independent
      registered public accounting firm’s attestation to or report on management’s
      assessment of our internal controls over financial reporting may have an adverse
      impact on the price of our common stock.




***Standards
      for compliance with Section 404 of the Sarbanes-Oxley Act of 2002 are uncertain,
      and if we fail to comply in a timely manner, our business could be harmed and
      our stock price could decline.***




Rules
      adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002
      require annual assessment of our internal control over financial reporting,
      and
      attestation of this assessment by our independent registered public accountant.
      Unless the SEC delays the date on which this requirement becomes effective,
      we
      will first have to include our assessment of our internal control over financial
      reporting in our annual report for fiscal year ending December 31, 2007. The
      standards that must be met for management to assess the effectiveness of the
      internal control over financial reporting are new and complex, and require
      significant documentation, testing and possible remediation to meet the detailed
      standards. We may encounter problems or delays in completing activities
      necessary to make an assessment of its internal control over financial
      reporting. In addition, we may encounter problems or delays in completing the
      implementation of any requested improvements and receiving an attestation of
      its
      assessment by our independent registered public accountants. If management
      cannot assess our internal control over financial reporting as effective, or
      our
      independent auditors are unable to issue an unqualified attestation report
      on
      such assessment, investor confidence and share value may be negatively
      impacted.




22




**ITEM
      3. CONTROLS AND PROCEDURES**




**Disclosure
      Controls and Procedures**




Our
      management has evaluated, under the supervision and with the participation
      of
      our chief executive officer and acting chief financial officer, the
      effectiveness of our disclosure controls and procedures as of the end of the
      period covered by this report. Based upon that evaluation, our chief executive
      officer and acting chief financial officer concluded that our disclosure
      controls and procedures were effective to provide reasonable assurance that
      we
      record, process, summarize and report the information we must disclose in
      reports that we file or submit under the Securities Exchange Act of 1934, as
      amended, within the time periods specified in the SEC’s rules and
      forms.





However,
      during the course of this evaluation, our chief executive officer and acting
      chief financial officer made the following observations:




·
            We
                have restated certain financial information contained in our quarterly
                report on Form 10-QSB for the quarter ended March 31,
                2005.





·
            Due
                to the significant commitment of Company time and resources required
                in
                connection with the review of our financial statements and the auditing
                of
                our 2004 financial statements, we did not timely file our annual
                report on
                Form 10-KSB for the fiscal year ended December 31, 2004 or our quarterly
                reports on Form 10-QSB for the quarters ended March 31, 2005 and
                June 30,
                2005.




Management
      concluded that the problems set forth above did not necessitate a conclusion
      that our disclosure controls and procedures were ineffective as of September
      30,
      2006.  First, our management has concluded that the problems set forth
      above were largely the result of inadequate staffing, competence and segregation
      of duties in our accounting and financial reporting functions and insufficient
      analysis, documentation and review of the selection and application of generally
      accepted accounting principles to significant non-routine transactions, which
      we
      have addressed by retaining an outside accounting firm and consultant to assist
      with some of the highly technical issues relating to the company’s capital
      structure. In addition, we were able to timely file our quarterly report on
      Form
      10-QSB for the quarter ended September 30, 2005, our annual report on Form
      10-KSB for the year ended December 31, 2005, our quarterly reports on Form
      10-QSB for the quarter ended March 31, 2006 (with extension), and June 30,
      2006
      (with extension) indicating that the issues relating to the timeliness of our
      reporting have been successfully addressed.





Management
      believes that additional progress in strengthening our disclosure controls
      and
      procedures will continue throughout fiscal year 2006. To further ensure that
      our
      disclosure controls and procedures continue to be effective, we intend to hire
      an accounting professional to increase our capabilities related to interpretive
      research into complex accounting issues promptly after we raise sufficient
      financing to permit us to do so.





Management
      continues to consider methods to improve the quality and timeliness of reporting
      and will continue to evaluate and address any issues it identifies relating
      to
      the processes and resources necessary for effective disclosure controls and
      procedures.




The
      effectiveness of a system of disclosure controls and procedures is subject
      to
      various inherent limitations, including cost limitations, judgments used in
      decision making, assumptions about the likelihood of future events, the
      soundness of internal controls, and the risk of fraud. Because of these
      limitations, there can be no assurance that any system of disclosure controls
      and procedures will be successful in preventing all errors or fraud or in making
      all material information known in a timely manner to the appropriate levels
      of
      management.




23




**Changes
      in Internal Control over Financial Reporting**




There
      were no changes in our internal control over financial reporting during the
      quarter ended September 30, 2006 that have materially affected, or are
      reasonably likely to materially affect, our internal control over financial
      reporting.




**PART
      II. OTHER INFORMATION**




**ITEM
      1.  LEGAL PROCEEDINGS**





**Legal
      Proceedings**


On
        March
        16, 2006, we, Carey Naddell, CEO of Eurotech, Ltd., and Eurotech, Ltd. executed
        a full mutual release of claims, completing a settlement of each of the actions
        among the parties related to obligations under two license agreements and
        a
        written service agreement. A settlement liability and related settlement
        expense
        in the amount of $175,000 was accrued by the Company at December 31, 2005.
        Under
        the terms of the settlement, $25,000 was due and paid at closing, and the
        balance of $150,000 was payable in seven (7) equal monthly installments of
        $21,428.57 commencing on April 15, 2006, with a final installment payment
        due on
        or before October 15, 2006. The final three payments in the aggregate amount
        of
        approximately $64,000 was not paid by the Company when due, and, in accordance
        with the settlement agreement, a default judgment has been entered against
        the
        Company. We are currently in negotiations with Eurotech to cure the default
        and
        complete the final three installment payments due under the settlement
        agreement.
  We
        are
        not a party to any other material legal proceedings. From time to time, we
        are
        involved in various routine legal proceedings incidental to the conduct of
        our
        business.


**ITEM
      5.  OTHER INFORMATION**


On
        September 13, 2006, the Company executed a promissory note agreement with
        Southridge Partners LP, one of our existing investors, under which the Company
        borrowed an additional $50,000. The promissory note is a 2% Convertible
        Promissory Note due March 31, 2007. We intend to use the proceeds for working
        capital. The promissory note bears interest at a fixed rate of 2% per annum
        computed on the unpaid principal balance, which is payable upon maturity.
        The
        promissory note is repayable on or before March 31, 2007 (the “Maturity Date”).
        Prior to the Maturity Date, all or a portion of the outstanding principal
        and
        interest on the note may be converted into a number of shares of the Company’s
        common stock equal to a fraction, the numerator of which shall be the amount
        of
        principal and interest being so converted and the denominator of which shall
        be
        equal to the conversion price. The conversion price is equal to eighty-percent
        (80%) of the average of the five lowest closing bid prices for the ten trading
        days immediately preceding the date of conversion.


24





**ITEM
      6.  EXHIBITS**





(a)
      Exhibits





**EXHIBITS**




**Incorporated
                by Reference****Exhibit**
              **No.**
            
            **Description**
            
            **Filed
                with**
              **this
                Form**
              **10-QSB**
            
            **Form**
            
            **Filing
                Date**
            
            **Exhibit**
              **No.**10.1
            
            Form
                of Promissory Note Agreement by and between Global Matrechs, Inc.
                and
                Aberdeen Avenue LLC, dated July 17, 2006 and September 13,
                2006.
            
            
            
            SB-2
            
            October
                5, 2006
            
            10.2410.2
            
            Nonnegotiable
                2% Convertible Promissory Note issued to Southridge Partners LP dated
                September 13, 2006.
            
            X10.3
            
            Registration
                Rights Agreement by and between Global Matrechs, Inc. and Brittany
                Capital
                Management Limited, dated September 14, 2006.
            
            
            
            8-K
            
            September
                18, 2006
            
            10.210.4
            
            Private
                Equity Credit Agreement by and between Global Matrechs, Inc. and
                Brittany
                Capital Management Limited, dated September 14, 2006.
            
            
            
            8-K
            
            September
                18, 2006
            
            10.110.5*
            
            Contract
              Manufacturing Agreement between Global Matrechs, Inc. and Dow Corning
              Corporation effective August 1, 2006
            
            X31.1
            
            Certification
                pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
            
            X32.1
            
            Certification
                pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
            
            X





*
            Portions
                of this document have been omitted and filed separately with the
                Securities and Exchange Commission pursuant to a request for confidential
                treatment of the omitted portions.




25


**SIGNATURES**





In
      accordance with the requirements of the Securities Exchange Act of 1934, the
      registrant caused this report to be signed on its behalf by the undersigned
      thereunto duly authorized.




**GLOBAL
                MATRECHS, INC.**Date:
                November 14, 2006
            By:
            /s/ Michael
              SheppardName:Michael
                SheppardTitle:President,
                Chief Executive Officer, andActing
                Chief Financial Officer




26


**EXHIBIT
      INDEX**




**Incorporated
                by Reference****Exhibit**
              **No.**
            
            **Description**
            
            **Filed
                with**
              **this
                Form**
              **10-QSB**
            
            **Form**
            
            **Filing
                Date**
            
            **Exhibit**
              **No.**10.1
            
            Form
                of Promissory Note Agreement by and between Global Matrechs, Inc.
                and
                Aberdeen Avenue LLC, dated July 17, 2006 and September 13,
                2006.
            
            
            
            SB-2
            
            October
                5, 2006
            
            10.2410.2
            
            Nonnegotiable
                2% Convertible Promissory Note issued to Southridge Partners LP dated
                September 13, 2006.
            
            X10.3
            
            Registration
                Rights Agreement by and between Global Matrechs, Inc. and Brittany
                Capital
                Management Limited, dated September 14, 2006.
            
            
            
            8-K
            
            September
                18, 2006
            
            10.210.4
            
            Private
                Equity Credit Agreement by and between Global Matrechs, Inc. and
                Brittany
                Capital Management Limited, dated September 14, 2006.
            
            
            
            8-K
            
            September
                18, 2006
            
            10.110.5*
            
            Contract Manufacturing
              Agreement between Global Matrechs, Inc. and Dow Corning Corporation
              effective August 1, 2006
            
            X31.1
            
            Certification
                pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
            
            X32.1
            
            Certification
                pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
            
            X


*
              Portions
                  of this document have been omitted and filed separately with the
                  Securities and Exchange Commission pursuant to a request for confidential
                  treatment of the omitted portions.


27