**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549





**FORM
      10-Q**


( Mark
      One )





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




For
      the
      quarterly period ended March 31, 2006




o
              
              TRANSITION REPORT UNDER SECTION 13
                OR 15(d)
                OF THE EXCHANGE ACT




For
      the
      transition period from ___________to_______________





Commission
      file number 00-32019





TASKER
      CAPITAL CORP.





(Exact
      name of registrant as specified in its charter)





Nevada
            
            88-0426048(State
                or other jurisdiction of incorporation or
                organization)
            
            (IRS
                Employer Identification
                No.)





39
      Old
      Ridgebury Road-Suite 14, Danbury, CT 06810-5116





(Address
      of principal executive offices)




(203)
      730-4350





(Registrant’s
      telephone number)





(Former
      name, former address and former fiscal year, if changed since last
      report)








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





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See


definition
      of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
      Act.




Large accelerated filer o
            Accelerated filer o
            Non-accelerated filer x







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




The
      number of shares outstanding of the registrant’s common stock as of May 5, 2006
      was 104,921,861.









**TASKER
      CAPITAL CORP.**





**INDEX**




**Page****PART
                  I. FINANCIAL INFORMATION****Item
                  1.**
              **Financial
                Statements**Unaudited
                  Condensed Consolidated Balance Sheets as of March 31, 2006 and
                  December
                  31, 2005
              3Unaudited
                  Condensed Consolidated Statements of Operations for the three months
                  ended
                  March 31, 2006 and 2005
              4Unaudited
                  Condensed Consolidated Statements of Cash Flow for the three months
                  ended
                  March 31, 2006 and 2005
              5Notes
                  to Unaudited Condensed Consolidated Financial Statements
              6**Item
                  2.**
              **Management’s Discussion And Analysis
                Of Financial Condition And Results Of Operations**
              16**Item
                  3.**
              **Quantitative And Qualitative
                Disclosures About Market Risk**
              24**Item
                  4.**
              **Controls And
                Procedures**
              24**PART
                  II. OTHER INFORMATION**Ite**m
                  1.**
              **Legal Proceedings**
              24**Item
                  1A.**
              **Risk Factors**
              25**Item
                  2.**
              **Unregistered Sales Of Equity
                Securities And Use Of Proceeds**
              25**Item
                  6.**
              **Exhibits**
              26**SIGNATURES**
              27




2


**PART
          I — FINANCIAL INFORMATION**
 **Item
          1. Financial Statements**
  **TASKER
          CAPITAL CORP. AND SUBSIDIARIES**
 **UNAUDITED
          CONDENSED CONSOLIDATED BALANCE SHEETS**




**March
                  31,**
              
              **December
                  31,****ASSETS**
              
              **2006**
              
              **2005**Current
                  assets:Cash
                  and cash equivalents
              
              $
              3,531,409
              
              $
              1,037,250Marketable
                  securities
              
              
              3,450,000
              
              
              —Accounts
                  receivable, net of allowance for doubtful accounts of $50,518 and
                  $79,500
                  as of March 31, 2006 and December 31, 2005, respectively
              
              
              78,963
              
              
              155,189Notes
                  receivable
              
              
              663,333
              
              
              653,958Inventories,
                  net of reserve of $20,666 and $74,675 as of March 31, 2006 and
                  December
                  31, 2005, respectively
              
              
              1,327,212
              
              
              1,350,963Prepaid
                  expenses & other current assets
              
              
              184,591
              
              
              191,227Total
                  current assets
              
              
              9,235,508
              
              
              3,388,587Property
                  and equipment, net
              
              
              1,444,670
              
              
              1,525,142Investment
                  in equity investee
              
              
              659,700
              
              
              664,737Intangible
                  assets, net
              
              
              21,050,814
              
              
              21,562,292Goodwill
              
              
              41,677,180
              
              
              41,677,180Deposit,
                  net
              
              
              36,081
              
              
              36,081Total
                  assets
              
              $
              74,103,954
              
              $
              68,854,019**LIABILITIES
                  AND STOCKHOLDERS' EQUITY**Current
                  liabilities:Convertible
                  debentures
              
              $
              —
              
              $
              194,000Accounts
                  payable
              
              
              1,527,111
              
              
              1,740,245Notes
                  payable - acquisition of IRL
              
              
              445,840
              
              
              445,840Other
                  accrued liabilities
              
              
              1,752,007
              
              
              1,611,587Total
                  current liabilities
              
              
              3,724,958
              
              
              3,991,672Long-term
                  liabilities:Notes
                  payable - shareholders
              
              
              451,104
              
              
              443,790Notes
                  payable - acquisition of IRL
              
              
              817,373
              
              
              1,077,447Other
                  long term liabilities
              
              
              50,053
              
              
              52,686Total
                  long-term liabilities
              
              
              1,318,530
              
              
              1,573,923Stockholders'
                  equity:Common
                  stock, $0.001 par value; 300,000,000 shares authorized; 104,773,020
                  and
                  89,167,095 shares issued and outstanding as of March 31, 2006 and
                  December
                  31, 2005, respectively
              
              
              104,773
              
              
              89,167Additional
                  paid-in capital
              
              
              99,946,927
              
              
              89,265,154Accumulated
                  deficit
              
              
              (30,991,235
              )
              
              (26,065,897
              )Total
                  stockholders' equity
              
              
              69,060,465
              
              
              63,288,424Total
                  liabilities and stockholders' equity
              
              $
              74,103,954
              
              $
              68,854,019




See
        accompanying notes




3




**TASKER
          CAPITAL CORP. AND SUBSIDIARIES**
 **UNAUDITED
          CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**
 **THREE
                    MONTHS ENDED MARCH 31,****2006**
                
                **2005****Revenues**
                
                $
                220,636
                
                $
                60,875**Cost
                    of goods sold**
                
                
                67,690
                
                
                25,162**Gross
                    margin**
                
                
                152,946
                
                
                35,713**Expenses**Selling,
                    general & administrative
                
                
                4,082,153
                
                
                2,899,716Product
                    development
                
                
                375,318
                
                
                340,505Depreciation
                    and amortization
                
                
                574,399
                
                
                12,034**Total
                    expenses**
                
                
                **5,031,870**
                
                
                **3,252,255****Loss
                    from operations**
                
                
                **(4,878,924**
                **)**
                
                **(3,216,542**
                **)**Other
                    income (expense):Interest
                    income
                
                
                38,609
                
                
                46,251Interest
                    expense
                
                
                (27,169
                )
                
                (113,608
                )Liquidated
                    damages
                
                
                (86,954
                )
                
                —Loss
                    on disposal of vehicle
                
                
                (50,387
                )
                
                —Other
                
                
                79,487
                
                
                —**Total
                    other expense, net**
                
                
                **(46,414**
                **)**
                
                **(67,357**
                **)****Net
                    loss**
                
                **$**
                **(4,925,338**
                **)**
                **$**
                **(3,283,899**
                **)****Net
                    loss per common share, basic and diluted**
                
                **$**
                **(0.05**
                **)**
                **$**
                **(0.06**
                **)**
  See
            accompanying notes


4




**TASKER
          CAPITAL CORP. AND SUBSIDIARIES**
 **UNAUDITED
          CONDENSED CONSOLIDATED STATEMENTS OF CASH
          FLOWS**


**Three
                  Months Ended March 31,****2006**
              
              **2005****Cash
                  flows from operating activities:**Net
                  loss
              
              $
              (4,925,338
              )
              $
              (3,283,899
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Depreciation
                  and amortization
              
              
              574,399
              
              
              12,034Noncash
                  interest- liquidating damages
              
              
              86,954
              
              
              —Noncash
                  interest- interest payable on convertible debentures
              
              
              13,696
              
              
              —Noncash-
                  loss on disposal of vehicle
              
              
              50,037
              
              
              —Noncash
                  interest -note payable and note receivable
              
              
              (2,061
              )
              
              14,717Stock
                  option compensation expense
              
              
              1,723,334
              
              
              484,000Loss
                  on equity investee
              
              
              5,037Common
                  stock, warrants and options for services
              
              
              —
              
              
              1,324,225Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              76,226
              
              
              (34,132
              )Inventories
              
              
              23,751
              
              
              (474,755
              )Prepaid
                  expenses
              
              
              16,636
              
              
              (79,268
              )Prepaid
                  commissions
              
              
              (10,000
              )
              
              (15,000
              )Accounts
                  payable
              
              
              (213,134
              )
              
              319,061Other
                  accrued liabilities
              
              
              37,137
              
              
              (176,510
              )Net
                  cash used in operating activities
              
              
              (2,543,326
              )
              
              (1,909,528
              )**Cash
                  flows from investing activities:**Purchases
                  of available for sale securities
              
              
              (3,450,000
              )
              
              —Purchases
                  of property and equipment
              
              
              (32,487
              )
              
              (106,751
              )Advances
                  pursuant to notes
              
              
              —
              
              
              (2,606,001
              )Acquisition
                  costs paid
              
              
              —
              
              
              (314,689
              )Payments
                  for deposits and other
              
              
              —
              
              
              (1,688
              )Net
                  cash used in investing activities
              
              
              (3,482,487
              )
              
              (3,029,129
              )**Cash
                  flows from financing activities:**Proceeds
                  from private placement
              
              
              9,335,151
              
              
              —Payment
                  of private placement broker fee
              
              
              (592,609
              )
              
              —Exercise
                  of warrants/options
              
              
              37,503
              
              
              128,024Repayments
                  on note payable - IRL
              
              
              (260,074
              )
              
              —Net
                  cash provided by financing activities
              
              
              8,519,971
              
              
              128,024**Net
                  increase (decrease) in cash and cash equivalents**
              
              
              2,494,158
              
              
              (4,810,633
              )**Cash
                  and cash equivalents, beginning of period**
              
              
              1,037,250
              
              
              14,225,305**Cash
                  and cash equivalents, end of period**
              
              $
              3,531,408
              
              $
              9,414,672**Supplemental
                  disclosures of cash flow information:**Interest
                  paid
              
              $
              13,246
              
              $
              16,275**Supplemental
                  disclosures of noncash investing and financing
                  activities:**Fair
                  value of warrants issued as private placement fees
              
              $
              593,555
              
              $
              —Conversion
                  of debt and accrued interest into common stock
              
              $
              194,000
              
              $
              99,930


See
        accompanying notes


5


**TASKER
        CAPITAL CORP.**AND SUBSIDIARIES****
 **NOTES
        TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
        STATEMENTS**




**1.**  **Basis
      of Presentation**





Tasker
      Capital Corp. was formed on May 13, 1996 and was in the development
      stage through December 31, 2005. The quarterly period ended March
      31, 2006 is the first period during which it is considered an operating
      company.





The
      accompanying unaudited condensed consolidated financial statements of Tasker
      Capital Corp. and its subsidiaries (collectively, “the Company”)as
      of March 31,
      2006 and December 31, 2005 and for the three month periods ended March 31,
      2006
      and 2005 reflect all adjustments of a normal and recurring nature to present
      fairly the consolidated financial position, results of operations and cash
      flows
      for the interim periods.  These unaudited condensed, consolidated financial
      statements have been prepared by the Company pursuant to the instructions to
      Form 10-Q, and Article 10 of Regulation S-X.  Pursuant to such
      instructions, certain financial information and footnote disclosures normally
      included in such financial statements have been condensed or
      omitted.




These
      unaudited condensed consolidated financial statements should be read in
      conjunction with the audited consolidated financial statements of the Company
      and notes thereto, together with management’s discussion and analysis or plan of
      operations, contained in the Company’s Annual Report on Form 10-KSB for the year
      ended December 31, 2005. The results of operations for the three month
      period ended March 31, 2006 are not necessarily indicative of the results that
      may occur for the year ending December 31, 2006.





Certain
      prior period amounts have been reclassified to conform to the current year
      presentation.





**2.
      Liquidity**





The
      Company had continued to sustain losses from operations and for the three months
      ended March 31, 2006 and 2005 it has incurred a net loss of approximately
      $4,925,000 and $3,284,000 respectively. In addition the Company has not
      generated positive cash flow from operations for the three months ended March
      31, 2006 and 2005. The Company expects to continue to incur losses for at
      least the short term. The Company expects to increase operating expenses as
      it attempts to build its brands, expand its customer base and develop new
      products. To become profitable, the Company must increase revenue substantially
      and achieve and maintain positive gross margins. The Company may not be able
      to
      increase revenue and gross margins sufficiently to achieve profitability.
      Consequently the results of operations and financial condition will be
      materially and adversely affected.





At
      March
      31, 2006, the Company had a total of approximately $7 million of cash, cash
      equivalents and marketable securities as a result of the January 2006 private
      placement.





Since
      the
      Company’s inception, the Company has funded operations and investing activities
      through the issuance of common stock and convertible debt under several private
      placements. Requirements for liquidated damages under some of its private
      placements may have an impact on the Company’s future liquidity. To date the
      Company has satisfied and/or received waivers for the provisions of a majority
      of the agreements that would have otherwise required the Company to pay
      liquidated damages. The Company does not expect, although certain of the
      conditions that may result in liquidated damages are not in its
      control, that any liquidated damage amounts it may be required to pay will
      be
      material.





The
      Company may be unable to meet its future capital requirements. The Company
      may
      require additional financing in the future in order to continue to implement
      its
      product and services development, marketing and other corporate programs. The
      Company may not be able to obtain such financing or obtain it on acceptable
      terms. Without additional financing, the Company may be forced to delay, scale
      back or eliminate some or all of itsproduct and services development, marketing
      and other corporate programs. If the Company is able to obtain such financing,
      the financing agreement may contain restrictive covenants that might negatively
      affect the Company’s common stock, such as limitations on payments of dividends,
      or, in the case of a debt financing, the Company may have reduced earnings
      due
      to interest expenses. Any further issuance of equity securities would likely
      have a dilutive effect on the holders of the Company’s common stock. The
      Company’s business, operating results and financial condition may be materially
      harmed if revenues from certain products do not materialize or grow slower,
      than the Company anticipates, or if operating expenses exceed the Company’s
      expectations or cannot be reduced timely.





6


**TASKER
        CAPITAL CORP.**AND SUBSIDIARIES****
 **NOTES
        TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
        STATEMENTS**




Based
      upon the Company’s forecast of future revenues from its products in conjunction
      with the cash and marketable securities on hand, cash expected to be generated
      from operations will provide adequate funding for the Company’s working capital
      over the next twelve months.  As with all business forecasts, management’s
      current assessment of future revenues is based upon its assumptions and
      expectations.  Future market trends for its products may not develop as
      management has predicted, and regulatory approvals required to market products
      as the Company currently plans may not be obtained, and, in the future, the
      Company may find that its cash on hand and cash from operations is not
      sufficient to fund existing operations or new opportunities may present
      themselves over the course of the next twelve months, in which case the Company
      may find that its cash on hand and cash from operations is not sufficient.
      Such
      changes may, or may not, require it to seek additional outside funding and,
      if
      required, there can be no assurance that suitable outside financing will be
      available to the Company.





**3.
      Share-Based Payments**





Effective
      January 1, 2006, the Company adopted Statement of Financial Accounting Standard
      No. 123 (revised 2004), “Share-Based Payment” (SFAS 123R). Under SFAS
      123(R), the Company is required to recognize, as expense, the estimated fair
      value of all share-based payments to employees. For the three months ended
      March
      31, 2006, the Company recorded expense of approximately $1.7 million in
      connection with its share-based payment awards to its employees. Compensation
      expense increased by approximately $1.6 million during the three months ended
      March 31, 2006 as result of implementing 123(R).




The
      Company adopted SFAS 123R under the modified prospective method. Under this
      method, the Company recognized compensation expense for stock options awarded
      prior to January 1, 2006, but vested in the quarter ended March 31, 2006 and
      stock options awarded in the three months ended March 31, 2006, based on the
      grant date estimate of fair value for those awards. Prior period financial
      information has not been restated.




For
      periods prior to the adoption of SFAS 123R, the Company had elected to follow
      Accounting Principles Board Opinion No. 25 “Accounting for Stock Issued to
      Employees,” (APB 25) and related Interpretations in accounting for its share
      based payment awards.




The
      following table illustrates the effect on net loss and loss per share as if
      the
      Company had applied the fair value recognition provisions of FASB Statement
      No. 123, “Accounting for Stock Based Compensation,” to its share based
      payment arrangements for the three months ended March 31, 2005.




**Three Months Ended**
              **March
                31, 2005**Net
                loss, as reported
            
            $
            (3,283,899
            )Add:
                Stock-based employee compensation expense included in reported net
                loss
            
            $
            484,000Deduct:
                Total stock-based employee compensation expense determined under
                fair
                value based method for all awards, net of related tax
                effects
            
            $
            (3,665,000
            )Pro
                forma net loss
            
            $
            (6,464,899
            )Basic
                and diluted net loss per share, as reported:
            
            $
            (0.06
            )Pro
                forma basic and diluted net loss per share
            
            $
            (0.11
            )





7


**TASKER
        CAPITAL CORP.**AND SUBSIDIARIES****
 **NOTES
        TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


Compensation
      cost associated with employee stock options represented approximately $1.7
      million for the three months ended March 31, 2006. The
      compensation cost associated with these awards is recorded as expense within
      the
      same functional expense category as cash compensation for the respective
      employee is recorded.No
      tax
      benefit has been recognized with respect to this expense as we have
      determined in our evaluation of our tax assets that it is more likely than
      not that we will not realize any benefit and have provided full valuation
      allowances.




The
      stock
      options were valued taking into consideration a forfeiture rate of 6.7% based
      on
      historical experience and using a straight-line pro-rated method of valuation.
      The resulting fair value is recorded as compensation cost on a straight line
      basis over the option vesting period. The assumptions made for purposes of
      estimating fair value under the Black-Scholes model for options granted during
      the three months ended March 31, 2006 were as follows:




Dividend
                yield:
            
            
            0
            %Expected
                term of options (years):
            
            
            6.1
                yearsRisk
                free interest rate:
            
            
            4.88
            %Volatility:
            
            
            135
            %




The
      Company’s estimate of an expected option term was derived based on the average
      of the sum of the vesting term and the original contract term. The estimated
      stock price volatility was derived based on a review of the Company’s actual
      historic volatility for a period equal to the expected term of its stock options
      awarded in the first fiscal quarter ended March 31, 2006, by reference to actual
      stock prices during this period historic stock prices over the past five years.
      The risk free interest rate was based on the five year Treasury note. The
      specific stock option valuation assumptions used for awards granted prior to
      January 1, 2006 are as disclosed in the Company’s prior annual reports on
      Form 10-KSB, as filed with the SEC.





A
      summary
      of stock option activity for the three months ended March 31, 2006 is as
      follows:


**Number
                  of shares**
              
              **Weighted
                  average exercise price per share**
              
              **Weighted
                  average remaining contractual term in years**
              
              **Aggregate
                  Intrinsic Value**Outstanding,
                  December 31, 2005
              
              
              16,540,777
              
              $
              0.91Granted
              
              
              5,645,000
              
              $
              1.00Exercised
              
              
              175,000
              
              $
              0.25Outstanding,
                  March 31, 2006
              
              
              22,010,777
              
              $
              0.94
              
              
              8.7
              
              $
              4,328,000Options
                  exercisable at March 31, 2006
              
              
              15,987,070
              
              $
              0.86
              
              
              8.4
              
              $
              3,881,000




The
      weighted average grant date fair value of options granted during the three
      months ended March 31, 2006 and 2005 was $0.67 and $3.18, respectively. The
      total intrinsic value of options exercised during the three months ended March
      31, 2006 and 2005 was approximately $82,000 and $1.4 million, respectively.
      As
      of March 31, 2006 there was approximately $4.3 million of unrecognized
      compensation cost related to stock option awards that is expected to be
      recognized as expense over a weighted average period of 2 years. The total
      fair
      value of stock options that vested during the three months ended March 31,
      2006
      and 2005 was approximately $3.9 million and $27.1 million,
      respectively.




8


**TASKER
        CAPITAL CORP.**AND SUBSIDIARIES****
 **NOTES
        TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**




4. Net Loss Per Common Share




The
      following table sets forth the computation of basic and diluted net loss per
      common share for the three months ended March 31, 2006 and 2005.


**Three
                  Months Ended****March
                  31,****2006**
              
              **2005****Numerator
                  for basic & diluted net loss per share**Net
                  loss
              
              $
              (4,925,338
              )
              $
              (3,283,899
              )Net
                  loss available tocommon
                  stockholders
              
              $
              (4,925,338
              )
              $
              (3,283,899
              )**Denominator:**Denominator
                  for basic & diluted net lossper
                  share - weighted-average shares
              
              
              100,526,919
              
              
              59,663,000**Basic
                  & diluted earnings net loss per share:**Net
                  loss
              
              $
              (0.05
              )
              $
              (0.06
              )**Diluted
                  earnings net loss per share:**Net
                  loss
              
              $
              (0.05
              )
              $
              (0.06
              )


As
      of
      March 31, 2006, 22,010,777 options and 21,497,200 warrants were excluded from
      the computation of net loss per share because the effect would be antidilutive.
      As of March 31, 2005 17,550,000 options, 7,980,575 warrants, and 5,940,000
      of
      convertible debentures were excluded from the computation of net loss per share
      because the effect would be antidilutive.




**5.
        Marketable Securities**
 
 The
        Company accounts for marketable securities in accordance with Statement of
        Financial Accounting Standards No. 115 “Accounting for Certain Investments in
        Debt and Equity Securities” (SFAS 115). SFAS 115 establishes the accounting and
        reporting requirements for all debt securities and for investments in equity
        securities that have determinable fair values. All marketable securities
        must be
        classified as one of the following: held-to-maturity, available-for-sale,
        or
        trading.
  The
          Company’s marketable securities consist of auction rate securities which are
          invested in agencies and institutions affiliated with U.S. states. The
          Company’s
          auction rate investments are classified as available-for-sale and are recorded
          at fair value. Interest income on the Company’s marketable securities is
          recognized in the statement of operations when earned. The cost of securities
          sold is determined based on the specific identification method.
  The
          Company’s available-for-sale investments may be offered for sale at auction
          every 28 or 35 days, depending on the individual security. The auction
          rate
          securities have stated contractual maturities, which represents the date
          they
          will be redeemed by the issuer, ranging from 22 to 32 years, and may,
          at the option of the issuer, be redeemed prior to the stated maturity date.
          As
          of March 31, 2006, the Company had invested $3,450,000 in marketable
          securities.
  **6.
          Inventories**
 
 Inventories
          consisted of the following:
 **March
                      31,**
                  
                  **December
                      31,****2006**
                  
                  **2005**Raw
                      Materials
                  
                  $
                  968,411
                  
                  $
                  955,701Finished
                      Goods
                  
                  
                  379,468
                  
                  
                  469,937Inventory
                      Reserve
                  
                  
                  (20,666
                  )
                  
                  (74,675
                  )$
                  1,327,213
                  
                  $
                  1,350,963
 9
  Inventories
          are stated at the lower of cost or market. Cost is determined using the
          first-in, first-out (FIFO) method.
 
 **7.
          Goodwill and Other Intangible Assets**
 
 The
          Company accounts for goodwill and other intangible assets at their estimated
          fair values in accordance with SFAS No. 142, “Goodwill and Other Intangible
          Assets”. In connection with the July 2005 asset acquisition, the Company
          recorded goodwill based on the excess of the purchase price over the
          identifiable tangible and intangible assets acquired and liabilities assumed.
          Goodwill is tested annually, every December, for impairment.
  The
          Company’s specifically identifiable intangible assets, which consist of utility
          patents, are reported at cost, net of accumulated amortization. These intangible
          assets are being amortized over their estimated useful lives, which is
          11.5
          years, at amortization rates that are proportional to each asset’s estimated
          economic benefit to the Company.


The
      carrying value of these intangible assets is reviewed annually by the Company,
      or more frequently when indicators of impairment are present, in accordance
      with
      the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of
      Long-Lived Assets” which requires impairment losses to be recorded on long-lived
      assets used in operations when indicators of impairment are present and
      undiscounted cash flows estimated to be generated by these assets are less
      than
      the assets’ carrying amount.




In
      performing its review of the recoverability of goodwill and other intangible
      assets, the Company considers several factors. These factors include the
      expected cash flows that an asset is expected to generate over its estimated
      economic life. The Company also considers whether there have been significant
      changes in legal factors or the overall business climate that could affect
      the
      underlying value of an asset or whether there is an expectation that the asset
      will be sold or disposed of before the end of its originally estimated useful
      life. In the case of goodwill, the Company must also consider, and estimate,
      the
      fair value of the reporting unit to which the goodwill is assigned. If, as
      a
      result of examining any of these factors, the Company concludes that the
      carrying value of its goodwill or other intangible assets exceeds its estimated
      fair value, the Company will record an impairment charge and reduce the carrying
      value of the asset to its estimated fair value.  This
      impairment charge may be material to the Company’s results of
      operations.





The
      approximate net carrying value of the goodwill and other intangible assets
      at
      March 31, 2006 and December 31, 2005 are as follows:




**March
                  31, 2006****Gross**
                **carrying**
                **amount**
              
              **Accumulated
                  amortization**
              
              **Net**
                **carrying
                  value**Amortized
                  utility patents
              
              $
              22,500,000
              
              $
              1,400,000
              
              $
              21,100,000Unamortized
                  goodwill
              
              $
              41,700,000
              
              $
              ---
              
              $
              41,700,000Total
                  intangible assets
              
              $
              64,200,000
              
              $
              1,400,000
              
              $
              62,800,000








10





**December
                  31, 2005****Gross**
                **carrying**
                **amount**
              
              **Accumulated
                  amortization**
              
              **Net**
                **carrying
                  value**Amortized
                  utility patents
              
              $
              22,500,000
              
              $
              938,000
              
              $
              21,562,000Unamortized
                  goodwill
              
              $
              41,700,000
              
              $
              ----
              
              $
              41,700,000Total
                  intangible assets
              
              $
              64,200,000
              
              $
              938,000
              
              $
              63,262,000





For
      the
      three months ended March 31, 2006, the Company recorded amortization expense
      of
      approximately $511,000 related to the intangible assets.





Estimated
      amortization expense for the remaining three quarters of the current fiscal
      year, and subsequent fiscal years, is as follows :




2006
              
              $
              1,534,0002007
              
              $
              2,046,0002008
              
              $
              2,046,0002009
              
              $
              2,046,0002010
              
              $
              2,046,0002011
                  and thereafter
              
              $
              11,382,000




**8.
      Derivative Instruments**





The
      Company has entered into several debt and equity transactions to fund its
      operations. A number of these transactions involved the issuance of convertible
      debt and warrants. These transactions also included registration rights
      agreements that impose significant penalties on us if certain conditions are
      not
      met. As a result of these registration rights agreements, the Company faces
      unique and complex accounting issues.





The
      Company has issued and outstanding convertible debt and certain convertible
      equity instruments with embedded derivative features such as the conversion
      feature of its convertible debt into the Company’s common stock. The Company
      analyzes these financial instruments in accordance with Statement of Financial
      Accounting Standards (“SFAS”) No. 133 and Emerging Issues Task Force (“EITF”)
      Issue Nos. 00−19 and 05−02 to determine if these hybrid contracts have embedded
      derivatives that must be bifurcated. In addition, free standing warrants are
      accounted for as either equity or liabilities in accordance with the provisions
      of EITF Issue No. 00−19.





EITF
      Issue No. 05−4 "The Effect of a Liquidated Damages Clause on a Freestanding
      Financial Instrument Subject to EITF Issue No. 00−19, 'Accounting for Derivative
      Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
      Stock'" addresses financial instruments, such as convertible notes and stock
      purchase warrants, which are accounted for under EITF 00−19, that are issued
      with a corresponding right to have these securities registered pursuant to
      a
      registration rights agreement that includes a liquidated damages clause.
      Alternative accounting treatments of registration rights are discussed in EITF
      Issue No. 05-4. One alternative treatment discussed in EITF Issue No. 05-4
      could
      require the warrants, the convertible debt and the registration rights agreement
      to be treated as a single financial instrument. If the EITF implements this
      approach, the convertible debt and the warrants the Company has issued would
      need to be recorded as a liability at fair value and changes in the fair value
      of the liability would need to be recorded in the statement of operations each
      period. Implementation of this approach may have a material non-cash impact
      to
      the Company’s consolidated financial statements. Since no consensus on EITF
      Issue No. 05−4 has been reached, the Company has given only prospective
      application to this guidance. Further impact on the Company’s consolidated
      financial statements of adopting the standard, if any, will follow the
      transition guidance when released.





11


In
      April
      and July 2004, the Company entered into private placement agreements for
      convertible debentures, registration rights agreements and warrants. Based
      on
      the interpretive guidance in EITF Issue No. 05−4 due to an uncapped liquidated
      damages provision in the registration rights agreements, the Company determined
      that the registration rights are derivative liabilities that should be
      bifurcated from the related financial instruments. Accordingly, the estimated
      fair value of the registration rights derivative of approximately $244,000
      was
      recorded as a liability as of October 1, 2005, the beginning of the first fiscal
      period after September 15, 2005, the date that EITF postponed further
      deliberations.





Changes
      in the estimated fair value of the registration rights derivative liability
      are
      recorded in the consolidated statement of operations. In the quarter ended
      March
      31, 2006, the Company recorded under the Other Income line of the condensed
      consolidated statement of operations a gain on the reduction of the derivative
      liability of approximately $87,000. At March 31, 2006, the derivative liability
      was approximately $150,000 and was reported under other accrued
      liabilities.





In
      connection with its examination of past transactions for application of EITF
      Issue No. 05-4, the Company  noted that for the period from entering
      into the April 2004 Securities Purchase Agreement until the Company increased
      its authorized shares in August 2004, the Company had insufficient shares to
      meet all potential obligations to issue shares under its convertible notes
      and
      exercisable warrants and options. Under EITF Issue No. 00-19, a liability should
      be recognized for those financial instruments for that period, with any changes
      in the fair value of such liabilities recognized in the Company’s consolidated
      statement of operations. Based on the Company’s analysis of such liabilities, we
      determined the effect of any such amounts to be immaterial.





**9.
      Contractual Obligations and Commitments**





The
      Company has the following commitments as of March 31, 2006, which are comprised
      primarily of a
      research and development fee contract, consulting and employment contracts,
      a
      vendor agreement, notes payable, as well as numerous operating leases.


**Payments
                  Due by****Period**
              
              **Less
                  Than**
              
              **1-3**
              
              **3-5**
              
              **More
                  Than****Contractual
                  Obligations**
              
              **Total**
              
              **1
                  Year**
              
              **Years**
              
              **Years**
              
              **5
                  Years**Research
                  & development fees (1)
              
              $
              150,000
              
              $
              150,000
              
              $
              —
              
              $
              —
              
              $
              —Consulting
                  agreements
              
              
              194,267
              
              
              194,267
              
              
              —
              
              
              —
              
              
              —Employment
                  agreements (2)
              
              
              2,295,433
              
              
              970,850
              
              
              1,324,583
              
              
              —
              
              
              —Vendor
                  agreements
              
              
              150,000
              
              
              150,000
              
              
              —
              
              
              —
              
              
              —Operating
                  leases
              
              
              1,345,252
              
              
              295,395
              
              
              987,628
              
              
              62,228
              
              
              —Note(s)
                  payable
              
              
              1,741,699
              
              
              691,266
              
              
              1,042,198
              
              
              8,235
              
              
              —**Total**
              
              **$**
              **5,876,651**
              
              **$**
              **2,451,778**
              
              **$**
              **3,354,409**
              
              **$**
              **70,463**
              
              **$**
              **—**





(1)
        On
        January 26, 2006, R&D fees payable under the Sub-License Agreement with
        pHarlo IP were amended so that these fees are (i) payable on a quarterly
        basis
        within 30 days after the end of each calendar quarter and (ii) are based
        on
        gross sales of the Company (or its affiliates) of products using the pHarlo
        technology. For fiscal year 2006, the R&D Fees must not be less than
        $150,000 and are capped at $500,000. The
        R&D Fees have no minimum amounts payable
        after 2006; however, they are capped at $2,000,000 for 2007, $4,000,000 for
        2008, $8,000,000 for 2009 and $10,000,000 for 2010 and beyond.
 
 (2)
        Subsequent to December 31, 2005, the Company terminated several of its existing
        employment agreements with some of its senior management and entered into
        new
        employment agreements with its current executive management. As of March
        31,
        2006 the revised estimated future minimum annual compensation under these
        employment agreements, including the new and terminated agreements for 2006,
        2007, 2008 and 2009 is approximately $970,850, $687,800, $587,800 and $49,000,
        respectively.
 
 12
 
 **10.
        Employment and Consulting Agreements**
 
 On
        January 26, 2006, effective on the closing of the January 2006 private
        placement, the Board of Directors of the Company appointed Richard D. Falcone
        as
        President and Chief Executive Officer of the Company. On February 9, 2006,
        the
        Company entered into an employment agreement with Mr. Falcone. The principal
        terms of the employment agreement are as follows: (i) Mr. Falcone’s base salary
        is $275,000 per year; (ii) any bonus payments made to Mr. Falcone will be
        at the
        discretion of the Board; (iii) Mr. Falcone is eligible to participate in
        the
        Company’s existing benefit plans; and (iv) Mr. Falcone has use of a Company car.
        In addition, the Company has agreed to provide Mr. Falcone with disability
        benefits, and has agreed to reimburse Mr. Falcone for health insurance coverage
        if the Company terminates its group health insurance plan. The employment
        agreement has a term of three years, with provision for automatic renewal
        for
        successive three year terms. If Mr. Falcone is terminated by the Company
        for any
        reason other than cause, as defined in his employment agreement, if he should
        resign for a good reason, as defined in his employment agreement and which
        includes a change in control of the Company, or if the Company should not
        renew
        his employment agreement after the expiration of the term, Mr. Falcone is
        entitled to severance. The severance payable to Mr. Falcone is dependant
        on how
        long he has been employed at the Company, beginning with twenty-four months
        of
        base salary (and any bonus to which he would have been entitled during such
        period) payable upon termination immediately after execution of his employment
        agreement, decreasing by one month for each month he remains employed at
        the
        Company, but subject to a minimum severance of twelve months of base salary.
        The
        obligation to pay severance is conditioned upon Mr. Falcone’s execution of a
        mutually agreeable release of claims against the Company. The Board also
        granted
        Mr. Falcone 2,200,000 stock options with an exercise price of $1.00 per share.
        The options have a ten year term, less one day. Twenty-five percent (25%)
        of the
        options vested immediately, and the remainder vest in equal monthly installments
        over the two-year period from the date of grant. If Mr. Falcone is terminated
        by
        the Company other than for cause, if Mr. Falcone resigns for good reason,
        or if
        termination is caused by Mr. Falcone’s death, the options will continue to vest;
        otherwise, vesting of the options ceases upon Mr. Falcone’s termination. In
        addition, if the Company undergoes a change in control, as defined in his
        employment agreement, the stock options granted above will fully vest upon
        the
        change in control.
 
 On
        January 26, 2006, the Company approved a new consulting arrangement with
        Mr.
        Gordon Davis, the Company’s former Chairman of the Board of Directors. On
        February 9, 2006, the Company entered into a consulting agreement with Mr.
        Davis
        with an effective date of February 2, 2006. This consulting agreement was
        not
        affected by Mr. Davis’s resignation as Chairman of the Board of Directors on May
        11, 2006. The principal terms of the consulting agreement are as follows:
        (i)
        Mr. Davis’s consulting fee is $120,000 per year; and (ii) Mr. Davis has use of a
        company car for company business. The consulting agreement has a term of
        three
        years, with provision for automatic renewal for successive one year terms.
        If
        Mr. Davis is terminated for any reason other than by the Company for cause,
        as
        defined in his consulting agreement, including if the consulting agreement
        is
        not renewed by the Company, he will be entitled to termination payments.
        If Mr.
        Davis’s termination is caused by his death or disability, then the termination
        fee is equal to $120,000. If the Company terminates Mr. Davis for any reason
        other than for cause, if Mr. Davis terminates the agreement for good reason,
        or
        if the Company does not renew the consulting agreement, then Mr. Davis’s
        termination fee is dependant on when the termination takes place. If the
        termination occurs prior to the one year anniversary of the effective date,
        then
        Mr. Davis is entitled to the $120,000 annual consulting fee for the remainder
        of
        the term of the consulting agreement. If the termination occurs after the
        one
        year anniversary of the effective date, Mr. Davis is entitled to the consulting
        fee then in effect for a period of one year following termination. The
        obligation to pay the termination fee is conditioned upon Mr. Davis’s execution
        of a release of claims against the Company. Mr. Davis will continue to receive
        remuneration for service on the Board of Directors. The Board also granted
        Mr.
        Davis 1,750,000 stock options with an exercise price of $1.00 per share.
        The
        options have a ten year term, less one day. Twenty-five percent (25%) of
        the
        options vested immediately, and the remainder vest in equal monthly installments
        over the two-year period from the date of grant. If Mr. Davis is terminated
        by
        the Company other than for cause, if Mr. Davis terminates for good reason,
        or if
        termination is caused by Mr. Davis’s death or disability, or non-renewal of the
        agreement by the Company, the options will continue to vest, otherwise, vesting
        of the options ceases upon Mr. Davis’s termination as a consultant. In addition,
        if the Company undergoes a change in control, as defined in the consulting
        agreement, the stock options granted above will fully vest upon the change
        in
        control.
 
 13
 On
        February 8, 2006, the Company appointed Stathis Kouninis as Chief Financial
        Officer. On February 13, 2006 the Company entered into an employment agreement
        with Mr. Kouninis. The principal terms of the employment agreement are as
        follows: (i) Mr. Kouninis will be paid a base salary of $165,000 per year;
        (ii)
        any bonus payment made to Mr. Kouninis will be at the discretion of the Board;
        and (iii) Mr. Kouninis will be eligible to participate in the Company’s existing
        benefit plans. In addition, the employment agreement will have a term of
        three
        years with provision for automatic renewal for successive one year terms.
        If Mr.
        Kouninis is terminated by the Company for any reason other than cause, as
        defined in his employment agreement, or if he should resign for good reason,
        as
        defined in his employment agreement, Mr. Kouninis will be entitled to receive,
        for a period of six months following termination, his base salary at the
        rate in
        effect on the date of termination. The obligation to pay severance is
        conditioned upon Mr. Kouninis’ execution of a mutually agreeable release of
        claims against the Company. The Company also granted Mr. Kouninis stock options
        to purchase 450,000 shares of the Company’s common stock at an exercise price of
        $1.00 per share. The options have a ten year term, less one day. Twenty five
        percent (25%) of the options vested on the date of grant, and the remainder
        will
        vest in equal monthly installments over the two-year period from the date
        of
        grant, provided that Mr. Kouninis remains employed by the Company. If the
        Company undergoes a change in control, as defined in his employment agreement,
        the stock options granted above will fully vest upon the change in control.
 
 On
        February 8, 2006, the Company entered into an employment agreement with Michael
        Bradley to serve as its Controller. The principal terms of the employment
        agreement are as follows: (i) Mr. Bradley will be paid a base salary of $140,000
        per year; (ii) any bonus payment made to Mr. Bradley will be at the discretion
        of the CEO; (iii) an automobile allowance in the amount of $7,800 per annum
        and
        (iv) Mr. Bradley will be eligible to participate in the Company’s existing
        benefit plans. In addition, the employment agreement will have a term of
        three
        years with provision for automatic renewal for successive one year terms.
        If Mr.
        Bradley is terminated by the Company for any reason other than cause, as
        defined
        in his employment agreement, or if he should resign for good reason, as defined
        in his employment agreement, Mr. Bradley will be entitled to receive, for
        a
        period of six months following termination, his base salary at the rate in
        effect on the date of termination. The obligation to pay severance is
        conditioned upon Mr. Bradley’s execution of a mutually agreeable release of
        claims against the Company. The Company also granted Mr. Bradley stock options
        to purchase 350,000 shares of the Company’s common stock at an exercise price of
        $1.00 per share. The options have a ten year term, less one day. Twenty five
        percent (25%) of the options vested on the date of grant, and the remainder
        will
        vest in equal monthly installments over the two-year period from the date
        of
        grant, provided that Mr. Bradley remains employed by the Company. If the
        Company
        undergoes a change in control, as defined in his employment agreement, the
        stock
        options granted above will fully vest upon the change in control.
 
 **11.
        Related Party Transactions**
 
 In
        2004,
        the Company entered into an Exclusive Field of Use License Agreement and
        Product
        Sale Agreement with Wynn Star Specialty Flavors LLC ("Wynn Starr"). Under
        the
        terms of this agreement and its subsequent amendments, the Company has granted
        Wynn Starr the exclusive, worldwide right to market and distribute products
        used
        as post-harvesting processing aids for the poultry industry based on the
        pHarlo
        technology. Wynn Starr is also responsible for taking the pHarlo concentrate
        provided by the Company and blending it with liquids to create the finished
        product that is ultimately distributed by Wynn Starr. In return for this
        license, Wynn Starr has agreed to pay the Company a royalty of $70.00 per
        gallon
        on all net sales (as defined in the Exclusive Field of Use License Agreement
        and
        Product Sale Agreement) sold by Wynn Starr for which payment is received
        from
        customers. No such royalties have accrued to date and the Company is currently
        renegotiating the royalty payments associated with the Exclusive Field of
        Use
        License Agreement and Product Sale Agreement. Steven Zavagli, one of the
        Company’s directors, is the founder, Chairman and the Chief Executive Officer of
        Wynn Starr and Wynn Starr’s ultimate parent company, Wynn Starr
        Flavors.
 
 14
 The
        Company paid Mr. Gordon O. Davis, the former Chairman of the board of directors,
        approximately $20,000 for consulting services during the quarter ended March
        31,
        2006.
 
 **12.
        Sale of Equity Securities**
 
 On
        January 26, 2006, the Company, entered into a Securities Purchase Agreement
        (the
“Purchase Agreement”) with accredited investors pursuant to which the Company
        sold 13,335,925 units consisting of one share of common stock and a warrant
        to
        purchase one share of common stock at an exercise price of $1.00 per share
        for
        $0.70 per unit. The
        Company also entered into a Registration Rights Agreement with such accredited
        investors pursuant to which the Company agreed to file a registration statement
        with the SEC covering the resale of the shares of common stock purchased
        pursuant to the Purchase Agreement and the shares of common stock receivable
        upon exercise of the warrants. **** On
        April
        26, 2006, the Company filed with the SEC a Registration Statement on Form
        S-1 to
        register these shares for resale. This registration statement is currently
        under
        review by the SEC. If
        such
        registration statement is not declared effective within six months after
        the
        filing of the registration statement, the Company will be required under
        the
        terms of the registration rights agreement to pay liquidated damages in the
        form
        of additional common stock and warrants.
 
 Emerging
        Growth Equities, Ltd., a Pennsylvania limited partnership, served as placement
        agent for the transaction. The net proceeds to the Company at the closing
        of
        this private placement, exclusive of the exercise price of the warrants,
        were
        approximately $8.7 million.
  As
        compensation for acting as placement agent, Emerging Growth Equities, Ltd.
        received a cash payment equal to 6% of the gross proceeds from the private
        placement, and also received a warrant exercisable for shares of the Company’s
        common stock in an amount equal to 6% of the gross proceeds from the sale
        of the
        shares and warrants divided by $0.70. The warrant to Emerging Growth Equities
        has an exercise price equal to $1.00 and is exercisable immediately for a
        term
        of five years.
  *Registration
          Right Agreement:*
  In
          connection with the January 2006 private placement, the Company also obtained
          waivers of all claims for liquidated damages relating to the inability
          of the
          Company to have the registration statement registering resale of securities
          purchased in the September 2005 private placement declared effective by
          the
          deadline specified in the Registration Rights Agreement. The Company received
          these waivers from shareholders representing more than a majority of all
          outstanding securities issued in connection with the September 2005 private
          placement. In consideration for obtaining the waiver, the Company repriced
          the
          warrants issued to shareholders providing the waiver such that the exercise
          price of the warrants issued in connection with the September 2005 private
          placement was reduced from $3.00 to $1.00.  Under the waiver, the date by
          which the registration statement covering resale of the securities purchased
          in
          the September 2005 private placement  was required to be declared effective
          was extended to May 23, 2006.  While the Company filed a registration
          statement with the SEC on April 26, 2006, the Company believes it is unlikely
          that such registration statement will be declared effective by May 23,
          2006.  The Company believes, however, that it has used its best efforts to
          cause the registration statement to be declared effective and that, therefore,
          pursuant to the terms of the applicable registration rights agreement,
          it will
          not be liable for liquidated damages.
 **Item
        2. Management’s Discussion And Analysis of Financial Condition And Results Of
        Operations**
 
 This
        Form
        10-Q, as well as our other reports filed with the SEC, and our press releases
        and other communications, contain forward-looking statements. Forward-looking
        statements include all statements regarding our expected financial position,
        results of operations, cash flows, dividends, financing plans, strategy,
        budgets, capital and other expenditures, competitive positions, growth
        opportunities, benefits from new technology, plans and objectives of management,
        and markets for stock. These forward-looking statements are based largely
        on our
        expectations and, like any other business, are subject to a number of risks
        and
        uncertainties, many of which are beyond our control. In some cases, you can
        identify forward-looking statements by words such as *“may,”
        “should,” “expect,” “plan,” “could,” “anticipate,” “intend,” “believe,”
“estimate,” “predict,” “potential,” “goal,”* or *“continue”* or
        similar terminology.
  15
 Forward-looking
        statements are not guarantees of performance. They involve risks, uncertainties
        and assumptions. Future results may differ materially from those expressed
        in
        the forward-looking statements. Many of the factors that will determine these
        results are beyond our ability to control or predict. Current and potential
        investors are cautioned not to put undue reliance on any forward-looking
        statements, which speak only to the date made.
  For
        a
        discussion of some of the factors that may cause actual results to differ
        materially from those suggested by the forward-looking statements, please
        read
        carefully the information under “Risk Factors” in our annual report of Form
        10-KSB for the year ended December 31, 2005 and in our other filings with
        the
        SEC. Some of the risks that current and potential investors should be aware
        of
        include, but are not limited to, the following:
 
 ·
            Our
                limited operating history in our present markets; ·
            Our
                limited experience in marketing our products; ·
            Our
                need to obtain regulatory approval for the manufacturing of some
                of our
                current products and products under
                development; ·
            Our
                ability to protect our intellectual property rights; ·
            Intense
                competition in our current markets; ·
            Our
                products, like most regulated products, may be subject to various
                enforcement actions, which could require, among other things, the
                relabeling, reformulation or recall of products and/or the submission
                of
                additional information in support of product claims or safety, or
                punitive
                actions, any of which could harm our reputation and business;
                and ·
            We
                do not maintain effective controls and procedures and we consistently
                had
                material weaknesses in our internal controls over financial
                reporting.  The
        identification in this document of factors that may affect future performance
        and the accuracy of forward-looking statements is meant to be illustrative
        and
        by no means exhaustive. All forward-looking statements should be evaluated
        with
        the understanding of their inherent uncertainty.
 
 **Company
        Overview**
 
 We
        are a
        manufacturer, distributor and marketer of products using a patented process,
        which we refer to as the "pHarlo technology," that utilizes a highly charged
        and
        acidified, yet stable and safe, solution that enables copper sulfate, a compound
        with bacteriostatic properties, to remain active throughout a wide range
        of pH
        values. We currently market:
 
 ·
            Close
                CallÔ,
                an oral hygiene breath drink; ·
            UnifreshÔFootbath, a grooming aid for dairy cows;
                and ·
            Tasker
                Pacific Blue Seafood Wash 
 The
        Company is also in the process of conducting tests of the pHarlo technology
        for
        other pre- and post-harvest food processing applications.
 
 On
        December 7, 2005 we announced that we intended to concentrate our efforts
        on the
        development and commercialization of our poultry processing products, seafood
        processing applications, and Unifresh® Footbath and Unifresh® Pen Spray
        products. We also announced that we intended to seek to license and/or sell
        the
        Close Call Ô brand
        and derivative applications.
 
 16
 In
        August
        2005, we began the in-plant commercial verification process for USDA approval
        to
        use the pHarlo technology in the scalder process of poultry processing. In
        January 2006 we received initial approval from the USDA to continue in-plant
        testing in two additional plants and we expect to complete these tests in
        the
        second quarter of 2006, at which time we will seek further USDA approval
        for
        full commercialization of the product.
 
 Initial
        tests of our poultry pen spray application began during the fourth quarter
        of
        2005 at poultry farms in France. This application was created to reduce or
        neutralize the ammonia byproduct generated by the birds’ natural waste during
        their growth phase. During the first quarter of 2006, we began a second phase
        of
        testing designed to attain a statistically acceptable measure of the product’s
        effectiveness under varying conditions. The second phase of tests is expected
        to
        be completed during the second quarter of 2006. Upon the successful completion
        of these tests, we intend to apply for regulatory approval in the US to
        commercialize the product. Additionally, we began testing our poultry pen
        spray
        in the United States early in the second quarter of 2006. We believe that
        use of
        our poultry pen spray in the United States is approved under the existing
        generally recognized as safe (GRAS) determination by the Food and Drug
        Administration (FDA). Consequently when the tests are completed to our
        satisfaction and to the satisfaction of our advisors we will start marketing
        the
        product in the United States.
 
 **Financial
        Overview**
 
 As
        a
        result of an acquisition in July 2005, we now own certain utility patent
        applications and provisional patent applications associated with the pHarlo
        technology including for pre-harvest and post-harvest food processing, skin
        care, pet products, hangover remedy, alcohol abatement and water purification
        applications.
 
 For
        the
        first three months of fiscal 2006, our revenue increased to approximately
        $221,000 from approximately $61,000 in the same period of the prior year.
        This
        increase was primarily attributable to sales of our Unifresh TM Footbath
        concentrate, a grooming aid for dairy cows, a product acquired in the July
        2005
        acquisition. We expect to continue to grow revenue during fiscal 2006 as
        a
        result of our increased sales and marketing efforts.
  We
        had a
        net loss of approximately $4,925,000 in the three months ended March 31,
        2006
        compared to a net loss of $3,284,000 in the three months ended March 31,
        2005.
        Excluding the stock compensation expense of $1,720,000 our net loss for the
        three months ended March 31, 2006 decreased by approximately $80,000 as compared
        to the net loss for the same period in 2005. The stock compensation expense
        is
        due to the adoption of SFAS 123R “Share Based Payment”. As a result of the
        adoption of SFAS 123(R), the fair value of all stock-based compensation is
        now
        recorded as expense in our financial statements, rather than as a footnote
        disclosure.
 
 There
        is
        no guarantee that we can achieve profitability on a quarterly or annual basis
        in
        the future. If revenues grow slower than anticipated, or if operating expenses
        exceed expectations, or cannot be reduced timely, we will continue to experience
        losses and the results of operations and financial condition will be materially
        and adversely affected.
 
 **Related
        Party Transactions**
 
 In
        2004, we
        entered into an Exclusive Field of Use License Agreement and Product Sale
        Agreement with Wynn Star Specialty Flavors LLC ("Wynn Starr"). Under the
        terms
        of this agreement and its subsequent amendments, we granted Wynn Starr the
        exclusive, worldwide right to market and distribute products used as
        post-harvesting processing aids for the poultry industry based on the pHarlo
        technology. Wynn Starr is also responsible for taking the pHarlo concentrate
        provided by us and blending it with liquids to create the finished product
        that
        is ultimately distributed by Wynn Starr. In return for this license, Wynn
        Starr
        has agreed to pay us a royalty of $70.00 per gallon on all net sales (as
        defined
        in the Exclusive Field of Use License Agreement and Product Sale Agreement)
        sold
        by Wynn Starr for which payment is received from customers. No such royalties
        have accrued to date and we are currently renegotiating the royalty payments
        associated with the Exclusive Field of Use License Agreement and Product
        Sale
        Agreement. Steven Zavagli, one of our directors, is the founder, Chairman
        and
        the Chief Executive Officer of Wynn Starr and Wynn Starr’s ultimate parent
        company, Wynn Starr Flavors.
 
 17
 We
        paid
        Mr. Gordon O. Davis, the former Chairman of our board of directors,
        approximately $20,000 for consulting services during the quarter ended March
        31,
        2006.
 
 **Critical
        Accounting Policies and Estimates**
  We
        believe that several accounting policies are important to understanding our
        historical and future performance. We refer to these policies as “critical”
because these specific areas generally require us to make judgments and
        estimates about matters that are uncertain at the time we make the estimate,
        and
        different estimates—which also would have been reasonable—could have been used,
        which would have resulted in different financial results.
  The
        critical accounting policies we identified in our most recent Annual Report
        on
        Form 10-KSB for the fiscal year ended December 31, 2005 related to goodwill
        and
        intangible assets, valuation of acquired intangible assets, derivative
        liabilities and inventory valuation and classification. With the adoption
        of
        SFAS 123(R) on January 1, 2006, we have identified the estimates and assumptions
        that accompany the fair value determination of our stock option awards as
        critical, as discussed below. It is important that the discussion of our
        operating results that follows be read in conjunction with the critical
        accounting policies discussed below as well as those disclosed in our Annual
        Report on Form 10-KSB, as filed with the SEC on March 31, 2006.
 
 **Stock-Based
        Compensation**
  Effective
        January 1, 2006, we adopted accounting rules (SFAS 123(R), “Share-Based
        Payment”) requiring the expense recognition of the estimated fair value of all
        share-based payments issued to employees. Prior to this, the estimated fair
        value associated with such awards was not recorded as an expense, but rather
        was
        disclosed in a footnote to our financial statements. For the quarter ended
        March
        31, 2006, we recorded approximately $1.72 million of expense associated with
        share-based payments, with the majority of this expense, approximately $1.68
        million, attributable to employee stock options.
  The
        valuation of employee stock options is an inherently subjective process,
        since
        market values are generally not available for long-term, non-transferable
        employee stock options. Accordingly, an option pricing model is utilized
        to
        derive an estimated fair value. In calculating the estimated fair value of
        our
        stock options, we used a Black-Scholes pricing model which requires the
        consideration of the following six variables for purposes of estimating fair
        value:
  •
              
              the
                  stock option exercise price,
  •
              
              the
                  expected term of the option,
  •
              
              the
                  grant date price of our common stock, which is issuable upon exercise
                  of
                  the option,
  •
              
              the
                  expected volatility of our common stock,
  •
              
              expected
                  dividends on our common stock (we do not anticipate paying dividends
                  for
                  the foreseeable future), and
  •
              
              the
                  risk free interest rate for the expected option term.
  18
 Of
        the
        variables above, the selection of an expected term and expected stock price
        volatility are the most subjective. Our estimate of the expected option term
        was
        6.1 years and was derived based on the average of the sum of the vesting
        term
        and the original contract term. In estimating our stock price volatility,
        we
        analyzed our historic volatility for a period equal to the expected term
        of our
        stock options awarded in the first fiscal quarter ended March 31, 2006, by
        reference to actual stock prices during this period and calculated an estimated
        volatility of 135%. We believe that each of these estimates, both expected
        term
        and volatility, is reasonable in light of the data we analyzed. However,
        as with
        any estimate, the ultimate accuracy of these estimates is only verifiable
        over
        time.
  The
        specific valuation assumptions noted above were applied to stock options
        that we
        granted subsequent to our adoption of SFAS 123(R). The majority of the stock
        option expense recorded in the quarter ended March 31, 2006 relates to options
        granted in the quarter ended March 31, 2006. We expect that stock compensation
        expense will continue to have a material impact on our financial results
        for the
        remainder of the fiscal year. For the remainder of fiscal 2006 we expect
        to
        incur stock compensation expenses of approximately $825,000 per quarter.
 
 **Three
        Months Ended March 31, 2006 Compared to Three Months Ended March 31,
        2005**
 
 **Revenues**
 
 Revenues
        for the three months ended March 31, 2006 were approximately $221,000 compared
        with approximately $61,000 for the corresponding period in 2005. This increase
        in revenue was due primarily to revenue associated with sales of Unifresh®
Footbath. The revenue for the three months ended March 31, 2005, was entirely
        due to sales of Close
        Call Ô .
        We
        expect that revenue will continue to increase throughout fiscal year 2006
        upon
        the successful marketing of existing products and the securing of regulatory
        approvals for certain applications that it intends to market. While waiting
        for
        regulatory approvals, we are aggressively marketing our existing products,
        building our network of distributors and we are identifying prospective
        customers.
 
 19
 **Product
        Development**
 
 Product
        development consists primarily of personnel costs to support product development
        which continued to be a major focus of our company for the first quarter
        of
        2006. Product development and research costs for the three months ended March
        31, 2006 increased by approximately $34,000 or 10% to approximately $375,000
        from approximately $341,000 for the three months ended March 31, 2005. The
        increase was primarily due to a $74,000 increase in compensation costs, due
        to
        increased staffing, and an increase in stock based compensation of approximately
        $40,000, which was partially offset by a decrease of consulting expenses
        of
        approximately $100,000. We expect that in fiscal 2006 product development
        expense will increase as a percentage of revenue as new product lines are
        tested
        and developed.
 
 **Selling,
        General and Administrative**
 
 Selling,
        General, and Administrative (“SGA”) expenses are primarily comprised of sales
        and marketing costs, compensation, professional fees, and general administrative
        costs. SGA costs for the three months ended March 31, 2006 increased by
        approximately $1.2 million from $2.9 million for the three months ended March
        31, 2005, to $4.1 million for the three months ended March 31, 2006. We
        anticipate that SGA costs will continue to decrease, as a percentage of
        revenues, in fiscal year 2006.
 
 Sales
        and
        marketing expenses consist primarily of salaries and other related costs
        for
        sales and marketing personnel, sales commissions, promotional expenses,
        advertising, public relations and trade shows. Sales and marketing costs
        increased by approximately $52,000 due
        to
        marketing research, branding and promotion for our Unifresh ® Footbath
        product line roll-out,
        as well as increased compensation expense for an increase in sales force
        personnel.
 
 Compensation
        expense consists primarily of salaries and other related costs for senior
        management, finance and administrative employees of our company. Compensation
        expense increased by approximately $416,000 primarily due to an increase
        in
        severance costs associated with a reduction in administrative and warehouse
        personnel, and to a lesser extent due to salaries for personnel from the
        July
        2005 acquisition.
 
 Professional
        fees for the three months ended March 31, 2006 decreased by $1.1 million
        primarily due to a non-cash
        charge decrease of approximately $1.2 million for stock options issued to
        an
        investor relations consultant for services provided in the three months ended
        March 31, 2005 .
 
 General
        and administrative expenses consist primarily of rent, insurance and t ravel
        and
        entertainment expenses .
        The
        increase in general administrative costs for the three months ended March
        31,
        2006 by approximately $658,000 was primarily attributable to approximately
        $320,000 in minimum purchase commitments for Close Call bottles, and a $50,000
        settlement in principle of the “BOC” claim discussed under legal proceedings.
        Rent and associated utility expenses for the Texas facility, acquired in
        the
        July 2005 acquisition, also increased by approximately $72,000.
  During
        the three months ended March 31, 2006, we recorded approximately $1.7
        million of expense associated with share-based payments in connection with
        our
        adoption of SFAS 123(R) on January 1, 2006. The expense associated with these
        awards is recorded as expense within the same functional expense category
        as
        cash compensation for the respective employee is recorded. For the three
        months
        ended March 31, 2006, stock compensation expense was allocated as
        follows :
 Sales
                    and marketing
                
                $
                183,000Product
                    development
                
                
                57,000General
                    and administrative
                
                
                1,480,000$
                1,720,000
 
  20
 
 **Depreciation
        and Amortization Expense**
 
 Depreciation
        and amortization expense, which includes the amortization of identifiable
        intangible assets, increased by approximately $562,000 from approximately
        $12,000 in the three months ended March 31, 2005, to approximately $574,000
        for
        the three months ended March 31, 2006, primarily due to the amortization
        of our
        utility patent intangible. This intangible has a current estimated value
        of
        approximately $21 million and is being amortized over 11.5 years.
 
 **Interest
        Expense**
 
 Interest
        expense decreased by approximately $87,000 from $114,000 for the three months
        ended March 31, 2005 to approximately $27,000 for the three months ended
        March
        31, 2006  primarily
        due to a reduction in interest payable for convertible debt.
 
 **Interest
        Income**
 
 Interest
        income decreased by approximately $7,000 from $46,000 for the three months
        ended
        March 31, 2005 to approximately $39,000 for the three months ended March
        31,
        2006 primarily due to a decreased cash balance in the three months ended
        March
        31, 2006, as compared to the same period ending March 31, 2005.
 
 **Other
        expenses, net**
 
 We
        incurred other expenses, net of approximately $46,000 for the three months
        ended
        March 31, 2006 as compared to no expense in the three months ended March
        31,
        2005. We accrued approximately $87,000 for (i) liquidating damages for
        failure to have a current prospectus available for the resale of common stock
        sold in the April 2004 and July 2004 private placements and (ii) a loss on
        a
        disposal of a vehicle in the amount of $50,000 as a result of the Settlement
        and
        Release Agreement we entered into with a former executive. This increase
        in
        expense was partially offset by the reduction of the fair market value of
        the
        registration rights liability by approximately $85,000.
  **Liquidity
        and Capital Resources**
 
 **Overview**
 
 Since
        our
        inception, we have funded operations and investing activities through the
        issuance of common stock and other financing activities under several private
        placements. Requirements for liquidated damages under some of our private
        placements may have an impact on our future liquidity. To date we have satisfied
        and/or received waivers for the provisions of a majority the agreements that
        would have otherwise required us to pay liquidated damages. We do not expect,
        although the conditions that may result in liquidated damages are not in
        our
        control, that any liquidated damage amounts we may be required to pay will
        be
        material.
 
 We
        may be
        unable to meet our future capital requirements. We may require additional
        financing in the future in order to continue to implement our product and
        services development, marketing and other corporate programs. We may not
        be able
        to obtain such financing or obtain it on acceptable terms. Without additional
        financing, we may be forced to delay, scale back or eliminate some or all
        of our
        product and services development, marketing and other corporate programs.
        If we
        are able to obtain such financing, the terms may contain restrictive covenants
        that might negatively affect our common stock, such as limitations on payments
        of dividends or, in the case of a debt financing, reduced earnings due to
        interest expenses. Any further issuance of equity securities would likely
        have a
        dilutive effect on the holders of our common stock. Our business, operating
        results and financial condition may be materially harmed if revenues do not
        develop or grow slower than we anticipate, if operating expenses exceed our
        expectations or cannot be reduced accordingly, or if we cannot obtain additional
        financing.
 
 21
  Based
        upon our forecast of future revenues from our products in conjunction with
        the
        cash and marketable securities on hand, cash expected to be generated from
        operations will provide adequate funding for the Company’s working capital over
        the next nine months.  As with all business forecasts, management’s current
        assessment of future revenues is based upon its assumptions and
        expectations.  Future market trends for its products may not develop as
        management has predicted, and regulatory approvals required to market products
        as the Company currently plans may not be obtained, and, in the future, the
        Company may find that its cash on hand and cash from operations is not
        sufficient to fund existing operations or new opportunities may present
        themselves over the course of the next twelve months, in which case the Company
        may find that its cash on hand and cash from operations is not sufficient.
        Such
        changes may, or may not, require it to seek additional outside funding and,
        if
        required, there can be no assurance that suitable outside financing will
        be
        available to the Company.
 
 **Operating
        Activities**
 
 At
        March
        31, 2006 our cash, cash equivalents and marketable securities balances were
        approximately $7 million compared with $1.0 million at December 31, 2005.
 
 Net
        cash
        used in operating activities for the three months ended March 31, 2006 was
        approximately $2.5 million, compared to net cash used in operating activities
        of
        approximately $1.9 million for the three months ended March 31, 2005.
  We
        have
        also fully reserved our note receivable of $890,000 from the Biofilm
        shareholders as there is no assurance that it is collectible. Also see
        discussion under “Off-Balance Sheet Arrangements”.
 
 **Investing
        Activities**
 
 Net
        cash
        used in investing
        activities for the three months ended March 31, 2006 was approximately
        $3.5 million as compared to approximately $3.0 million for the three months
        ended March 31, 2005.
 
 As
        of
        March 31, 2006 approximately $3.4 million of the January 2006 private placement
        proceeds are invested in marketable securities.
  **Financing
        Activities**
 
 Net
        cash
        provided by financing activities during the three months ended March 31,
        2006
        was approximately $8.5 million, as compared to approximately $128,000 for
        the
        three months ended March 31, 2005.
 
 The
        net
        cash provided by financing activities for the three months ended March 31,
        2006
        principally represents proceeds from the sale of common stock and warrants.
        In
        January 2006, we completed a private placement in
        which
        we raised gross proceeds of $9.3 million through the sale of 13,335,295 shares
        of our common stock at a purchase price of $.70 per share, which were sold
        together with warrants to purchase an additional 13,335,295 shares of our
        common
        stock at an exercise price of $1.00.
 
 As
        partial consideration for the purchase of the pHarlo assets in the July 2005
        acquisition, we issued a promissory note in the amount of $1,931,973 to Indian
        River Labs, L.L.C. (“IRL”). The promissory note bears interest of 3.4% per annum
        and is payable in equal bi-weekly principal installments of $37,153, plus
        interest, through July 2007. During
        the quarter ended March 31, 2006 we paid approximately $260,000 under the
        IRL
        promissory note.
  **Registration
          Rights Agreement**
 
 In
          connection with the January 2006 private placement, we obtained waivers of
          all claims for liquidated damages relating to our inability to have
          the registration statement registering resale of securities purchased in
          the
          September 2005 private placement declared effective by the deadline specified
          in
          the Registration Rights Agreement. We received these waivers from
          shareholders representing more than a majority of all outstanding securities
          issued in connection with the September 2005 private placement. In consideration
          for obtaining the waiver, we repriced the warrants issued to shareholders
          providing the waiver such that the exercise price of the warrants issued
          in
          connection with the September 2005 private placement was reduced from $3.00
          to
          $1.00.  Under the waiver, the date by which the registration statement
          covering resale of the securities purchased in the September 2005 private
          placement was required to be declared effective was extended to May 23,
          2006.  While we filed a registration statement with the SEC on April 26,
          2006, we believe it is unlikely that such registration statement will be
          declared effective by May 23, 2006.  We believe, however, that it we
          have used our best efforts to cause the registration statement to be
          declared effective and that, therefore, pursuant to the terms of the applicable
          registration rights agreement, we will not be liable for liquidated
          damages.
 
 22
 **Off-Balance
        Sheet Arrangements**
 
 During
        the three months ended March 31, 2006, we did not engage in material off-balance
        sheet activities, including the use of structured finance, special purpose
        entities; material trading activities in non-exchange traded commodity
        contracts; or transactions with persons or entities that benefit from their
        non-independent relationship with us.
 
 In
        April
        2005, we purchased from Electric Aquagenies Unlimited, Inc. 359,000 common
        shares of Biofilm, representing 27% of Biofilm’s outstanding common stock, for
        cash consideration of $718,000. We believe that our 27% equity interest in
        Biofilm is a significant variable interest, as defined by FIN 46(R)
“ *Consolidation
        of Variable Interest Entities* ”,
        however we believe that we are currently not the primary beneficiary of Biofilm
        and thus we would not be required to consolidate the accounts of Biofilm.
        We
        believe that our maximum exposure to loss as a result of our involvement
        with
        Biofilm is limited to our initial investment of $718,000
 
 **Contractual
        Obligations and Commitments**
 
 We
        had
        the following commitments as of March 31, 2006, which are comprised primarily
        of
        a research and development fee contract, consulting and employment contracts,
        a
        vendor agreement, notes payable, as well as numerous operating
        leases:
 **Payments
                    Due by Period****Less
                    Than**
                
                **1-3**
                
                **3-5**
                
                **More
                    Than****Contractual
                    Obligations**
                
                **Total**
                
                **1
                    Year**
                
                **Years**
                
                **Years**
                
                **5
                    Years**Research
                    & development fees (1)
                
                $
                150,000
                
                $
                150,000
                
                $
                —
                
                $
                —
                
                $
                —Consulting
                    agreements
                
                
                194,267
                
                
                194,267
                
                
                —
                
                
                —
                
                
                —Employment
                    agreements (2)
                
                
                2,295,433
                
                
                970,850
                
                
                1,324,583
                
                
                —
                
                
                —Vendor
                    agreements
                
                
                150,000
                
                
                150,000
                
                
                —
                
                
                —
                
                
                —Operating
                    leases
                
                
                1,345,252
                
                
                295,395
                
                
                987,628
                
                
                62,228
                
                
                —Note(s)
                    payable
                
                
                1,741,699
                
                
                691,266
                
                
                1,042,198
                
                
                8,235
                
                
                —**Total**
                
                **$**
                **5,876,651**
                
                **$**
                **2,451,778**
                
                **$**
                **3,354,409**
                
                **$**
                **70,463**
                
                **$**
                **—**


(1)
        On
        January 26, 2006, R&D fees payable under the Sub-License Agreement with
        pHarlo IP were amended so that these fees are (i) payable on a quarterly
        basis
        within 30 days after the end of each calendar quarter and (ii) are based
        on
        gross sales of our Company (or our affiliates) of products using the pHarlo
        technology. For fiscal year 2006, the R&D Fees must not be less than
        $150,000 and are capped at $500,000. The
        R&D Fees have no minimum amounts payable
        after 2006; however, they are capped at $2,000,000 for 2007, $4,000,000 for
        2008, $8,000,000 for 2009 and $10,000,000 for 2010 and beyond.
 
 (2)
        Subsequent to December 31, 2005, we terminated several of our existing
        employment agreements with some of our senior management and entered into
        new
        employment agreements with our current executive management. As of March
        31,
        2006 the revised estimated future minimum annual compensation under these
        employment agreements, including the new and terminated agreements for 2006,
        2007, 2008 and 2009 is approximately $970,850, $687,800, $587,800 and $49,000,
        respectively.
 
 **Item
        3. Quantitative and Qualitative Disclosures about Market
        Risk**
 
 **Interest
        Rate Risk**
  Our
        exposure to market risk, including changes in interest rates, relates primarily
        to changes in the market value of our investment in marketable securities.
        These
        investments bear interest at a variable interest rate, which is subject to
        market changes. We have not entered into any interest rate swap agreements,
        or
        other instruments to minimize our exposure to interest rate fluctuations.
        We
        have not had any derivative instruments in the past and do not presently
        plan to
        in the future. Our investment portfolio consists of demand deposits and
        marketable securities. Due to the highly liquid nature of our investment,
        a
        sudden sharp change in interest rates would not have a material adverse effect
        on the value of the portfolio.
 
 23
 **Item
        4. Controls and Procedures**
 
 As
        required by Rule 13a-15 under the Securities Exchange Act of 1934 (the “Exchange
        Act”), we carried out an evaluation of the effectiveness of the design and
        operation of our disclosure controls and procedures as of the end of the
        period
        covered by this report. This evaluation was carried out under the supervision
        and with the participation of our Chief Executive Officer, Richard Falcone,
        and
        Chief Financial Officer, Stathis Kouninis.
 
 Disclosure
        controls and procedures are controls and other procedures that are designed
        to
        ensure that information required to be disclosed in our reports filed or
        submitted under the Exchange Act is recorded, processed, summarized and
        reported, within the time periods specified in the Securities and Exchange
        Commission’s rules and forms. Disclosure controls and procedures include,
        without limitation, controls and procedures designed to ensure that information
        required to be disclosed in our reports filed under the Exchange Act is
        accumulated and communicated to management, including our Chief Executive
        Officer and Chief Financial Officer, to allow timely decisions regarding
        required disclosure.
 
 Based
        upon that evaluation, our Chief Executive Officer and Chief Financial Officer
        concluded that our disclosure controls and procedures as of the end of the
        period covered by this report were ineffective in timely alerting management
        to
        material information relating to us required to be included in our periodic
        SEC
        filings. As described in the our Quarterly Reports throughout 2005 and under
        Item 9A of Part II in our Annual Report on Form 10-KSB for the year ended
        December 31, 2005, we have already instituted and are continuing to
        implement, corrective actions with respect to the deficiencies in our disclosure
        controls and procedures.
 
 Other
        than noted under Item 9A of Part II in the our Annual Report on Form 10-KSB
        for
        the year ended December 31, 2005, there were no changes to the our internal
        control over financial reporting that occurred during the our last fiscal
        quarter that have materially affected, or are reasonably likely to materially
        affect, our internal controls over financial reporting.
 
 We
        note,
        however, that the identification of the material weaknesses described in
        the our
        Annual Report on Form 10-KSB for the year ended December 31, 2005 resulted
        from our management’s continuing assessment of internal control over financial
        reporting required by Section 404 of the Sarbanes-Oxley Act of 2002. While
        every
        effort will be made to ensure the financial reporting system will adhere
        to our
        internal controls, we cannot be certain that additional material weaknesses
        will
        not be identified prior to the filing of management’s annual report on internal
        control over financial reporting.
  **PART
        II — OTHER INFORMATION**
 
 **Item
        1. Legal Proceedings**
 
 On
        October 26, 2005, a civil action captioned "The BOC Group, Inc. v. Tasker
        Capital Corp., Randy Cable, and Shaun Porter" was filed in the United States
        District Court for the District of Connecticut.  In the complaint, The BOC
        Group alleges that Mr. Porter and Mr. Cable, employees of Tasker, have breached
        certain restrictive covenants contained in their employment agreements with
        The
        BOC Group, and that we tortuously interfered with The BOC Group’s agreements
        with Mr. Porter and Mr. Cable. The BOC Group also claims that we, Mr. Porter
        and
        Mr. Cable violated Connecticut’s statutes governing trade secrets and unfair
        trade practices. The BOC Group and we have agreed in principal to resolve
        the
        matter by the payment of $50,000 by us to The BOC Group. The final paperwork
        reflecting the settlement and the stipulation of dismissal with prejudice
        to be
        filed with the Court is in the process of being finalized.
 
 24
 On
        January 18, 2006, a civil action captioned “Dallas XXIX Corporate Square, L.P.,
        v. Coast to Coast Laboratories and Tasker Capital Corp.” was filed in the
        Circuit Court of Pinellas County, Florida. The plaintiff alleges that Coast
        to
        Coast Laboratories Corp., a wholly owned subsidiary of our company, has breached
        a lease agreement and that  we have breached a guaranty. Dallas XXIX
        Corporate Square, L.P. and we have agreed in principal to resolve the matter
        by
        the payment of $25,000 by us to Dallas XXIX Corporate Square, L.P. The final
        paperwork reflecting the settlement and the stipulation of dismissal with
        prejudice to be filed with the Court is in the process of being finalized.
 
 **Item
        1A. Risk Factors**
 
 In
        addition to the other information set forth in this report, you should carefully
        consider the factors discussed in “ Risk Factors” in our Annual Report on Form
        10-KSB for the year ended December 31, 2005, which could materially affect
        our
        business, financial condition or future results. The risk factors described
        in
        our Annual Report on Form 10-KSB are not the only risks facing our Company.
        Additional risks and uncertainties not currently known to us or that we
        currently deem to be immaterial also may materially adversely affect our
        business, financial condition and/or operating results.
  **Item
        2. Unregistered Sales of Equity Securities and Use of
        Proceeds**
  On
        January 26, 2006, we entered into a Securities Purchase Agreement with
        several accredited investors pursuant to which the Registrant sold 13,335,925
        units, each unit consisting of one share of common stock and a five-year
        warrant
        to purchase one share of common stock at an exercise price of $1.00 per share
        for $0.70 per unit. The gross proceeds to us at the closing of this private
        placement, exclusive of the exercise price of the warrants, were $9,335,148.
        Emerging Growth Equities, Ltd. served as placement agent for the transaction.
        As
        compensation for serving as placement agent, Emerging Growth Equities, Ltd.
        received a cash payment equal to 6% of the gross proceeds from the private
        placement, and also received a warrant exercisable for shares of common stock
        in
        an amount equal to 6% of the gross proceeds from the sale of the shares and
        warrants divided by $0.70. The warrant to Emerging Growth Equities has an
        exercise price of $1.00 and is exercisable immediately for a term of five
        years.
        The aforementioned securities were issued by us in transactions exempt from
        the
        registration requirements under the Securities Act of 1933, by reason of
        Section 4(2) and/or Rule 506 of Regulation D of the Securities Act.
        Pursuant to the terms of the Securities Purchase Agreement, we were able
        to rely
        upon the representations and warranties provided by the investors contained
        therein in connection with the issuance of the aforementioned securities
        without
        registration.
  During
        the three-month period ended March 31, 2006, we granted the following stock
        options:
  ·
            stock
                options to purchase an aggregate 495,000 shares of common stock,
                at an
                exercise price of $1.00 per share, were granted to three non-executive
                employees; and  ·
            stock
                options to purchase an aggregate 5.2 million shares of common stock,
                at an
                exercise price of $1.00 per share, were granted to two of our executive
                officers, two directors and one former
                director.  The
        grant
        of such stock options to the above-listed persons was not registered under
        the
        Securities Act of 1933, because the stock options either did not involve
        an
        offer or sale for purposes of Section 2(a)(3) of the Securities Act, in reliance
        on the fact that the stock options were granted for no consideration, or
        were
        offered and sold in transactions not involving a public offering, exempt
        from
        registration under the Securities Act pursuant to Section 4(2).
 
 25
 **Item
        6. Exhibits**
 
 See
        the
        Exhibit Index for a list of exhibits filed as part of this Quarterly Report
        on
        Form 10-Q, which Exhibit Index is incorporated herein by
        reference.
  26
  **SIGNATURES**
 
 In
        accordance with the requirements of the Exchange Act, the registrant caused
        this
        report to be signed on its behalf by the undersigned, thereunto duly
        authorized.
 
 TASKER
                CAPITAL
                CORP.Date: May
                15,
                2006
              By:
              /s/ Stathis
                KouninisStathis
                KouninisChief
                  Financial Officer,
                  Treasurer and Secretary
                (Principal Financial and Accounting
                  Officer)




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**Exhibit
      Index**




10.1
            Securities
                Purchase Agreement, dated as of January 26, 2006, by and among Tasker
                Capital Corp. and the Purchaser parties thereto (incorporated by
                reference
                to Exhibit 10.68 to the Registrant’s Form S-1 filed on April 26,
                2006)


10.2
            Registrations
                Rights Agreement, dated as of January 26, 2006, by and among Tasker
                Capital Corp. and the Purchaser parties thereto (incorporated by
                reference
                to Exhibit 10.69 to the Registrant’s Form S-1 filed on April 26,
                2006)


10.3
            Employment
                Agreement, dated as of February 9, 2006 between Tasker capital Corp.
                and
                Richard D. Falcone (incorporated by reference to Exhibit 10.70 to
                the
                Registrant’s Form S-1 filed on April 26,
                2006)


10.4
            Consultant
                Agreement, dated as of February 9, 2006 between Tasker capital Corp.
                and
                Gordon Davis (incorporated by reference to Exhibit 10.71 to the
                Registrant’s Form S-1 filed on April 26,
                2006)


10.5
            Employment
                Agreement, dated as of February 13, 2006 between Tasker capital Corp.
                and
                Stathis Kouninis (incorporated by reference to Exhibit 10.72 to the
                Registrant’s Form S-1 filed on April 26,
                2006)


10.6
            Separation
                Agreement and General Release, dated as of February 8, 2006 between
                Tasker
                capital Corp. and Robert D. Jenkins (incorporated by reference to
                Exhibit
                10.73 to the Registrant’s Form S-1 filed on April 26,
                2006)


21.1
            Subsidiaries
                of the registrant (incorporated by reference to Exhibit 21.1 to the
                Registrant’s Registration Statement on Form SB-2 filed on August 30,
                2005)


31.1
            Rule
                13a-14(a)/15d-14(a) Certification by Principal Executive Officer


31.2
            Rule
                13a-14(a)/15d-14(a) Certification by Principal Financial
                Officer


32.1
            Section
                1350 Certifications by Principal Executive Officer


32.2
            Section
                1350 Certifications by Principal Financial Officer






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