**UNITEDSTATES****SECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549**

**FORM10-Q**
| (Mark One)                                                                                                                                              |                                                                                     |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------|
|                                                                                                                                                    |                                                                                     |
| x                                                                                                                                                       | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934 |
|                                                                                                                                                    |                                                                                     |
| For the  quarterly period ended September 30, 2006                                                                                                      |
|                                                                                                                                                    |                                                                                     |
| o                                                                                                                                                       | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)  THE SECURITIES EXCHANGE ACT OF 1934   |
|                                                                                                                                                    |                                                                                     |
| For the  transition period from                       to |

 

Commission file number00-32019

**TASKER PRODUCTS 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)

**TASKER CAPITAL CORP.**(Former name, former address and former fiscal year, ifchanged since last report)

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

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2 ofthe Exchange Act.
| Large accelerated filer o | Accelerated filer o | Non-accelerated filer x |
|---------------------------|---------------------|-------------------------|

 

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

Thenumber of shares outstanding of the registrant’s common stock as of November10, 2006 was 105,339,975.

 

 

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**TASKERPRODUCTS CORP.**

**INDEX**
|                                    | ** **                                                                                                         | ** ** |
|------------------------------------|--------------------------------------------------------------------------------------------------------------------|------------|
|                               |                                                                                                               |       |
| **PART I. FINANCIAL  INFORMATION** |                                                                                                               |
|                               |                                                                                                               |       |
| **Item 1.**                        | **Financial Statements**                                                                                           |       |
|                               | Unaudited  Condensed Consolidated Balance Sheets as of September  30, 2006 and December 31, 2005              | 3          |
|                               | Unaudited  Condensed Consolidated Statements of Operations for the three months ended  September 30, 2006 and 2005 | 4          |
|                               | Unaudited  Condensed Consolidated Statements of Operations for the nine months ended  September 30, 2006 and 2005  | 5          |
|                               | Unaudited  Condensed Consolidated Statements of Cash Flow for the nine months ended  September 30, 2006 and 2005   | 6          |
|                               | Notes to  Unaudited Condensed Consolidated Financial Statements                                                    | 7          |
|                               |                                                                                                               |       |
| **Item 2.**                        | **Management’s  Discussion And Analysis Of Financial Condition And Results Of Operations**                    | 17         |
|                               |                                                                                                               |       |
| **Item 3.**                        | **Quantitative  And Qualitative Disclosures About Market Risk**                                                    | 31         |
|                               |                                                                                                               |       |
| **Item 4.**                        | **Controls And  Procedures**                                                                                       | 31         |
|                               |                                                                                                               |       |
| **PART II. OTHER  INFORMATION**    | 32                                                                                                                 |
|                               |                                                                                                               |       |
| **Item 1.**                        | **Legal Proceedings**                                                                                              | 32         |
|                               |                                                                                                               |       |
| **Item 1A.**                       | **Risk Factors**                                                                                                   | 33         |
|                               |                                                                                                               |       |
| **Item 2.**                        | **Unregistered  Sales Of Equity Securities And Use Of Proceeds**                                                   | 38         |
|                               |                                                                                                               |       |
| **Item  6.**                       | **Exhibits**                                                                                                       | 39         |
|                               |                                                                                                               |       |
| **SIGNATURES**                     | 39                                                                                                                 |

 

2

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**PART I —FINANCIAL INFORMATION**

**Item 1. Financial Statements**

**TASKERPRODUCTS CORP. AND SUBSIDIARIES****UNAUDITED CONDENSED CONSOLIDATED BALANCESHEETS****(In thousands except per share data)**
| ** **                                                                                                                                                                 | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                 | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| **ASSETS**                                                                                                                                                                 | ** ** | ** **             | ** ** | ** **            | ** ** |
|                                                                                                                                                                       |       |                   |       |                  |       |
| Current assets:                                                                                                                                                            |       |                   |       |                  |       |
| Cash and cash  equivalents                                                                                                                                                 |       | $                      | 76         |                  | $          | 1,037 |   |
| Marketable  securities                                                                                                                                                     |       | 1,250                  |       | —                |       |
| Accounts  receivable, net of allowance for doubtful accounts of $29 and $80 as of  September 30, 2006 and December 31, 2005, respectively                                  |       | 340                    |       | 155                   |       |
| Inventories, net  of reserve of $0 and $75 as of September 30, 2006 and December 31, 2005,  respectively                                                                   |       | 733                    |       | 1,351                 |       |
| Prepaid expenses  & other current assets                                                                                                                               |       | 265                    |       | 192                   |       |
| Total current  assets                                                                                                                                                      |       | 2,664                  |       | 2,735                 |       |
|                                                                                                                                                                       |       |                   |       |                  |       |
| Notes receivable                                                                                                                                                           |       | 709                    |       | 654                   |       |
| Property and equipment,  net                                                                                                                                               |       | 1,392                  |       | 1,525                 |       |
| Investment in equity  investee                                                                                                                                             |       | 652                    |       | 665                   |       |
| Intangible assets, net                                                                                                                                                     |       | 8,094                  |       | 21,562                |       |
| Goodwill                                                                                                                                                                   |       | 23,765                 |       | 41,677                |       |
| Deposit, net                                                                                                                                                               |       | 40                     |       | 36                    |       |
| Total assets                                                                                                                                                               |       | $                      | 37,316     |                  | $          | 68,854 |   |
|                                                                                                                                                                       |       |                   |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                             | ** ** | ** **             | ** ** | ** **            | ** ** |
| Current liabilities:                                                                                                                                                       |       |                   |       |                  |       |
| Convertible  debentures                                                                                                                                                    |       | $                      | —     |                  | $          | 194 |   |
| Accounts payable                                                                                                                                                           |       | 1,029                  |       | 1,740                 |       |
| Notes payable —  acquisition of IRL                                                                                                                                   |       | 446                    |       | 446                   |       |
| Other accrued  liabilities                                                                                                                                                 |       | 1,537                  |       | 1,612                 |       |
| Total current  liabilities                                                                                                                                                 |       | 3,012                  |       | 3,992                 |       |
|                                                                                                                                                                       |       |                   |       |                  |       |
| Long-term liabilities:                                                                                                                                                     |       |                   |       |                  |       |
| Notes payable —  shareholders                                                                                                                                         |       | 463                    |       | 444                   |       |
| Notes payable —  acquisition of IRL                                                                                                                                   |       | 371                    |       | 1,077                 |       |
| Other long term  liabilities                                                                                                                                               |       | 44                     |       | 53                    |       |
| Total long-term  liabilities                                                                                                                                               |       | 878                    |       | 1,574                 |       |
|                                                                                                                                                                       |       |                   |       |                  |       |
| Stockholders’ equity:                                                                                                                                                 |       |                   |       |                  |       |
| Common stock,  $0.001 par value; 300,000 shares authorized; 105,340 and 89,167 shares issued  and outstanding as of September 30, 2006 and December 31, 2005, respectively |       | 105                    |       | 89                    |       |
| Additional  paid-in capital                                                                                                                                                |       | 101,650                |       | 89,265                |       |
| Accumulated  deficit                                                                                                                                                       |       | (68,329                | )          | (26,066               | )          |
| Total  stockholders’ equity                                                                                                                                           |       | 33,426                 |       | 63,288                |       |
| Total liabilities and  stockholders’ equity                                                                                                                           |       | $                      | 37,316     |                  | $          | 68,854 |   |

 

See accompanying notes

3

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**TASKERPRODUCTS CORP. AND SUBSIDIARIES****UNAUDITED CONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS****(In thousands except per share data)**
| ** **                                        | ** ** | **THREE MONTHS ENDED  SEPTEMBER 30,** | ** ** |
|---------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                        | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
|                                              |       |                                                 |       |   |   |
| **Revenues**                                      |       | $                                                    | 531        |   | $ | 1,128 |   |
| **Cost of  goods sold**                           |       | 234                                                  |       | 328 |   |
| **Gross  margin**                                 |       | 297                                                  |       | 800 |   |
|                                              |       |                                                 |       |   |   |
| **Expenses**                                      | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Selling, general & administrative             |       | 2,551                                                |       | 2,979 |   |
| Write off of raw materials                        |       | 582                                                  |       | —- |   |
| Product development                               |       | 558                                                  |       | 756 |   |
| Depreciation and amortization                     |       | 276                                                  |       | 1,145 |   |
| **Total  expenses**                               | ** ** | **3,967**                                            | ** ** | **4,880** | ** ** |
|                                              |       |                                                 |       |   |   |
| **Loss  from operations**                         | ** ** | **(3,670**                                           | **)**      | **(4,080** | **)** |
|                                              |       |                                                 |       |   |   |
| Other income (expense):                           |       |                                                 |       |   |   |
| Interest income                                   |       | 52                                                   |       | 21 |   |
| Interest expense                                  |       | (20                                                  | )          | (33 | ) |
| Liquidated damages                                |       | (19                                                  | )          | (112 | ) |
| Other                                             |       | 6                                                    |       | (4 | ) |
| **Total  other expense, net**                     | ** ** | **19**                                               | ** ** | **(128** | **)** |
|                                              |       |                                                 |       |   |   |
| **Net  loss**                                     | ** ** | **$**                                                | **(3,651** | **)** | **$** | **(4,208** | **)** |
|                                              |       |                                                 |       |   |   |
| **Net loss per common share,  basic and diluted** | ** ** | **$**                                                | **(0.03**  | **)** | **$** | **(0.05** | **)** |

 

See accompanying notes

4

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**TASKERPRODUCTS CORP. AND SUBSIDIARIESUNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(In thousands except per share data)**
| ** **                                        | ** ** | **NINE MONTHS ENDED   SEPTEMBER 30,** | ** **  |
|---------------------------------------------------|------------|-----------------------------------------------------------|-------------|
| ** **                                        | ** ** | **2006**                                                  | ** **  | **2005** | ** ** |
|                                              |       |                                                      |        |   |   |
| **Revenues**                                      |       | $                                                         | 1,289       |   | $ | 1,433 |   |
| **Cost of  goods sold**                           |       | 447                                                       |        | 438 |   |
| **Gross  margin**                                 |       | 842                                                       |        | 995 |   |
|                                              |       |                                                      |        |   |   |
| **Expenses**                                      |       |                                                      |        |   |   |
| Selling, general & administrative             |       | 9,542                                                     |        | 9,011 |   |
| Write off of raw materials                        |       | 582                                                       |        | —- |   |
| Product development                               |       | 1,447                                                     |        | 1,742 |   |
| Depreciation and amortization                     |       | 1,430                                                     |        | 1,182 |   |
| Impairment of goodwill and intangible asset       |       | 30,152                                                    |        | — |   |
| **Total  expenses**                               | ** ** | **43,153**                                                | ** **  | **11,935** | ** ** |
|                                              |       |                                                      |        |   |   |
| **Loss  from operations**                         | ** ** | **(42,311**                                               | **)**       | **(10,940** | **)** |
|                                              |       |                                                      |        |   |   |
| Other income (expense):                           |       |                                                      |        |   |   |
| Interest income                                   |       | 190                                                       |        | 111 |   |
| Interest expense                                  |       | (69                                                       | )           | (188 | ) |
| Liquidated damages                                |       | (155                                                      | )           | (174 | ) |
| Loss on disposal of vehicle                       |       | (50                                                       | )           | — |   |
| Other                                             |       | 131                                                       |        | (14 | ) |
| **Total  other expense, net**                     | ** ** | **47**                                                    | ** **  | **(265** | **)** |
|                                              |       |                                                      |        |   |   |
| **Net loss**                                      | ** ** | **$**                                                     | **(42,264** | **)** | **$** | **(11,205** | **)** |
|                                              |       |                                                      |        |   |   |
| **Net loss per common share,  basic and diluted** | ** ** | **$**                                                     | **(0.41**   | **)** | **$** | **(0.16** | **)** |

 

See accompanying notes

5

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**TASKER PRODUCTS CORP. ANDSUBSIDIARIESUNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)**
| ** **                                                                    | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                    | ** ** | **September 30,**          | ** ** |
| ** **                                                                    | ** ** | **2006**                        | ** ** | **2005** | ** ** |
| **Cash  flows from operating activities:**                                    | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Net loss                                                                      |       | $                               | (42,264    | ) | $ | (11,205 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities:  |       |                            |       |   |   |
| Non-cash items                                                                |       |                            |       |   |   |
| Impairment charge of goodwill and intangible asset                            |       | 30,152                          |       | — |   |
| Stock option compensation expense                                             |       | 3,312                           |       | 484 |   |
| Depreciation and amortization                                                 |       | 1,430                           |       | 1,182 |   |
| Write off of raw materials                                                    |       | 582                             |       | — |   |
| Liquidated damages                                                            |       | 156                             |       | 55 |   |
| Gain on settlement of vendor obligations                                      |       | (63                             | )          | — |   |
| Loss on disposal of fixed assets                                              |       | 53                              |       | — |   |
| Iinterest payable on convertible debentures                                   |       | 24                              |       | — |   |
| Interest on note payable and note receivable                                  |       | (37                             | )          | — |   |
| Allowance for uncollectible accounts receivable                               |       | 19                              |       | — |   |
| Loss on equity investee                                                       |       | 13                              |       | 15 |   |
| Common stock, warrants and options for services                               |       | —                          |       | 2,890 |   |
| Changes in operating assets and liabilities:                                  |       |                            |       |   |   |
| Accounts receivable                                                           |       | (204                            | )          | (1,041 | ) |
| Inventories                                                                   |       | 36                              |       | (1,804 | ) |
| Prepaid expenses                                                              |       | (44                             | )          | (297 | ) |
| Prepaid commissions                                                           |       | (30                             | )          | (75 | ) |
| Accounts payable                                                              |       | (558                            | )          | 2,292 |   |
| Other accrued liabilities                                                     |       | (263                            | )          | 190 |   |
| Net cash used in  operating activities                                        |       | (7,686                          | )          | (7,313 | ) |
|                                                                          |       |                            |       |   |   |
| **Cash  flows from investing activities:**                                    | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Purchases of available-for-sale securities                                    |       | (18,100                         | )          | — |   |
| Proceeds from available-for-sale securities                                   |       | 16,850                          |       | — |   |
| Purchases of property and equipment                                           |       | (121                            | )          | (628 | ) |
| Repayment of notes                                                            |       | —                          |       | (3,551 | ) |
| Assets acquired                                                               |       | —                          |       | (2,460 | ) |
| Investments in equity investee                                                |       | —                          |       | (718 | ) |
| Payments for deposits and other                                               |       | (3                              | )          | (18 | ) |
| Net cash used in investing activities                                         |       | (1,374                          | )          | (7,375 | ) |
|                                                                          |       |                            |       |   |   |
| **Cash  flows from financing activities:**                                    | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Proceeds from  private placement                                              |       | 9,335                           |       | 6,435 |   |
| Payment of  private placement broker fees                                     |       | (593                            | )          | — |   |
| Exercise of  warrants/options                                                 |       | 63                              |       | 225 |   |
| Repayments on  note payable - IRL                                             |       | (706                            | )          | (186 | ) |
| Other                                                                         |       | —                          |       | 1 |   |
| Net cash  provided by financing activities                                    |       | 8,099                           |       | 6,475 |   |
|                                                                          |       |                            |       |   |   |
| **Net  decrease in cash and cash equivalents**                                |       | (961                            | )          | (8,213 | ) |
| **Cash  and cash equivalents, beginning of period**                           |       | 1,037                           |       | 14,225 |   |
|                                                                          |       |                            |       |   |   |
| **Cash  and cash equivalents, end of period**                                 |       | $                               | 76         |   | $ | 6,012 |   |
|                                                                          |       |                            |       |   |   |
| **Supplemental  disclosures of cash flow information:**                       | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Interest paid                                                                 |       | $                               | 32         |   | $ | 133 |   |
| **Supplemental  disclosures of non-cash investing and financing activities:** | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Fair value of warrants issued as private placement  fees                      |       | $                               | 593        |   | $ | — |   |
| Conversion of  debt and accrued interest into common stock                    |       | $                               | 194        |   | $ | 292 |   |

See accompanying notes

6

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**TASKER PRODUCTS CORP. ANDSUBSIDIARIESNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

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

Tasker Products Corp. (formerly known as TaskerCapital Corp.) was formed on May 13, 1996 and was in the developmentstage through December 31, 2005. The quarterlyperiod ended March 31, 2006 is the first period during whichTasker Products Corp. is considered an operating company.

In June 2006 theshareholders of Tasker approved an amendment to Tasker’s articles ofincorporation to change Tasker’s name to Tasker Products Corp. The name changebecame effective on June 28, 2006.

The accompanyingunaudited condensed consolidated financial statements of Tasker Products Corp.and its subsidiaries (collectively, “the Company”) as of September 30, 2006 andDecember 31, 2005 and for the three and nine month periods ended September 30,2006 and 2005 reflect all adjustments of a normal and recurring nature topresent fairly the consolidated financial position, results of operations andcash flows for the interim periods.  These unaudited condensed,consolidated financial statements have been prepared by the Company pursuant tothe instructions to Form 10-Q, and Article 10 of Regulation S-X.  Pursuantto such instructions, certain financial information and footnote disclosuresnormally included in such financial statements have been condensed or omitted.

These unaudited condensedconsolidated financial statements should be read in conjunction with theaudited consolidated financial statements of the Company and notes thereto,together with management’s discussion and analysis or plan of operations, containedin the Company’s Annual Report on Form 10-KSB/A for the year endedDecember 31, 2005. The results of operations for the three and nine monthperiods ended September 30, 2006 are not necessarily indicative of the resultsthat may occur for the year ending December 31, 2006.

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

**2. Liquidity — Going Concern**

At September 30, 2006,the Company had a total of approximately $1.3 million of cash, cash equivalentsand marketable securities. If the Company is unable to arrange new financing byDecember 2006, the Company will not have sufficient cash to support itsoperations and meet its obligations and it will be forced to consider thefurther restructuring of its operations, disposition of various assets, seekingof protection from its creditors, or ceasing of operations and liquidation.

Based upon the Company’sforecast of future revenues from its products in conjunction with the cash andmarketable securities on hand, cash expected to be generated from operationswill not provide adequate funding for the Company’s working capital over thenext three months. The Company is rapidly depleting its cash resources andits ability to continue to operate and grow its business is dependent uponobtaining new financing.  The cost of anynew financing may be prohibitive. While the Company has been in the process ofaggressively developing, marketing and selling its products, there can be noassurances that those efforts will be met with success in the marketplace orthat the timing of the Company’s efforts will be consistent with its cashavailability and burn rate. If the Company is unable to arrange new financingby December 2006, the Company will not have sufficient cash to support itsoperations and meet its obligations and it will be forced to consider thefurther restructuring of its operations, disposition of various assets, seekingof protection from its creditors, or ceasing of operations and liquidation. TheCompany anticipates that it will need approximately an additional $3 to $5million to support its operations and meet its obligations over the next twelvemonths. The Company is currently reviewing alternative methods of financing,including private issuances of debt and/or equity.

The Company has incurredlosses in its operations in each quarter since it changed its businessdirection in late 2002. For the three and nine months ended September 30, 2006the Company has incurred a net loss of approximately $3.7 million and $42.3million, respectively. The nine months loss is inclusive of an impairment chargefor goodwill and intangible assets of approximately $30.2 million. In additionthe Company has not generated positive cash flow from operations for the threeand nine months ended September 30, 2006 and 2005. The Company expects tocontinue to incur losses until it can generate sufficient revenue growth fromexisting and new business arrangements. To become profitable, the Company mustincrease revenue substantially and achieve and maintain positive gross andoperating margins. If the Company is not able to increase revenue and gross andoperating margins sufficiently to achieve profitability, the Company’s resultsof operations and financial condition will be materially and adverselyaffected.

Since the Company’sinception, the Company has funded operations and investing activities throughthe sale of common stock, warrants and convertible debt under several privateplacements. Requirements for liquidated damages under some of these private 

7

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placements may have an impact on the Company’s futureliquidity. To date the Company has satisfied and/or received waivers for theprovisions of a majority of the agreements that would have otherwise requiredthe Company to pay liquidated damages, At September 30, 2006, the Company’sderivative liability balance, related to the April 2004 and July 2004registration rights agreements, was approximately $150,000. Additionally,included in the other accrued liabilities at September 30, 2006 isapproximately $130,000 of interest and late fees and approximately $441,000 ofincurred liquidated damages associated with the April 2004 and theJuly 2004 convertible debentures. The Company’s  obligation to accrue liquidated damages underthese registration rights agreements ceased on April 30 and July 22,2006, respectively.

On April 26, 2006, theCompany filed a registration statement registering resale of securitiespurchased in the September 2005 and January 2006 private placements. Thisregistration statement was declared effective by the SEC on October 31, 2006.As it relates to the September 2005 private placement, the Companybelieves that it has used its best efforts to cause the registration statementto be declared effective and, therefore, pursuant to the terms of theSeptember 2005 registration rights agreement, the Company believes that isnot currently liable for liquidated damages as a result of the registrationstatement not being declared effective by May 23, 2006. Should the rightsholders dispute that the Company used its best efforts, and the Company eitheraccedes to their assertion or is found to not have used its best efforts, theestimated maximum amount of liquidated damages for which the Company would beliable, assuming (i) ineffectiveness from May 23, 2006 to the end ofthe period covered by the registration agreement and (ii) a stock price of$0.37 for periods subsequent to July 26, 2006, is approximately $270,000.

As it relates to theJanuary 2006 private placement, the Company, despite using its bestefforts, failed to have the registration statement declared effective by theSEC on or before October 26, 2006. Consequently, on November 25, 2006 theCompany is required to issue to each holder of the January 2006 privateplacement, shares and warrants equal to one percent of the respective number ofshares and warrants purchased by each holder or an aggregate of 138,859 sharesof common stock and warrants to purchase 138,859 shares of common stock.

**3. Impairment of Goodwill andIntangible Assets**

In the secondquarter of 2006, the Company’s management tested for impairment of itsintangible assets and its goodwill in accordance with Statement of FinancialAccounting Standards (SFAS) No. 144 “Accounting for the Impairment orDisposal of Long-Lived Assets” (SFAS No. 144) and Statement of FinancialStandards No. 142 “Goodwill and Other Intangible Assets” (SFASNo. 142) respectively. The testing was triggered by the following eventsand circumstances that constitute impairment indicators under the literature:

·        apreliminary expectation that third and fourth quarter 2006 originally projectedrevenues will not be attained;

·        a decreasein expected future cash flows; and

·        a declinein the market price of the Company’s common stock

Upon completion ofthe impairment tests, the Company recorded non-cash impairment charges toidentifiable intangible assets and goodwill of $12.2 million and $17.9 million,respectively.  Note 8 describes theimpact of accounting for the adoption of SFAS No. 142, “Goodwill and OtherIntangible Assets”, the impairment tests performed during the second quarter of2006 and the underlying assumptions.

**4. Share-Based Payments**

Effective January 1,2006, the Company adopted Statement of Financial Accounting StandardNo. 123 (revised 2004), “Share-Based Payment” (SFAS 123R). Under SFAS123(R), the Company is required to recognize, as expense, the estimated fairvalue of all share-based payments to employees. For the three and nine monthsended September 30, 2006, the Company recorded expense of approximately$481,000 and approximately $3.3 million, respectively, in connection with itsshare-based payment awards to its employees.

The Company adopted SFAS123R under the modified prospective method. Under this method, the Companyrecognized compensation expense for stock options awarded prior to January 1,2006, but vested in the nine months ended September 30, 2006 based on the grantdate estimate of fair value for those awards. Prior period financialinformation has not been restated.

8

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

The following tableillustrates the effect on net loss and loss per share as if the Company hadapplied the fair value recognition provisions of FASB Statement No. 123, “Accountingfor Stock Based Compensation,” to its share based payment arrangements for thethree and nine months ended September 30, 2005.
| ** **                                                                                                                                    | ** ** | **Three Months  Ended  Sept 30, 2005**     | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **(In thousands  except per  share data)** | ** ** |
| Net loss, as  reported                                                                                                                        |       | $                                                         | (4,208     | ) |
| Add: Stock-based  employee compensation expense included in reported net loss                                                                 |       | $                                                         | —     |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effects |       | $                                                         | (989       | ) |
| Pro forma net  loss                                                                                                                           |       | $                                                         | (5,197     | ) |
|                                                                                                                                          |       |                                                      |       |
| Basic and  diluted net loss per share, as reported:                                                                                           |       | $                                                         | (0.05      | ) |
| Pro forma basic and  diluted net loss per share:                                                                                              |       | $                                                         | (0.06      | ) |

 

9

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| ** **                                                                                                                                    | ** ** | **Nine Months   Ended  Sept 30, 2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **(In thousands  except per  share data)**  | ** ** |
| Net loss, as reported                                                                                                                         |       | $                                                          | (11,205    | ) |
| Add: Stock-based  employee compensation expense included in reported net loss                                                                 |       | $                                                          | 484        |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effects |       | $                                                          | (3,665     | ) |
| Pro forma net loss                                                                                                                            |       | $                                                          | (14,386    | ) |
|                                                                                                                                          |       |                                                       |       |
| Basic and diluted net  loss per share, as reported:                                                                                           |       | $                                                          | (0.16      | ) |
| Pro forma basic and diluted net loss per share                                                                                                |       | $                                                          | (0.21      | ) |

 

Compensation costassociated with employee stock options represented approximately $481,000 and$3.3 million, respectively, for the three and nine months ended September 30,2006. Stock based compensation expense increased by approximately $170,000 and$2.5 million from $311,000 and $795,000 for the three and nine months endedSeptember 30, 2005, respectively.

The compensation costassociated with these awards is recorded as expense within the same functionalexpense category as cash compensation for the respective employee is recorded.No tax benefit has been recognized with respect to this expense as we havedetermined in our evaluation of our tax assets that it is more likely thannot that we will not realize any benefit and have provided full valuationallowances.

The stock options werevalued taking into consideration a forfeiture rate of 14.5% based on historicalexperience and using a straight-line pro-rated method of valuation. Theresulting fair value is recorded as compensation cost on a straight line basisover the option vesting period. The assumptions made for purposes of estimatingfair value under the Black-Scholes model for options granted during the ninemonths ended September 30, 2006 were as follows:
| Dividend yield:                    |   | 0           | %      |
|------------------------------------|--------|-------------|--------|
| Expected term of options  (years): |   | 6           |   |
| Risk free interest  rate:          |   | 4.63% -5.04 | %      |
| Volatility:                        |   | 132%-135    | %      |

 

The Company’s estimate of an expected option term wasderived based on the average of the sum of the vesting term and the originalcontract term. The estimated stock price volatility was derived based on areview of the Company’s actual historic volatility for a period equal to theexpected term of its stock options awarded in the nine months ended September30, 2006, by reference to actual stock prices during this period and historicstock prices over the past five years. The risk free interest rate was based onthe five year Treasury note. The specific stock option valuation assumptionsused for awards granted prior to January 1, 2006 are as disclosed in theCompany’s 2005 annual report on Form 10-KSB/A, as filed with the SEC.

10

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A summary of stock option activity for the nine monthsended September 30, 2006 is as follows:
| ** **                                 | ** ** | **Number of  shares** | ** ** | **Weighted  average  exercise price  per share** | ** ** | **Weighted  average  remaining  contractual  term (years)** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|--------------------------------------------|------------|----------------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                 | ** ** | **(In thousands)**    | ** ** | ** **                                                 | ** ** | ** **                                                       | ** ** | **(In thousands)**             | ** ** |
| Outstanding,  December 31, 2005            |       | 16,541                     |       | $                                                          | 0.91       |                                                             |       |                                |       |   |
| Granted                                    |       | 5,645                      |       | $                                                          | 1.00       |                                                             |       |                                |       |   |
| Exercised                                  |       | (175                       | )          | $                                                          | 0.25       |                                                             |       |                                |       |   |
| Outstanding,  March 31, 2006               |       | 22,011                     |       | $                                                          | 0.94       |                                                             | 8.7        |                                | $          | 4,328 |   |
| Granted                                    |       | 530                        |       | $                                                          | 1.00       |                                                             |       |                                |       |   |
| Exercised                                  |       | (100                       | )          | $                                                          | 0.25       |                                                             |       |                                |       |   |
| Outstanding,  June 30, 2006                |       | 22,441                     |       | $                                                          | 0.94       |                                                             | 8.4        |                                | $          | 2,213 |   |
| Granted                                    |       | 500                        |       | $                                                          | 0.12       |                                                             |       |                                |       |   |
| Exercised                                  |       | (338                       | )          | $                                                          | 0.25       |                                                             |       |                                |       |   |
| Cancelled                                  |       | (1,625                     | )          | $                                                          | 1.11       |                                                             |       |                                |       |   |
| Options outstanding at  September 30, 2006 |       | 20,977                     |       | $                                                          | 0.92       |                                                             | 8.1        |                                | $          | —0 |   |

 

The weighted average grant date fair value of optionsgranted during the three months ended September 30, 2006 and 2005 was $0.12 and$2.50, respectively. The total intrinsic value of options exercised during thethree months ended September 30, 2006 was approximately $95,000. The totalintrinsic value of options exercised during the three months ended September30, 2005 was approximately $190,000.  Asof September 30, 2006 there was approximately $2.3 million of unrecognizedcompensation cost related to stock option awards that is expected to berecognized as expense over a weighted average period of 1.5 years.

The weighted averagegrant date fair value of options granted during the nine months ended September30, 2006 and 2005 was $0.65 and $2.98, respectively. The total intrinsic valueof options exercised during the nine months ended September 30, 2006 and 2005was approximately $217,000 and $1.6 million, respectively.  As of September 30, 2006 there wasapproximately $2.3 million of unrecognized compensation cost related to stockoption awards that is expected to be recognized as expense over a weightedaverage period of 1.5 years.

**5. Net Loss Per Common Share**

The following table setsforth the computation of basic and diluted net loss per common share for thethree and nine months ended September 30, 2006 and 2005.
| ** **                                                                        | ** ** | **Three Months Ended**                                  | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                                        | ** ** | **September 30,**                                            | ** ** |
| ** **                                                                        | ** ** | **(in thousands except per share data)** | ** ** |
| ** **                                                                        | ** ** | **2006**                                                          | ** ** | **2005** | ** ** |
| **Numerator  for basic & diluted net loss per share:**                        | ** ** | ** **                                                        | ** ** | ** ** | ** ** |
| Net loss                                                                          |       | $                                                                 | (3,651     | ) | $ | (4,208 | ) |
| Net loss available to common stockholders                                         |       | $                                                                 | (3,651     | ) | $ | (4,208 | ) |
|                                                                              |       |                                                              |       |   |   |
| **Denominator:**                                                                  | ** ** | ** **                                                        | ** ** | ** ** | ** ** |
| Denominator for basic & diluted net loss per  share - weighted-average shares |       | 105,206                                                           |       | 82,152 |   |
|                                                                              |       |                                                              |       |   |   |
| **Basic & diluted earnings  net loss per share:**                             |       | $                                                                 | (0.03      | ) | $ | (0.05 | ) |

 

11

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| ** **                                                                        | ** ** | **Nine Months Ended**                                   | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                                        | ** ** | **September 30,**                                            | ** ** |
| ** **                                                                        | ** ** | **(in thousands except per share data)** | ** ** |
| ** **                                                                        | ** ** | **2006**                                                          | ** ** | **2005** | ** ** |
| **Numerator  for basic & diluted net loss per share:**                        | ** ** | ** **                                                        | ** ** | ** ** | ** ** |
| Net loss                                                                          |       | $                                                                 | (42,264    | ) | $ | (11,205 | ) |
| Net loss available to common stockholders                                         |       | $                                                                 | (42,264    | ) | $ | (11,205 | ) |
| **Denominator:**                                                                  | ** ** | ** **                                                        | ** ** | ** ** | ** ** |
| Denominator for basic & diluted net loss per  share - weighted-average shares |       | 103,577                                                           |       | 68,316 |   |
| **Basic & diluted earnings  net loss per share:**                             |       | $                                                                 | (0.41      | ) | $ | (0.16 | ) |

 

As of September 30, 2006,20,977,368 options and 21,497,200 warrants were excluded from the computationof net loss per share because their effect would be anti-dilutive. As ofSeptember 30, 2005 18,374,999 options, 8,561,120 warrants, and 2,100,000 ofconvertible debentures were excluded from the computation of net loss per sharebecause the effect would be anti-dilutive.

**6. Marketable Securities**

The Company accounts formarketable securities in accordance with Statement of Financial AccountingStandards No. 115 “Accounting for Certain Investments in Debt and EquitySecurities” (SFAS 115). SFAS 115 establishes the accounting and reportingrequirements for all debt securities and for investments in equity securitiesthat have determinable fair values. All marketable securities must beclassified as one of the following: held-to-maturity, available-for-sale, ortrading.

The Company’s marketablesecurities consist of auction rate securities which are invested in agenciesand institutions affiliated with U.S. states. The Company’s auction rateinvestments are classified as available-for-sale and are recorded at fairvalue. Interest income on the Company’s marketable securities is recognized inthe statement of operations when earned. The cost of securities sold isdetermined based on the specific identification method.

The Company’savailable-for-sale investments may be offered for sale at auction every 28days. The auction rate securities have stated contractual maturities, whichrepresents the date they will be redeemed by the issuer, rangingfrom approximately 22 to approximately 40 years, and may, at the option ofthe issuer, be redeemed prior to the stated maturity date. As of September 30,2006, the Company had invested $1.25 million in marketable securities.

**7. Inventories**

Inventories consisted of the following:
| ** **         | ** ** | **September 30,**  | ** ** | **December 31,** | ** ** |
|--------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **         | ** ** | **2006**                | ** ** | **2005**              | ** ** |
| ** **         | ** ** | **(in thousands)** | ** ** |
| Raw Materials      |       | $                       | 338        |                  | $          | 956 |   |
| Finished Goods     |       | 395                     |       | 470                   |       |
| Inventory  Reserve |       | —                  |       | (75                   | )          |
|               |       | $                       | 733        |                  | $          | 1,351 |   |

 

The Company believes thatour Close CallTM product could be marketed more efficiently by a company eitheralready established in the industry or with more commercial resources.Therefore, the Company is  seeking tolicense and/or sell the Close CallTM brand or derivative applications. Inimplementing this approach and in an effort to reduce wharehousing expense theCompany adjusted the level of Close CallTM raw materials. Accordingly,  in October and November 2006 the Companydisposed 3.5 million  Close CallTM  empty bottles and related packaging material. Also, the Company iscurrently in the process of disposing an additional  2.6 million empty  bottles of Close CallTM. This disposalinitiative resulted in a write off of Close CallTM raw material inventory ofapproximately $582,000, net of  estimatedrecoveries, which is the primary reason for the reduction in the balance of rawmaterials.

Inventories are stated at the lower of cost or market.Cost is determined using the first-in, first-out (FIFO) method.

**8. Goodwill and Other IntangibleAssets**

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The Company accounts for goodwill and other intangibleassets at their estimated fair values in accordance with SFAS No. 142, “Goodwilland Other Intangible Assets”. In connection with the July 2005 assetacquisition, the Company recorded goodwill based on the excess of the purchaseprice over the identifiable tangible and intangible assets acquired andliabilities assumed. Goodwill is tested annually for impairment, or morefrequently when indicators of impairment are present. If the carrying amount ofthe goodwill exceeds its fair value, an impairment loss is recognized for anyexcess of the carrying amount of the reporting unit’s goodwill over the impliedfair value of that goodwill. The implied fair value of goodwill is determinedin the same manner as would occur in a purchase transaction, treating the fairvalue of the reporting unit as the equivalent of the purchase price anddeducting from that amount, the fair value of the net assets assigned to thereporting unit. The Company is the reporting unit for the purpose of thisimpairment calculation.

The Company considered the impairment indicatorspreviously discussed in Note 3 “Impairment of Goodwill and Intangible Asset”.With the assistance of an independent valuation firm, we determined the fairvalues of our reporting unit utilizing the discounted cash flow method. Theanalysis indicated that the carrying amount of our reporting unit exceeded itsfair value. Accordingly, under SFAS No. 142, we were required to performthe second step of the impairment testing for the reporting unit. This stepinvolved the adjustment of the assets and liabilities of the reporting unit totheir fair market values as of June 30, 2006, for purposes of comparingthe implied fair value of the reporting unit’s goodwill to the carrying amountof such goodwill. The analysis indicated a goodwill impairment of approximately$17.9 million. This amount was recorded in the second quarter of 2006.

The Company’sspecifically identifiable intangible assets, which consist exclusively of utilitypatents, are reported at cost, net of accumulated amortization. Theseintangible assets are being amortized over their estimated useful lives, whichis 11.5 years, at amortization rates that reflect the life of the underlyingpatent and the asset’s estimated economic benefit to the Company.

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

Accordingly, we initiatedan impairment analysis of our long-lived assets and determined that thecarrying value of these assets exceeded their projected undiscounted net cashflows. We calculated the fair values of our long-lived assets based on thediscounted cash flow method . Cash flow projections were based on management’sforecast relating to the intellectual properties and life was based on theremainder of the underlying patent life. Under the relief from royalty valuationmethod, we evaluate what the royalty we would have to pay would be, if we didnot own the rights to the patent. The assumptions underlying the method includea projection of sales related to the utilization of the patents and what theroyalty rate we would expect to pay resulting in a total royalty amount,adjusted for an appropriate discount rate and amortization benefit. The fairvalues indicated that an impairment of the Company’s intangible assets existed.Accordingly, during the second quarter of 2006 the Company recorded animpairment charge of approximately $12.2 million related to the acquiredutility patents. The amounts are recorded within impairment of goodwill andintangible assets on the consolidated statements of operations.

The approximate netcarrying value of the goodwill and other intangible assets at September 30,2006 and December 31, 2005 are as follows:
| ** **                 | ** ** | **September 30, 2006** | ** ** |
|----------------------------|------------|----------------------------------|------------|
| ** **                 | ** ** | **(in thousands)**          | ** ** |
| ** **                 | ** ** | **Gross  carrying  amount**      | ** ** | **Impairment  charge** | ** ** | **Accumulated  amortization** | ** ** | **Net  carrying  value** | ** ** |
| Amortized  utility patents |       | $                                | 22,505     |   | $ | 12,239 |   | $ | 2,172 |   | $ | 8,094 |   |
| Unamortized  goodwill      |       | $                                | 41,677     |   | $ | 17,913 |   | $ | — |   | $ | 23,764 |   |
| Total intangible assets    |       | $                                | 64,182     |   | $ | 30,152 |   | $ | 2,172 |   | $ | 31,858 |   |

 
| ** **                 | ** ** | **December 31, 2005** | ** ** |
|----------------------------|------------|---------------------------------|------------|
| ** **                 | ** ** | **(in thousands)**         | ** ** |
| ** **                 | ** ** | **Gross  carrying  amount**     | ** ** | **Accumulated  amortization** | ** ** | **Net  carrying  value** | ** ** |
| Amortized  utility patents |       | $                               | 22,505     |   | $ | 943 |   | $ | 21,562 |   |
| Unamortized  goodwill      |       | $                               | 41,677     |   | $ | — |   | $ | 41,677 |   |
| Total intangible assets    |       | $                               | 64,182     |   | $ | 943 |   | $ | 63,239 |   |

 

13

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For the three and nine months ended September 30,2006, the Company recorded amortization expense of approximately $207,000 andapproximately $1.2 million respectively, related to the intangible assets.

Estimated amortization expense for the intangibleasset for the remaining quarter of the current fiscal year, and subsequentfiscal years, is as follows:
| ** **          | ** ** | **(in thousands)** | ** ** |
|---------------------|------------|-------------------------|------------|
| 2006                |       | $                       | 207        |   |
| 2007                |       | $                       | 827        |   |
| 2008                |       | $                       | 827        |   |
| 2009                |       | $                       | 827        |   |
| 2010                |       | $                       | 827        |   |
| 2011 and thereafter |       | $                       | 4,579      |   |

 

**9. Derivative Instruments**

The Company hasissued and outstanding several financial instruments with embedded derivativefeatures consisting of convertible debt and warrants.****TheCompany analyzes these financial instruments in accordance with Statement ofFinancial Accounting Standards (“SFAS”) No. 133 and Emerging Issues task Force(“EITF”) Issue Nos. 00-19 and 05-02 to determine if these hybridcontracts have embedded derivatives that must be bifurcated. In addition, freestanding warrants are accounted for as either equity or liabilities inaccordance with the provisions of EITF Issue No. 00-19.

EITF Issue No.05-4 “The Effect of a Liquidated Damages Clause on a FreestandingFinancial Instrument Subject to EITF Issue No. 00-19, “Accounting forDerivative Financial Instruments Indexed to, and Potentially Settled in, aCompany’s Own Stock” addresses financial instruments, such as convertible notesand stock purchase warrants, which are accounted for under EITF 00-19,that are issued with a corresponding right to have these securities registeredpursuant to a registration rights agreement that includes a liquidated damagesclause.  Alternative accounting treatments ofregistration rights are discussed in EITF Issue No. 05-4.  One alternative treatment discussed in EITFIssue No. 05-4 could require the warrants, the convertible debt and theregistration rights agreement to be treated as a single financial instrument.If the EITF implements this approach, the convertible debt and the warrants theCompany has issued would need to be recorded as a liability at fair value andchanges in the fair value of the liability would need to be recorded in thestatement of operations each period. Implementation of this approach may have amaterial non-cash impact to the Company’s consolidated financial statement.Since no consensus on EITF Issue No. 05-4 has been reached, the Companyhas adopted View C as described in the EITF Issue No. 05-4 Issue SummaryNo. 1. Under View C, registration rights agreements and the associatedfinancial instruments are accounted for as separate instruments. Accordingly,the Company has given only prospective application to this guidance.  Further impact on its consolidated financialstatements of adopting the standard, if any, will follow the transitionguidance when released.

In April and July2004, the Company entered into private placement agreements for convertibledebentures, registration rights agreements and warrants.  Based on the interpretive guidance in EITFIssue No. 05-4 due to an uncapped liquidated damages provision in theregistration rights agreements, the Company determined that the registrationrights are derivative liabilities that should be bifurcated from the relatedfinancial instruments.  Accordingly, the estimated fair value of theregistration rights derivative of approximately $244,000 was recorded as aliability as of October 1, 2005, the beginning of the first fiscal period afterSeptember 15, 2005, the date that EITF postponed further deliberations.

In connection with the Company’s December 2004 andJanuary 2006 private placements, the Company’s estimated fair value of therelated registration rights derivative was immaterial at the inception and at eachreporting date since and the Company has not recorded a liability. At eachreporting period, the Company calculates the estimated fair value of theregistration rights derivatives. If the underlying assumptions of thecalculation change such that the estimated fair value is not immaterial, theCompany will record a liability at that time. In connection with the Company’sSeptember 2005 private placement, the Company’s estimated fair value of therelated registration rights derivative at its inception was immaterial and theCompany did not record a liability. Subsequently, in connection with theJanuary 2006 private placement, the Company amended its September 2005agreement with the rights holder to waive the liquidated damages relating toits inability to have such registration statement declared effective by May 23,2006. On April 26, 2006, the Company filed a registration statement registeringresale of securities purchased in the September 2005 and January 2006 privateplacements. This registration statement was declared effective by the SEC on October 31, 2006. As it relates tothe September 2005 private placement, the Company believes that it hasused its best efforts to cause the registration statement to be declaredeffective and, therefore, pursuant to the terms of the September 2005registration rights agreement, the Company believes 

14

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that is not currently liable for liquidated damages asa result of the registration statement not being declared effective byMay 23, 2006. Should the rights holders dispute that the Company used itsbest efforts, and the Company either accedes to their assertion or is found tonot have used its best efforts, the estimated maximum amount of liquidateddamages for which the Company would be liable, assuming (i) ineffectivenessfrom May 23, 2006 to the end of the period covered by the registrationagreement and (ii) a stock price of $0.37 for periods subsequent toJuly 26, 2006, is approximately $270,000.

As it relates tothe January 2006 private placement, the Company failed to have theregistration statement declared effective by the SEC on or before October 26,2006. Consequently, on November 25, 2006 the Company is required to issue toeach holder of the January 2006 private placement, shares and warrants equalto one percent of the respective number of shares and warrants purchased byeach holder or an aggregate of 138,859 shares of common stock and warrants topurchase 138,859 shares of common stock.

Changes in the estimatedfair value of the registration rights derivative liability are recorded in theconsolidated statement of operations. There was no change in the fair value ofthe registration rights derivative liability in the third quarter of 2006. AtSeptember 30, 2006, the derivative liability was approximately $150,000 and wasreported under other accrued liabilities.

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

**10. Contractual Obligations andCommitments**

The Company has thefollowing commitments as of September 30, 2006, which are comprised primarilyof a research and development fee contract, consulting and employmentcontracts, vendor agreements, notes payable, as well as numerous operatingleases.
| ** **                                                 | ** ** | **(in thousands)**   | ** ** |
|------------------------------------------------------------|------------|---------------------------|------------|
| ** **                                                 | ** ** | **Payments  Due by** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                 | ** ** | **Period**                | ** ** | **Less Than** | ** ** | **1-3** | ** ** | **3-5** | ** ** | **More Than** | ** ** |
| **Contractual Obligations**                           | ** ** | **Total**                 | ** ** | **1 Year** | ** ** | **Years** | ** ** | **Years** | ** ** | **5 Years** | ** ** |
| Research &  development (“R&D”) fees (1) |       | $                         | 75         |   | $ | 75 |   | $ | — |   | $ | — |   | $ | — |   |
| Consulting  agreements                                     |       | 340                       |       | 90 |   | 250 |   | — |   | — |   |
| Employment  agreements (2)                                 |       | 1,550                     |       | 195 |   | 1,355 |   | — |   | — |   |
| Vendor  agreements                                         |       | 36                        |       | 5 |   | 31 |   | — |   | — |   |
| Operating leases                                           |       | 1,158                     |       | 92 |   | 957 |   | 109 |   | — |   |
| Note(s) payable                                            |       | 1,207                     |       | 114 |   | 1,085 |   | 8 |   | — |   |
| **Total**                                                  | ** ** | **$**                     | **4,366**  | ** ** | **$** | **571** | ** ** | **$** | **3,678** | ** ** | **$** | **117** | ** ** | **$** | **—** | ** ** |

----

(1)           On January 26, 2006, R&D feespayable under a Patent and Sub-License Agreement with pHarlo IP were amended sothat these fees are (i) payable on a quarterly basis within 30 days after theend 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 year2006, 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 for2009 and $10,000,000 for 2010 and beyond. In the third quarter of 2006 theCompany paid, under this agreement, approximately $64,000 of R&D fees.

(2)           In the first quarter of fiscal 2006,the Company entered into new employment agreements with its current executivemanagement. During the nine months ended September 30, 2006 the Companyterminated several of its existing employment agreements with its former seniorand other management personnel. As of September 30, 2006 the revised estimatedfuture minimum annual compensation under these employment agreements, includingthe new and terminated agreements for 2006, 2007, 2008 and 2009, isapproximately $195,100, $707,800, $597,800 and $49,000, respectively.

**11. Related Party Transactions**

15

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In2004, the Company entered into an Exclusive Field of Use License Agreement andProduct Sale Agreement with Wynn Starr Special Products, LLC. Under the termsof this agreement, as amended through October 20, 2006, the Companygranted Wynn Starr the exclusive, worldwide right to market and distributeproducts used as post-harvesting processing aids, or chemicals that assist withmicrobial reduction and shelf life extension without changing foodcharacteristics for the poultry industry based on the pHarlo technology. Inreturn for this license, Wynn Starr has agreed to pay the Company a royalty of70% of the net sales price for each gallon of licensed products sold by WynnStarr for which payment is received from customers and in no event less thanmanufacturing cost plus 40% of manufacturing cost. However, the minimumpurchase price to Wynn Starr may be adjusted to the extent manufacturing costvaries by more than 5%. Net sales price and licensed products are defined inthe Exclusive Field of Use License Agreement and Product Sales Agreement. As ofSeptember 30, 2006 no royalties were due and none had been paid to the Company  under this royalty arrangement. Steven B.Zavagli, a former member of the Company’s board of directors, is the founder,Chairman and the Chief Executive Officer of Wynn Starr and Wynn Starr’sultimate parent company, Wynn Starr Flavors, Inc.

TheCompany paid Mr. Gordon O. Davis, the former Chairman of the board ofdirectors, approximately $60,000 for consulting services during the nine monthsended September 30, 2006.

**12.Sale of Equity Securities**

In connection withthe January 2006 private placement, the Company obtained waivers of all claimsfor liquidated damages relating to the inability of the Company to have theregistration statement registering resale of securities purchased in theSeptember 2005 private placement declared effective by the deadline specifiedin the applicable registration rights agreement. The Company received thesewaivers from shareholders representing more than a majority of all outstandingsecurities issued in connection with the September 2005 private placement. Inconsideration for obtaining the waiver, the Company repriced the warrantsissued to shareholders providing the waiver such that the exercise price of thewarrants issued in connection with the September 2005 private placement wasreduced from $3.00 to $1.00.  Under the waiver, the date by which theregistration statement covering resale of the securities purchased in theSeptember 2005 private placement was required to be declared effective wasextended to May 23, 2006.

On April 26, 2006, theCompany filed a registration statement registering resale of securitiespurchased in the September 2005 and January 2006 private placements. Thisregistration statement  was declaredeffective by the SEC on October 31, 2006. As it relates to theSeptember 2005 private placement, the Company believes that it has usedits best efforts to cause the registration statement to be declared effectiveand, therefore, pursuant to the terms of the September 2005 registrationrights agreement, the Company believes that is not currently liable forliquidated damages as a result of the registration statement not being declaredeffective by May 23, 2006. Should the rights holders dispute that theCompany used its best efforts, and the Company either accedes to theirassertion or is found to not have used its best efforts, the estimated maximumamount of liquidated damages for which the Company would be liable, assuming(i) ineffectiveness from May 23, 2006 to the end of the periodcovered by the registration agreement and (ii) a stock price of $0.37 forperiods subsequent to July 26, 2006, is approximately $270,000.

As it relates tothe January 2006 private placement, the Company failed to have theregistration statement declared effective by the SEC on or before October 26,2006. Consequently, on November 25, 2006 the Company is required to issue toeach holder of the January 2006 private placement, shares and warrantsequal to one percent of the respective number of shares and warrants purchasedby each holder or an aggregate of 138,859 shares of common stock and warrantsto purchase 138,859 shares of common stock.

## **13.Restructuring Charges**

During the fourth quarterof fiscal year 2005 the Company recorded and paid approximately $29,000 ofseverance to one executive and five staff members. Seven more staff memberswere terminated but no severance was paid to them during this time period.Additionally, in a separate cost reduction action during the first quarter offiscal year 2006, the Company recorded severance costs of approximately$224,000 for one executive and four administrative staff members whoseemployment was terminated as a result of the Company’s effort to reduceoperating costs. In the first fiscal quarter of 2006, the Company paid $117,000of the $224,000 severance obligation it recorded in the same quarter. Consequently,the severance obligation accrual balance as of March 31, 2006 was $107,000. Inthe second fiscal quarter of 2006 the Company paid $92,000 of the $107,000severance obligation accrual that remained as of March 31, 2006. The remaining$15,000 of severance obligation outstanding as of June 30, 2006 was paid inJuly 2006. During the third quarter of fiscal year 2006 the Company revised thesalary structure of three of its employees and  terminated sevenother employees. In relation to these reductions the Company recorded and paidin full in the third quarter of 2006 severance costs of approximately $35,000.No severance accrual remained at the end of third quarter of fiscal year 2006related to the first and third fiscal quarter cost reduction actions.

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**14.  Segments — Enterprise Wide Disclosures**

The Company owns severalutility patents that allow it to produce, market and distribute certain productapplications related to these utility patents. In 2005, the Company beganselling two product applications, Unifresh® Footbath and Close CallTM. The ChiefOperating Decision Maker (CODM) of the Company is the President and CEO. Theoperating results of each product application, other than for revenue, are notseparately tracked or reported. Operating results by product application arenot reviewed by the CODM because discrete financial information is notavailable. Consequently, as permitted by the provisions of SFAS No. 131, “DisclosureAbout Segments of an Enterprise and Related Information,” the Company has onereportable segment for financial statement purposes.

*Revenueby Product*

The Company’s revenue byproduct is as follows:
| ** **               | ** ** | **Three Months Ended Sept 30,** | ** ** | **Nine Months Ended Sept 30,** | ** ** |
|--------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **               | ** ** | **2006**                                            | ** ** | **2005**                                           | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **               | ** ** | **(in thousands)**                             | ** ** |
| Unifresh®  Footbath |       | $                                                   | 488        |                                               | $          | 1,000 |   | $ | 1,094 |   | $ | 1,000 |   |
| Close CallTM         |       | 20                                                  |       | 128                                                |       | 172 |   | 433 |   |
| Poultry  Processing      |       | 23                                                  |       | —                                             |       | 23 |   | — |   |
|                     |       | $                                                   | 531        |                                               | $          | 1,128 |   | $ | 1,289 |   | $ | 1,433 |   |

##  

## *Dependence on Certain Customers*

The Company’s dependenceon certain customers as a percentage of total revenue is as follows:
| ** ** | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended   September 30,** | ** ** |
|------------|------------|------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** ** | ** ** | **2006**                                             | ** ** | **2005**                                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
| Customer A |       | 48.6                                                 | %          | —                                                    | %          | 31.7 | % | — | % |
| Customer B |       | 21.3                                                 | %          | —                                                    | %          | — | % | — | % |
| Customer C |       | —                                               | %          | —                                                    | %          | 18.2 | % | — | % |
| Customer D |       | —                                               | %          | 61.6                                                      | %          | — | % | 48.5 | % |

 

**Item 2.Management’s Discussion And Analysis of Financial Condition And Results OfOperations**

This Form 10-Q, containsforward-looking statements, which include all statements regarding our expectedfinancial position, results of operations, cash flows, financing plans, strategy,budgets, capital and other expenditures, competitive positions, growthopportunities, benefits from new technology, plans and objectives ofmanagement, and markets for stock. These forward-looking statements are basedlargely on our expectations and, like any other business, are subject to anumber of risks and uncertainties, many of which are beyond our control. Insome 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.

Forward-lookingstatements are not guarantees of performance. They involve risks, uncertaintiesand assumptions. Future results may differ materially from those expressed inthe forward-looking statements. Many of the factors that will determine theseresults are beyond our ability to control or predict. Current and potentialinvestors are cautioned not to put undue reliance on any forward-lookingstatements, which speak only to the date made.

For a discussion of someof the factors that may cause actual results to differ materially from thosesuggested by the forward-looking statements, please read carefully theinformation under Part II, Item 1A of this Form 10-Q. Some of the risks thatcurrent and potential investors should be aware of include, but are not limitedto, the following:

·                     If we areunable to ****obtain new financing by December 2006, our liquidity position will becomesignificantly impaired****;

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·                     We do notmaintain effective controls and procedures and we consistently had materialweaknesses in our internal controls over financial reporting;

·                     Our limitedoperating history in our present markets;

·                     Our limitedexperience in marketing our products;

·                     Our need toobtain regulatory approval for the manufacturing and sale of some of ourcurrent products and products under development;

·                     Our abilityto protect our intellectual property rights;

·                     Intensecompetition in our current markets; and

·                     Our products,like most regulated products, may be subject to various enforcement actions,which could require, among other things, the relabeling, reformulation orrecall of products and/or the submission of additional information in supportof product claims or safety, or punitive actions, any of which could harm ourreputation and business.

The identification inthis document of factors that may affect future performance and the accuracy offorward-looking statements is meant to be illustrative and by no meansexhaustive. All forward-looking statements should be evaluated with theunderstanding of their inherent uncertainty.

**Company Overview**

We are a manufacturer,distributor and marketer of products using a patented process, which we referto as the “pHarlo technology,” that utilizes a highly charged and acidified,yet stable and safe, solution that enables copper sulfate, a compound with bacteriostaticproperties, to remain active throughout a wide range of pH values. We own theutility patent applications and provisional patent applications associated withthe pHarlo technology and have entered into a sub-license agreement for thebase patents associated with the pHarlo technology, in the following fields ofuse:

·                     AntimicrobialComposition for Pre-Harvest and Post-Harvest Treatment of Plants and Animals

·                     AntimicrobialFood Additive and Treatment for Cooked Food, Water and Wastewater

·                     AntimicrobialProcessing Aid and Food Additive (US Provisional Application)

·                     OralHealth Care Drink and Method for Reducing Malodors

·                     SkinCare Composition for Dermatological Disorders including burn and wrinkle creams(US Provisional Application) Hangover Remedy and Alcohol Abatement Composition

We currently market:

·                     Unifresh ®Footbath, a grooming aid for dairy cows;

·                     Close CallTM,an oral hygiene breath drink;

·                     TaskerPacific BlueTM Seafood Wash; and

·                     Tasker Blue,an antimicrobial processing aid in poultry scalders.

In December 2005 wedecided to concentrate our efforts on the development and commercialization ofour poultry processing products, seafood processing applications, and Unifresh®Footbath and Unifresh® Pen Spray products. We also decided to seek to licenseand/or sell the Close CallTM brand and derivative applications.

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### *Unifresh®Footbath*

We currently marketUnifresh®Footbath concentrate, a grooming aid that helps clean anddisinfect the hooves of dairy cows. Because of the bacteriostatic properties ofthe pHarlo technology, this product helps control bacteria that infect thehooves of cows and cause interdigital dermatitis, or a bacterial infection ofthe skin on a cow’s hoof, and interdigital papillomatosis, or a disease thataffects a cow’s hoof that may cause severe lameness, decreased milk yield, bodyweight loss, decreased reproductive performance and increased veterinaryexpenses. Unifresh ®Footbath concentrate was launched during the thirdquarter of 2005. In the fourth quarter of 2005, we discovered that our Unifresh®Footbath product’s effectiveness was diminished in water that hadabnormally high alkaline content, a term commonly used to refer to themeasurement of pH, for example, of soil. We reformulated our Unifresh®Footbath concentrate with the addition of a compound that neutralizesalkali, or a type of base that has a pH greater than 7, which can increase thepH of water or soil. In the first quarter of 2006, we introduced our enhancedformulation to the market. It is currently being sold to dairy farms throughoutthe U.S. through our sales force, independent brokers and farm productdistributors. We currently market the product as a grooming aid. No federalagency approvals are required for marketing this product.

### *Close CallTM*

Our oral hygiene drink,Close CallTM, is marketed as an oral hygiene breath drink that eliminates odorsfrom tobacco, garlic, onion and alcohol. The FDA requires companies makingstructure or function claims relating to a dietary supplement product, such asClose CallTM, to “certify that the firm has substantiation that the claim istruthful and not misleading.” While the FDA does not require any presentationof this support, it does require a notice of dietary supplement ingredients andclaims. This is currently being prepared. We currently market the product as abeverage, but there can be no assurance that the FDA will agree with thischaracterization or the product claims, which could result in additionalregulatory requirements and potentially subject us to a variety of enforcementactions.

We believe that our CloseCallTM product could be marketed more efficiently by a company either alreadyestablished in the industry or with more commercial resources. Therefore, weplan to seek to license and/or sell the Close CallTM brand or derivativeapplications.

*Poultry Processing*

In August 2005, we began the in-plant commercialverification process for USDA approval to use the pHarlo technology in thescalder process of poultry processing. In January 2006 we received initialconsent from the USDA to continue in-plant testing in two additional plants. Wecompleted these tests and we submitted their results of the tests to USDA forreview in the second quarter of 2006. In August 2006 we received a letter fromthe USDA indicating that it had no objection to the use of our product as anantimicrobial processing aid in poultry scalders. This letter enables us tobegin commercialization of the product in the United States.

### *SeafoodProcessing Products*

We recently beganmarketing the pHarlo technology for use in pathogen reduction, or a process bywhich certain bacteria that cause disease or illness are reduced in number oreliminated, and shelf life extension, or the act of increasing the length ofthe time a product can spend during processing, distribution and retail beforebecoming unacceptable for consumption, in seafood processing, subject to thereceipt of any necessary regulatory approvals. Our product, Tasker Pacific BlueSeafood Wash, has been tested at the North Carolina State Center for MarineScience & Technology, Virginia Tech University and Mississippi StateUniversity on shrimp, mahi mahi, salmon, flounder, scallops and catfish. Theresults of these studies indicated that the pHarlo technology could possiblydouble the shelf life on catfish filets and significantly increase the shelflife of scallops.

**Financial Overview**

As a result of anacquisition in July 2005, we now own certain utility patent applications andprovisional patent applications associated with the pHarlo technology includingfor pre-harvest and post-harvest food processing, skin care, pet products,hangover remedy, alcohol abatement and water purification applications.

We had a net loss ofapproximately $3.7 million in the three months ended September 30, 2006compared to a net loss of $4.2 million in the three months ended September 30,2005. Excluding the stock based compensation expense of approximately $481,000, our net loss for the three months ended September 30, 2006 decreased byapproximately $700,000 to $3.2 million as compared to a net loss of $3.9million, excluding stock based compensation expense of $311,000, for the threemonths ended September 30, 2005.

 

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We had a net loss ofapproximately $42.3 million in the nine months ended September 30, 2006compared to a net loss of $11.2 million in the nine months ended September 30,2005. Excluding the charge for the impairment of goodwill and intangible assetsof approximately $30.2 million and the stock based compensation expense of $3.3million our net loss for the nine months ended September 30, 2006 decreased byapproximately $2 million to $8.8 million as compared to a net loss of $10.8million, excluding stock based compensation expense of approximately $796,000,for the nine months ended September 30, 2005. The increase in stock basedcompensation expense is due to the adoption of SFAS 123R “Share Based Payment”on January 1, 2006. As a result of the adoption of SFAS 123(R), the fair valueof all stock-based compensation is now recorded as expense in our financialstatements, rather than as a footnote disclosure.

*Liquidity- Going Concern*

Based upon our forecastof future revenues from our products in conjunction with the cash andmarketable securities on hand, cash expected to be generated from operationswill not provide adequate funding for our working capital over the next three months. Weare rapidly depleting our cash resources and our ability to continue to operateand grow our business is dependent upon obtaining new financing. The cost ofany new financing may be prohibitive. While we have been in the process ofaggressively developing, marketing and selling our products, there can be noassurances that those efforts will be met with success in the marketplace orthat the timing of our efforts will be consistent with our cash availabilityand burn rate. If we are unable to arrange new financing by December 2006, wewill not have sufficient cash to support our operations and meet ourobligations and we will be forced to consider the further restructuring of ouroperations, disposition of various assets, seeking of protection from ourcreditors, or ceasing of operations and liquidation. We anticipate that we willneed approximately $3 to $5 million to support our operations and meet ourobligations over the next twelve months. We are currently reviewing alternativemethods of financing, including private issuances of debt and/or equity.

**Impairment of goodwill and intangible assets**

Goodwill

We account for goodwill and other intangible assets attheir estimated fair values in accordance with SFAS No. 142, “Goodwill andOther Intangible Assets”. In connection with the July 2005 asset acquisition,we recorded goodwill based on the excess of the purchase price over theidentifiable tangible and intangible assets acquired and liabilities assumed.Goodwill is tested annually for impairment, or more frequently when indicatorsof impairment are present. If the carrying amount of the goodwill exceeds itsfair value, an impairment loss is recognized for any excess of the carryingamount of the reporting unit’s goodwill over the implied fair value of thatgoodwill. The implied fair value of goodwill is determined in the same manneras would occur in a purchase transaction, treating the fair value of thereporting unit as the equivalent of the purchase price and deducting from thatamount, the fair value of the net assets assigned to the reporting unit. TheCompany is the reporting unit for the purpose of this impairment calculation.

In the second quarter of 2006 we tested for impairmentof its goodwill in accordance with SFAS No. 142. The testing was triggeredby a preliminary expectation that third and fourth quarter 2006 originallyprojected revenues will not be attained, a decrease in expected future cashflows and a decline in the market price of our common stock. These events andcircumstances constitute impairment indicators under the literature. Uponcompletion of the impairment tests, we recorded non-cash impairment charge togoodwill of $17.9 million. At June 30, 2006, the carrying value of goodwillbefore the impairment charge was approximately $41.7 million and the carryingvalue of the reporting unit was $68.2 million. The estimate of the fair value of the reporting unit, and afterrecording impairments to our intangible assets and goodwill, the carryingvalue, was $38.1 million, and our estimate of the market capitalization basedon the closing price of the common stock on June 30, 2006 was $51.5 million,which exceeded our estimate of fair value by $13.4 million. At June 30, 2006,after recording an impairment charge to the intangible assets of $12.2 millionbased on their estimated fair value, the carrying value of the reporting unitwas $56.0 million, resulting in an impairment charge to goodwill of $17.9million. After the impairment charge, the carrying value of the goodwill was$23.8 million.

The fair value of thereporting unit was based on the income approach using a discounted cash flowmodel. Cash flow projections were based on our revenue projections for ourproducts. As a result of the circumstances outlined in the following, wereduced our revenue projections by 68% in 2006 and in 2007, 54% in 2008, 46% in2009 and 43% in 2010. We projected revenue growth rates of 300% in 2007, ascompared to the significantly reduced revenue amount base in 2006, and fromreduced revenue levels, growth rates per year of 80%, 55% and 38% in 2008, 2009and 2010, respectively, a growth rate of 7% per year in 2011 through 2015 and aterminal growth rate of 5% for all subsequent years. The majority of thereduction in the amount of revenue was due to the indefinite delay in theimplementation of the enforcement framework of EU regulations regarding thewelfare of poultry birds. We removed from our projections all revenue relatedto our poultry pen spray product since we are not certain of the timing of theenforcement of these regulations. Additionally, in order for this product to besold in the U.S., we need to make additional 

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revisions to its formulation that will require timeand additional resources. Consequently, we have not included any U.S. revenuein our projections. We also reduced our projections related to our UnifreshFootbath product since our distributors were unable to devote the level of saleand technical personnel to promote and educate our customers on the benefits ofour products that we originally anticipated. On the other hand, the expectationof receipt of USDA approval in the third quarter of 2006 (received in August2006) for the application of our poultry processing wash in the scalder processresulted in the increase of projected revenues related to this product.  However, we are still in the process ofcompleting the commercial verification process for the poultry processing washand the Tasker Pacific Blue Seafood Wash as we do not yet have a proven recordof acceptance of our products by our target audience. Customers in our industryare traditionally averse to entering into long-term agreements, thereforelimiting our ability to commit distributors or predict specific customerpurchase volumes. If we do not commercially verify these products, we may needto record an additional impairment charge. To the extent an additionalimpairment charge is required, it will likely have a material impact on ourfinancial results.

The discount rate usedwas 25% and was based on venture capital rates for start-up companies insimilar industries.

The table below presentsa sensitivity analysis for 5% change per projected year in earnings beforetaxes and 1% changes in the discount rate:
| **Earnings Before Taxes** | ** ** | **24% Discount Rate** | ** ** | **25% Discount Rate** | ** ** | **26% Discount Rate** | ** ** |
|-------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                          | ** ** | **(in millions)**          | ** ** |
| -5%                                 |       | $                               | 38.7       |                            | $          | 35.7                            |       | $ | 33.0 |   |
| As projected                        |       | $                               | 41.3       |                            | $          | 38.1                            |       | $ | 35.3 |   |
| +5%                                 |       | $                               | 43.9       |                            | $          | 40.5                            |       | $ | 37.4 |   |
|                                |       |                            |       |                            |       |                            |       |

The table below presentsthe 1% sensitivity analysis (including tax amortization benefit) for revenueterminal growth rate and discount rate:
| **Terminal growth rate** | ** ** | **24% Discount Rate** | ** ** | **25% Discount Rate** | ** ** | **26% Discount Rate** | ** ** |
|------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                         | ** ** | **(in millions)**          | ** ** |
| 4%                                 |       | $                               | 40.4       |                            | $          | 37.3                            |       | $ | 34.6 |   |
| 5%                                 |       | $                               | 41.3       |                            | $          | 38.1                            |       | $ | 35.3 |   |
| 6%                                 |       | $                               | 42.3       |                            | $          | 38.9                            |       | $ | 35.9 |   |
|                               |       |                            |       |                            |       |                            |       |

Intangible assets

Our specificallyidentifiable intangible assets, which consist exclusively of utility patents,are reported at cost, net of accumulated amortization. These intangible assetsare being amortized over their estimated useful lives, which is 11.5 years, atamortization rates that reflect the life of the underlying patent and the asset’sestimated economic benefit to the Company.

We review the carryingvalue of these intangible assets annually, or more frequently when indicatorsof impairment are present, in accordance with the provisions of SFAS No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets” which requires impairmentlosses to be recorded on long-lived assets used in operations when indicatorsof impairment are present and undiscounted cash flows estimated to be generatedby these assets are less than the assets’ carrying amount.

Accordingly, we initiatedan impairment analysis of our long-lived assets and determined that thecarrying value of these assets exceeded their projected undiscounted net cashflows. We calculated the fair values of our long-lived assets based on thediscounted cash flow method . Cash flow projections were based on management’sforecast relating to the intellectual properties and life was based on theremainder of the underlying patent life. Under the relief from royaltyvaluation method, we evaluate what the royalty we would have to pay would be,if we did not own the rights to the patent. The assumptions underlying themethod include a projection of sales related to the utilization of the patentsand what the royalty rate we would expect to pay resulting in a total royaltyamount, adjusted for an appropriate discount rate and amortization benefit. Thefair values indicated that an impairment of the Company’s intangible assetsexisted. Accordingly, during the second quarter of 2006 the Company recorded animpairment charge of 

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approximately $12.2 million related to the acquiredutility patents. The amounts are recorded within impairment of goodwill andintangible assets on the consolidated statements of operations

Our projection ofrevenues, the same as used in our reporting unit cash flow projections forpurposes of evaluating any impairment of goodwill, assumes growth rates of 300%in 2007, as compared to a relatively low revenue base in 2006, growth rates peryear of 80%, 55% and 38% in 2008, 2009 and 2010, respectively, and a growthrate of 7% per year in 2011 through 2015. The majority of the reduction in theamount of revenue was due to the indefinite delay of the enforcement frameworkof EU regulations regarding the welfare of poultry birds. We removed from ourprojections all revenue related to our poultry pen spray product since we arenot certain of the timing of the enforcement of these regulations.Additionally, in order for this product to be sold in the U.S., we need to makeadditional revisions to its formulation. Consequently, we have not included anyU.S. revenue in our projections. We also reduced our projections related to ourUnifresh Footbath product since our distributors were unable to devote thelevel of sale and technical personnel to promote and educate our customers onthe benefits of our product that we originally anticipated. On the other hand,the expectation of receipt of USDA approval in the third quarter of 2006(received in August 2006) for the application of our poultry processing wash inthe scalder process resulted in the increase of projected revenues related tothis product.  However, we are still inthe process of completing the commercial verification process for the poultryprocessing wash and the Tasker Pacific Blue Seafood Wash as we do not yet havea proven record of acceptance of our products by our target audience. Customersin our industry are traditionally averse to entering into long-term agreements,therefore limiting our ability to commit distributors or predict specificcustomer purchase volumes. If we do not commercially verify these products, wemay need to record an additional impairment charge. To the extent an additionalimpairment charge is required, it will likely have a material impact on ourfinancial results.

The discount rate usedincreased from the December 2005 amount, to 16%, primarily due to changes ininterest rates. The discount rate was based on a cost of equity analysis, whichwas based on industry rates of returns, by applying the Capital Asset PricingModel (CAPM). The royalty rate was 5%, which was based primarily on the royaltyrate we paid to pHarlo IP LLC prior to the acquisition of the patents, as wellas economic factors.

The table belowpresents the sensitivity analysis for a 5% revenue increase or decrease perprojected year (including tax amortization benefit) and a 1% increase ordecrease in the discount rate:
| **Revenue Change for Each Year** | ** ** | **15% Discount Rate** | ** ** | **16% Discount Rate** | ** ** | **17% Discount Rate** | ** ** |
|------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                           | ** ** | **(in millions)**          | ** ** |
| -5%                                                  |       | $                               | 8.1        |                            | $          | 7.7                             |       | $ | 7.3 |   |
| As projected                                         |       | $                               | 8.8        |                            | $          | 8.3                             |       | $ | 7.8 |   |
| +5%                                                  |       | $                               | 9.4        |                            | $          | 8.9                             |       | $ | 8.4 |   |

 

The table belowpresents the sensitivity analysis for 1% increase or decrease in the royaltyrate and in the discount rate:
| **Royalty Rate** | ** ** | **15% Discount Rate** | ** ** | **16% Discount Rate** | ** ** | **17% Discount Rate** | ** ** |
|-----------------------|------------|---------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **            | ** ** | **(in millions)**          | ** ** |
| 4%                    |       | $                               | 6.2        |                            | $          | 5.9                             |       | $ | 5.6 |   |
| 5%                    |       | $                               | 8.8        |                            | $          | 8.3                             |       | $ | 7.8 |   |
| 6%                    |       | $                               | 11.2       |                            | $          | 10.6                            |       | $ | 10.1 |   |

 

**Related Party Transactions**

In2004, we entered into an Exclusive Field of Use License Agreement and ProductSale Agreement with Wynn Starr Special Products, LLC. Under the terms of thisagreement, as amended through October 20, 2006, we granted Wynn Starr theexclusive, worldwide right to market and distribute products used aspost-harvesting processing aids, or chemicals that assist with microbialreduction and shelf life extension without changing food characteristics forthe poultry industry based on the pHarlo technology. In return for thislicense, Wynn Starr has agreed to pay us a royalty of 70% of the net salesprice for each gallon of licensed products sold by Wynn Starr for which paymentis received from customers and in no event less than manufacturing cost plus40% of manufacturing cost. However, the minimum purchase price to Wynn Starrmay be adjusted to the extent manufacturing cost varies by more than 5%. Netsales price and licensed products are defined in the Exclusive Field of UseLicense Agreement and Product Sales Agreement. As 

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of September 30, 2006 no royalties were due andnone had been paid to us under this royalty arrangement. Steven B. Zavagli, aformer member of our board of directors, is the founder, Chairman and the ChiefExecutive Officer of Wynn Starr and Wynn Starr’s ultimate parent company, WynnStarr Flavors, Inc.

Wepaid Mr. Gordon O. Davis, the former Chairman of the board of directors,approximately $60,000 for consulting services during the nine months endedSeptember 30, 2006.

**Critical Accounting Policies andEstimates**

We believe that severalaccounting policies are important to understanding our historical and futureperformance. We refer to these policies as “critical” because these specificareas generally require us to make judgments and estimates about matters thatare uncertain at the time we make the estimate, and different estimates—whichalso would have been reasonable—could have been used, which would have resultedin different financial results.

The critical accountingpolicies we identified in our most recent Annual Report on Form 10-KSB/A forthe fiscal year ended December 31, 2005 related to goodwill and intangibleassets, valuation of acquired intangible assets, derivative liabilities andinventory valuation and classification. With the adoption of SFAS 123(R) onJanuary 1, 2006, we have identified the estimates and assumptions that accompanythe fair value determination of our stock option awards as critical, asdiscussed below. It is important that the discussion of our operating resultsthat follows be read in conjunction with the critical accounting policiesdiscussed below as well as those disclosed in our Annual Report on Form10-KSB/A, as filed with the SEC on October 26, 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 allshare-based payments issued to employees. Prior to this, the estimated fairvalue associated with such awards was not recorded as an expense, but ratherwas disclosed in a footnote to our financial statements. For the nine monthsended September 30, 2006, we recorded approximately $3.3 million of stock basedcompensation expense, with approximately $2.2 million of this expense,attributable to employee stock options and the remainder approximately $1.1attributable to stock options awarded to consultants and non-employee boardmembers.

The valuation of employeestock options is an inherently subjective process, since market values aregenerally not available for long-term, non-transferable employee stock options.Accordingly, an option pricing model is utilized to derive an estimated fairvalue. In calculating the estimated fair value of our stock options, we used aBlack-Scholes pricing model which requires the consideration of the followingsix variables for purposes of estimating fair value:

·                     the stockoption exercise price,

·                     the expectedterm of the option,

·                     the grantdate price of our common stock, which is issuable upon exercise of the option,

·                     the expectedvolatility of our common stock,

·                     expecteddividends on our common stock (we do not anticipate paying dividends for theforeseeable future), and

·                     the risk freeinterest rate for the expected option term.

Of the variables above, the selection of an expectedterm and expected stock price volatility are the most subjective. Our estimateof the expected option term was averaged at 6.3 years over the nine monthsended September 30, 2006 and was derived based on the average of the sum of thevesting term and the original contract term. In estimating our stock pricevolatility, we analyzed our historic volatility for a period equal to theexpected term of our stock options awarded in the nine months ended September30, 2006, by reference to actual stock prices during this period and calculatedan estimated volatility between 132% to 135%. We believe that each of theseestimates, both expected term and volatility, is reasonable in light of thedata we analyzed. However, as with any estimate, the ultimate accuracy of theseestimates is only verifiable over time.

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The specific valuationassumptions noted above were applied to stock options that we grantedsubsequent to our adoption of SFAS 123(R). The majority of the stock optionexpense recorded in the three and nine months ended September 30, 2006 relatesto options granted in the nine months ended September 30, 2006. We expect thatstock compensation expense will continue to have a material impact on ourfinancial results for the remainder of the fiscal year. For the remainder offiscal 2006 we expect to incur stock compensation expenses of approximately$600,000 for the fourth quarter.

**Three Months Ended September 30, 2006Compared to Three Months Ended September 30, 2005**

**Revenues**

Revenues for the threemonths ended September 30, 2006 were approximately $531,000 compared with approximately$1.1 million for the corresponding period in 2005. This decrease is primarilydue to decreased sales in Unifresh ® Footbath related to one large order from asingle customer that did not reorder in 2006. We expect that revenue willcontinue to increase throughout fiscal year 2006 primarily due to the increasedsales in Unifresh® Footbath and to a lesser extent due to the sales of our newproducts for the poultry and seafood processing industries.

**Selling, General and Administrative**

Selling, General, andAdministrative (“SGA”) expenses are primarily comprised of sales and marketingcosts, compensation costs, professional fees, and general administrative costs.SGA costs for the three months ended September 30, 2006 decreased byapproximately $441,000 from approximately $3.0 million for the three monthsended September 30, 2005, to approximately $2.6 million for the three monthsended September 30, 2006. We anticipate that SGA costs will continue todecrease, as a percentage of revenues and in absolute dollars, in fiscal year2006.

Sales and marketingexpenses consist primarily of salaries and other related costs for sales andmarketing personnel, sales commissions, promotional expenses, advertising,public relations and trade shows. Sales and marketing costs for the threemonths ended September 30, 2006 decreased by approximately $204,000 due toreduced consulting expense for advertising and marketing campaigns onselectively smaller number of products than the products for the same period in2005.

Compensation expenseconsists primarily of salaries and other related costs for senior management,finance and administrative employees of our company. Compensation expensedecreased by approximately $242,000 primarily due to a reduction inadministrative and warehouse personnel. In the third quarter we revised thesalary structure of three of our employees and we terminated seven otheremployees. As a result of these reductions we expect that we will experiencecost savings of approximately $174,000 per quarter starting late in the thirdquarter of 2006 to early part of the fourth quarter of 2006.

Professional fees for thethree months ended September 30, 2006 increased by approximately $83,000primarily due to an increase of $208,000 in legal fees related to the filing ofthe registration statement on Form S-1 partially offset by the decrease of$105,000 in accounting fees and a decrease in investor relations of $20,000.

General andadministrative expenses consist primarily of rent, insurance and travel andentertainment expenses. The decrease in general administrative costs for thethree months ended September 30, 2006 by approximately $179,000 wasattributable to a decrease in miscellaneous costs of approximately $181,000, adecrease in insurance expense of $20,000, a decrease in rent expense of$17,000,    partially offset by anincrease in travel expenses of approximately $39,000.

Stock based compensationexpense for selling, general and administrative employees increased byapproximately $114,000 to approximately 425,00 for the three months endedSeptember 30, 2006 as compared to $311,000 for the same time period in 2005.This increase is the result of implementing SFAS 123(R) in January 2006. Theexpense associated with these awards is recorded as expense within the samefunctional expense category as cash compensation for the respective employee isrecorded. For the three months ended September 30, 2006, stock compensationexpense was allocated as follows:
| ** **                  | ** ** | **(in thousands)** | ** ** |
|-----------------------------|------------|-------------------------|------------|
| Sales and  marketing        |       | $                       | 175        |   |
| Product  development        |       | 56                      |       |
| General and  administrative |       | 250                     |       |
|                        |       | $                       | 481        |   |

 

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**Write off of raw materials**

We believe that our CloseCallTM product could be marketed more efficiently by a company either alreadyestablished in the industry or with more commercial resources. Therefore, weare seeking to license and/or sell the Close CallTM brand or derivativeapplications. In implementing this approach and in an effort to reducewharehousing expenses we adjusted the level of Close CallTM raw materials.Accordingly,  in October and November2006 we disposed 3.5 million  Close CallTM  empty bottles and related packaging material. Also, we are currently inthe process of disposing an additional 2.6 million empty  bottles ofClose CallTM. This disposal initiative resulted in a write off of Close CallTMraw material inventory of approximately $582,000, net of  estimated recoveries.

**Product Development**

Product developmentconsists primarily of personnel costs to support product development. Productdevelopment and research costs for the three months ended September 30, 2006decreased by approximately $198,000  toapproximately $558,000 from approximately $756,000 for the three months endedSeptember 30, 2005. This decrease is primarily due to our decision to focus ourdevelopment efforts in a select smaller number of products, which were closerto commercialization rather than the larger number of products we weredeveloping in the same time period in 2005. The decrease in the number of products we are developing and testing inthe three months ended September 30, 2006 resulted in the decrease in thirdparty laboratory testing cost of approximately $177,000, a decrease in productsupplies of $70,000 and and a decrease in salaries of $59,000, partially offsetby an increase in stock based compensation of approximately $56,000, anincrease of warehouse expenses of approximately $38,000 and an increase in travelexpenses for production employees of $14,000. We expect that in fiscal 2006product development expense will increase in absolute dollars but decrease as apercentage of revenue.

**Depreciation and Amortization Expense**

Depreciation andamortization expense, which includes the amortization of identifiableintangible assets, decreased by approximately $869,000 from approximately $1.1million in the three months ended September 30, 2005, to approximately $276,000for the three months ended September 30, 2006, primarily due to the reductionin the carrying value of the intangible assets from as a result of theimpairment charge of $12.2  recorded inthe second quarter of 2006.

**Interest Income**

Interest income increasedby approximately $31,000 from $21,000 for the three months ended September 30,2005 to approximately $52,000 for the three months ended September 30, 2006primarily due to an increased interest received on the Company’s investments inmarketable securities in the three months ended September 30, 2006, as comparedto the same period ending September 30, 2005.

**Interest Expense**

Interest expensedecreased by approximately $13,000 from $33,000 for the three months endedSeptember 30, 2005 to approximately $20,000 for the three months endedSeptember 30, 2006  primarilydue to a reduction in interest payable for convertible debt that was convertedin full in January 2006.

**Other expenses, net**

We incurred otherexpenses, net of approximately $13,000 for the three months ended September 30,2006 as compared to $116,000 for the three months ended September 30, 2005. Thedecrease is due to the decrease in the accrual of liquidated damages forfailure to have a current prospectus available for the resale of common stocksold in the April 2004 and July 2004 private placements and is offset by a gainfrom the extinguishment of debt of approximately $13,000. The decrease in theaccrual is due to the fact that our obligation to accrue liquidated damagesunder the April 2004 and July 2004 registration rights agreements ceased inApril 20, 2006 and July 22, 2006.

**Nine Months Ended September 30, 2006Compared to Nine Months Ended September 30, 2005**

**Revenues**

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Revenues for the ninemonths ended September 30, 2006 was approximately $1.3 million compared withapproximately $1.4 million for the corresponding period in 2005. This decreaseis primarily due to decreased sales of Close CallTM by approximately $200,000offset by an increase of approximately $100,000 in Unifresh® Footbathsales.  We expect that revenue willcontinue to increase throughout fiscal year 2006 primarily due to the increasedsales in Unifresh® Footbath and to a lesser extent due to the sales of our newproducts for the poultry and seafood processing industries.

**Selling, General and Administrative**

SGA expenses areprimarily comprised of sales and marketing costs, compensation, professionalfees, and general administrative costs. SGA costs for the nine months endedSeptember 30, 2006 increased by approximately $531,000 from $9.0 million forthe nine months ended September 30, 2005, to $9.5 million for the nine monthsended September 30, 2006. We anticipate that SGA costs will continue todecrease, as a percentage of revenues, in fiscal year 2006.

Sales and marketing expensesconsist primarily of salaries and other related costs for sales and marketingpersonnel, sales commissions, promotional expenses, advertising, publicrelations and trade shows. Sales and marketing costs decreased by approximately$74,000 due to a decrease in promotional and advertising expenses expenses of$60,000, a decrease in consulting expense of $60,000, a decrease in publicrelations expense of $43,000, a decrease in sales commissions of $25,000, adecrease in trade show expense of $17,000 and a decrease in printing andrendering expenses of approximately $6,000. This decrease was partially offsetby an increase in research and development fees of $137,000 related to thePatent and Sub-License Agreement with pHarlo IP.

Compensation expenseconsists primarily of salaries and other related costs for senior management,finance and administrative employees of our company. Compensation expensedecreased by approximately $64,000 primarily due to a reduction inadministrative and warehouse personnel. In the third quarter of 2006, werevised the salary structure of three of our employees and we terminated sevenother employees. As a result of these reductions we expect that we willexperience cost savings of approximately $175,000 per quarter starting late inthe third quarter of 2006 to early in the fourth quarter of 2006.

Professional fees for thenine months ended September 30, 2006 decreased by $2.2 million primarily due toa non-cash charge of approximately $2.5 million for stock options issued to aninvestor relations consultant for services provided in the nine months endedSeptember 30, 2005 and  a decrease inaccounting fees of $141,000 partially offset by an increase of approximately$450,000 in legal fees associated with our increased litigation activity andthe SEC filings for the nine months ended September 30, 2006.

General andadministrative expenses consist primarily of rent, insurance and travel andentertainment expenses. The increase in general and administrative costs forthe nine months ended September 30, 2006, as compared to the nine months endedSeptember 30, 2005, was approximately $565,000. This increase was attributableto a settlement fee of approximately $249,000 for the termination of minimumpurchase commitment obligations for Close CallTM bottles, increase in travel andentertainment expenses of  approximately$195,000, increase in general insurance costs of approximately $135,000,increase in rent and associated utility expenses for the Texas facility,acquired in the July 2005 acquisition, of approximately $55,000, increase dueto the settlement of the “BOC” claim, discussed under legal proceedings, ofapproximately $50,000, increase in recruiting fees of approximately $20,000,and increase in provision for allowance for doubtful accounts of approximately$19,000.  This increase was partiallyoffset by a decrease in miscellaneous expense of approximately $167,000.

Stock based compensation expense for selling, generaland admistrative employees increased by approximately $2.3 million for the ninemonths ended September 30, 2006 from $795,000 for the nine months endedSeptember 30, 2005 to $3.1 million for the nine months ended September 30,2006. This increase is the result of implementing SFAS 123(R) in January 2006.The expense associated with these awards is recorded as expense within the samefunctional expense category as cash compensation for the respective employee isrecorded. For the nine months ended September 30, 2006, stock compensationexpense was allocated as follows :

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| ** **                  | ** ** | **(in thousands)** | ** ** |
|-----------------------------|------------|-------------------------|------------|
| Sales and  marketing        |       | $                       | 396        |   |
| Product  development        |       | 218                     |       |
| General and  administrative |       | 2,698                   |       |
|                        |       | $                       | 3,312      |   |

**Write off of raw materials**

We believe that our CloseCallTM product could be marketed more efficiently by a company either alreadyestablished in the industry or with more commercial resources. Therefore, weare seeking to license and/or sell the Close CallTM brand or derivativeapplications. In implementing this approach and in an effort to reducewharehousing expenses we adjusted the level of Close CallTM raw materials.Accordingly,  in October and November2006 we disposed 3.5 million  Close CallTM  empty bottles and related packaging material. Also, we are currently inthe process of disposing an additional 2.6 million empty  bottles ofClose CallTM. This disposal initiative resulted in a write off of Close CallTMraw material inventory of approximately $582,000, net of  estimated recoveries.

**Product Development**

Product developmentconsists primarily of personnel costs to support product development. Productdevelopment and research costs for the nine months ended September 30, 2006decreased by approximately $295,000 to approximately $1.4 million fromapproximately $1.7 million for the nine months ended September 30, 2005. Thisdecrease is primarily due to our decision to focus our development efforts in aselect smaller number of products, which were closer to commercializationrather than the larger number of products we were developing in the same timeperiod in 2005.  The decrease in thenumber of products we are developing and testing in the nine months endedSeptember 30, 2006 resulted in the decrease in consulting expenses ofapproximately $393,000 and a decrease in third party laboratory testing costsof approximately $268,000 decrease.  Thisdecrease was partially offset by an increase in stock based compensationexpense of approximately $215,000, an increase in warehouse costs ofapproximately $128,000, an increase in travel expenses of approximately $15,000and an increase in product samples of $8,000. We expect that in fiscal 2006 product development expense will increasein absolute dollars as we continue to develop and enhance our product lines,but should decrease as a percentage of total revenues.

 **Depreciationand Amortization Expense**

Depreciation andamortization expense, which includes the amortization of identifiableintangible assets, increased by approximately $248 from approximately $1.2million in the nine months ended September 30, 2005, to approximately $1.4million for the nine months ended September 30, 2006, primarily due to theamortization of our utility patent intangible. This patent intangible, afterthe impairment charge of approximately $12.2 million recorded in the secondquarter of 2006, has a current estimated value of approximately $8.3 millionand is being amortized over 11 years.

**Impairment of goodwill and intangible assets**

In the secondquarter of 2006, we initiated  testingfor impairment of our intangible assets and our goodwill due to the presence ofimpairment indicators including a preliminary expectation that third and fourthquarter 2006 originally projected revenues will not be attained, a decrease inexpected future cash flows and a decline in the market price of our commonstock . Upon completion of the impairment tests, we recorded non-cashimpairment charges to intangible assets and goodwill of $12.2 million and $17.9million, respectively.  We did not recordan impairment charge for the same six month period in 2005. Also, seediscussion under “Financial Overview.”

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**Interest Expense**

Interest expensedecreased by approximately $119,000 from $188,000 for the nine months endedSeptember 30, 2005 to approximately $69,000 for the nine months ended September30, 2006   primarily due to a reduction in interestpayable for convertible debt that was converted in full in January 2006.

**Interest Income**

Interest income increasedby approximately $79,000 from $111,000 for the nine months ended September 30,2005 to approximately $190,000 for the nine months ended September 30, 2006primarily due to an increase in interest earned from the Company’s investmentsin marketable securities, as compared to the same period ending September 30,2005.

**Other expenses, net**

We incurred otherexpenses, net of approximately $74,000 for the nine months ended September 30,2006 as compared to $189,000 of accrued liquidated damages for the nine monthsended September 30, 2005. We accrued approximately $155,000 for(i) liquidated damages for failure to have a current prospectus availablefor the resale of common stock sold in the April 2004 and July 2004 privateplacements, and (ii) a loss on a disposal of assets in the amount of $53,000 asa result of the Settlement and Release Agreement we entered into with a formerexecutive and the loss in the investment in the subsidiary Biofilm ofapproximately $14,000. This increase in expense was partially offset by thereduction of the fair market value of the registration rights liability byapproximately $85,000 and the gain on settlement of vendor obligations at lessthan their carrying value by approximately $63,000.

**Liquidity and Capital Resources**

**Overview**

Since our inception, wehave funded operations and investing activities through the sale of commonstock, warrants and convertible debt under several private placements.Requirements for liquidated damages under some of these private placements mayhave an impact on our future liquidity. To date we have satisfied and/orreceived waivers for the provisions of a majority the agreements that wouldhave otherwise required us to pay liquidated damages. At September 30,2006, our derivative liability balance, related to the April 2004 and July 2004registration rights agreements, was approximately $150,000. Additionally,included in the other accrued liabilities at June 30, 2006 isapproximately $130,000 of interest and late fees and approximately $423,000 ofincurred liquidated damages associated with the April 2004 and theJuly 2004 convertible debentures. The Company’s obligation to accrueliquidated damages under these registration rights agreements ceased in April30 and July 22, 2006, respectively. Through July 22, 2006, the Company hasaccrued $441,000 in liquidated damages related to these agreements. We have notincurred any liquidated damages liabilities related to any of our otherregistration rights agreements.

**Liquidity - Going Concern**

Based upon ourforecast of future revenues from our products in conjunction with the cash andmarketable securities on hand, cash expected to be generated from operationswill not provide adequate funding for our working capital over the next three months. Weare rapidly depleting our cash resources and our ability to continue to operateand grow our business is dependent upon obtaining new financing.  The cost of any new financing may beprohibitive. While we have been in the process of aggressively developing,marketing and selling our products, there can be no assurances that thoseefforts will be met with success in the marketplace or that the timing of ourefforts will be consistent with our cash availability and burn rate If we areunable to arrange new financing by December 2006, we will not have sufficientcash to support our operations and meet our obligations and we will be forcedto consider the further restructuring of our operations, disposition of variousassets, seeking of protection from our creditors, or ceasing of operations andliquidation.We anticipate that we will need approximately an additional $3 to$5 million to support our operations and meet our obligations over the nexttwelve months. We are currently reviewing alternative methods of financing, includingprivate issuances of debt and/or equity.

**Operating Activities**

At September 30, 2006 ourcash, cash equivalents and marketable securities balances were approximately$1.3 million compared with $1.0 million at December 31, 2005.

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Net cash used in operatingactivities for the nine months ended September 30, 2006 was approximately $7.7million, compared to net cash used in operating activities of approximately$7.3 million for the nine months ended September 30, 2005.

We have fully reservedour note receivable of $890,000 from the Biofilm shareholders as there is noassurance that it is collectible. Also see discussion under “Off-Balance SheetArrangements”.

**Investing Activities**

Net cash used ininvesting activities for the nine months ended September 30, 2006 wasapproximately $1.4 million as compared to approximately $7.4 million for thenine months ended September 30, 2005. The decrease in net cash used ininvesting activities was primarily due to the repayment of loans in the ninemonths ended September 30, 2005.

**Financing Activities**

Net cash provided byfinancing activities during the nine months ended September 30, 2006 wasapproximately $8.1 million, as compared to approximately $6.5 million for thenine months ended September 30, 2005.

The net cash provided byfinancing activities for the nine months ended September 30, 2006 principallyrepresents proceeds from the sale of common stock and warrants. In January2006, 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 apurchase price of $.70 per share, which were sold together with warrants topurchase an additional 13,335,295 shares of our common stock at an exerciseprice of $1.00.

As partial considerationfor the purchase of the pHarlo assets in the July 2005 acquisition, we issued apromissory 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 equalbi-weekly principal installments of $37,153, plus interest, through July 2007.During the nine months ended September 30, 2006 we paid approximately $706,000under the IRL promissory note.

During the nine monthsended September 30, 2006, we were in default of certain of our obligationsunder the April and July 2004 registration rights agreements.  The Company’s obligation to accrue liquidateddamages under these registration rights agreements ceased in April 30 and July22, 2006, respectively. Through July 22, 2006, the Company has accrued $441,000in liquidated damages related to these agreements.

**Registration Rights Agreements**

In connection with theJanuary 2006 private placement, we obtained waivers of all claims forliquidated damages relating to our inability to have the registrationstatement registering resale of securities purchased in the September 2005private placement declared effective by the deadline specified in theapplicable registration rights agreement. We received these waivers fromshareholders representing more than a majority of all outstanding securitiesissued in connection with the September 2005 private placement. Inconsideration for obtaining the waiver, we repriced the warrants issued toshareholders providing the waiver such that the exercise price of the warrantsissued in connection with the September 2005 private placement was reduced from$3.00 to $1.00.  Under the waiver, the date by which the registrationstatement covering resale of the securities purchased in the September 2005private placement was required to be declared effective was extended toMay 23, 2006.  On April 26, 2006, we filed a registration statementregistering resale of securities purchased in the September 2005 andJanuary 2006 private placements. This registration statement was declaredeffective by the SEC on October 31, 2006. As it relates to theSeptember 2005 private placement, we believe that we have used our bestefforts to cause the registration statement to be declared effective and,therefore, pursuant to the terms of the September 2005 registration rightsagreement, we believe that is not currently liable for liquidated damages as aresult of the registration statement not being declared effective byMay 23, 2006. Should the rights holders dispute that the Company used itsbest efforts, and the Company either accedes to their assertion or is found tonot have used its best efforts, the estimated maximum amount of liquidateddamages for which the Company would be liable, assuming(i) ineffectiveness from May 23, 2006 to the end of the periodcovered by the registration agreement and (ii) a stock price of $0.37 forperiods subsequent to July 26, 2006, is approximately $270,000.

As it relates to theJanuary 2006 private placement, we failed to have the registrationstatement declared effective by the SEC on or before October 26, 2006.Consequently, on November 25, 2006 we are required to issue to each holder ofthe January 2006 private placement, shares and warrants equal to onepercent of the respective number of shares and warrants purchased by eachholder or an aggregate of 138,859 shares of common stock and warrants topurchase 138,859 shares of common stock.

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**Off-Balance Sheet Arrangements**

During the three and ninemonths ended September 30, 2006, we did not engage in material off-balancesheet activities, including the use of structured finance, special purposeentities; material trading activities in non-exchange traded commoditycontracts; or transactions with persons or entities that benefit from theirnon-independent relationship with us.

In April 2005, wepurchased from Electric Aquagenies Unlimited, Inc. 359,000 common shares ofBiofilm, representing 27% of Biofilm’s outstanding common stock, for cashconsideration of $718,000. We believe that our 27% equity interest in Biofilmis 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 Biofilmand thus we would not be required to consolidate the accounts of Biofilm. Webelieve that our maximum exposure to loss as a result of our involvement withBiofilm is limited to our initial investment of $718,000.

**Contractual Obligations andCommitments**

We had the following commitments as of September 30,2006, which are comprised primarily of a research and development fee contract,consulting and employment contracts, a vendor agreement, notes payable, as wellas numerous operating leases:
| ** **                                                 | ** ** | **(in thousands)**   | ** ** |
|------------------------------------------------------------|------------|---------------------------|------------|
| ** **                                                 | ** ** | **Payments  Due by** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                 | ** ** | **Period**                | ** ** | **Less Than** | ** ** | **1-3** | ** ** | **3-5** | ** ** | **More Than** | ** ** |
| **Contractual Obligations**                           | ** ** | **Total**                 | ** ** | **1 Year** | ** ** | **Years** | ** ** | **Years** | ** ** | **5 Years** | ** ** |
| Research &  development (“R&D”) fees (1) |       | $                         | 75         |   | $ | 75 |   | $ | — |   | $ | — |   | $ | — |   |
| Consulting agreements                                      |       | 340                       |       | 90 |   | 250 |   | — |   | — |   |
| Employment agreements  (2)                                 |       | 1,550                     |       | 195 |   | 1,355 |   | — |   | — |   |
| Vendor agreements                                          |       | 36                        |       | 5 |   | 31 |   | — |   | — |   |
| Operating leases                                           |       | 1,158                     |       | 92 |   | 957 |   | 109 |   | — |   |
| Note(s) payable                                            |       | 1,207                     |       | 114 |   | 1,085 |   | 8 |   | — |   |
| **Total**                                                  | ** ** | **4,366**                 | ** ** | **571** | ** ** | **3,678** | ** ** | **$** | **117** | ** ** | **$** | **—** | ** ** |
|                                                            |            |                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)           OnJanuary 26, 2006, R&D fees payable under a Patent and Sub-License Agreementwith pHarlo IP were amended so that these fees are (i) payable on a quarterlybasis within 30 days after the end of each calendar quarter and (ii) are basedon gross sales of our Company (or our affiliates) of products using the pHarlotechnology. 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 amountspayable after 2006; however, they are capped at $2,000,000 for 2007, $4,000,000for 2008, $8,000,000 for 2009 and $10,000,000 for 2010 and beyond. In thesecond quarter of 2006 we paid, under this agreement, approximately $75,000 ofR&D fees related to the revenue generated in the second quarter of 2006 andto the agreement that pHarlo IP was due $75,000 by September 1, 2006.

(2)           Inthe first quarter of fiscal 2006, we entered into new employment agreementswith our current executive management. During the nine months ended September30, 2006 we terminated several of our existing employment agreements with ourformer senior and other management personnel. As of September 30, 2006 therevised estimated future minimum annual compensation under these employmentagreements, including the new and terminated agreements for 2006, 2007, 2008and 2009, is approximately $195,100, $707,800, $597,800 and $49,000,respectively.

 

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**Item 3.Quantitative and Qualitative Disclosures about Market Risk**

**Interest Rate Risk**

Our exposure to market risk, including changes ininterest rates, relates primarily to changes in the market value of ourinvestment in marketable securities. These investments bear interest at avariable interest rate, which is subject to market changes. We have not enteredinto any interest rate swap agreements, or other instruments to minimize ourexposure to interest rate fluctuations. We have not had any derivative instrumentsin the past and do not presently plan to in the future. Our investmentportfolio consists of demand deposits and marketable securities. Due to thehighly liquid nature of our investment, a sudden sharp change in interest rateswould not have a material adverse effect on the value of the portfolio.

**Item 4. Controls and Procedures**

As required by Rule 13a-15 under the SecuritiesExchange Act of 1934 (the “Exchange Act”), we carried out an evaluation of theeffectiveness of the design and operation of our disclosure controls andprocedures as of the end of the period covered by this report. This evaluationwas carried out under the supervision and with the participation of our ChiefExecutive Officer, Richard Falcone, and Chief Financial Officer, StathisKouninis.

Disclosure controls and procedures are controls andother procedures that are designed to ensure that information required to bedisclosed in our reports filed or submitted under the Exchange Act is recorded,processed, summarized and reported, within the time periods specified in theSecurities and Exchange Commission’s rules and forms. Disclosure controls andprocedures include, without limitation, controls and procedures designed toensure that information required to be disclosed in our reports filed under theExchange Act is accumulated and communicated to management, including our ChiefExecutive Officer and Chief Financial Officer, to allow timely decisionsregarding required disclosure.

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Based upon that evaluation, our Chief Executive Officerand Chief Financial Officer concluded that our disclosure controls andprocedures as of the end of the period covered by this report were noteffective. As described in our Quarterly Reports throughout 2005 and 2006 andunder Item 9A of Part II in our Annual Report on Form 10-KSB/A for the yearended December 31, 2005, we have already instituted and are continuing toimplement, corrective actions with respect to the deficiencies in ourdisclosure controls and procedures.

Although we have instituted and are continuing toimplement corrective actions with respect to the deficiencies in our disclosurecontrols and procedures, such corrective actions were not sufficient to detectan error in our Excel spreadsheet for the calculation of certain line items inthe column captioned “May 13, 1996 (inception) to December 31, 2005” in ourConsolidated Statements of Operations for the three years ended December 31,2005 (the “Inception Column”). As a result of this error, we reported incorrectvalues in the Inception Column as follows:

·                     Although theamount of “Total Expenses” was correct, the components of Total Expenses (i.e.,selling, general & administrative; product development; and depreciationand amortization) were incorrect.

·                     Although theamount of “Total other expense, net” was correct, two of the components ofTotal other expense, net (i.e., interest expense, net and liquidated damages)were incorrect.

Such error was caused by the lack of an automatedfinancial reporting system and a small accounting staff that does not allow fora thorough review process. We have engaged a consultant to design financialreports so that we do not rely on spreadsheets and we will add additionalaccounting staff when our financial condition allows us to do so.

As noted above and under Item 9A of Part II in the ourAnnual Report on Form 10-KSB/A for the year ended December 31, 2005, therewere changes to our internal control over financial reporting that occurredduring our last fiscal quarter that have materially affected, or are reasonablylikely to materially affect, our internal controls over financial reporting.

While every effort will be made to ensure thefinancial reporting system will adhere to our internal controls, we cannot becertain that additional material weaknesses will not be identified prior to thefiling of management’s annual report on internal control over financialreporting.

**PARTII — OTHER INFORMATION**

**Item 1. Legal Proceedings**

On May 25, 2006, a civil action captioned *James Collins v. Tasker Products Corp*. was filed in theConnecticut Superior Court for the Judicial District of Stamford.  In the complaint, Mr. Collins alleges thatTasker breached the employment agreement between him and our company.  Specifically, Mr. Collins alleges that he isdue severance compensation pursuant to the employment agreement.  On June 29, 2006, we filed our answer to thecomplaint.  The answer also allegesnumerous counterclaims against Mr. Collins, including a violation ofConnecticut’s Uniform Trade Secrets Act, breach of duty of loyalty and variouscomputer related offenses.  We are alsopresently seeking permission to implead our former President and CEO, Robert P.Appleby, for breach of duty of care, breach of duty of loyalty, and fraud inthe inducement related to his entering into the employment agreement with Mr.Collins. The motion is currently pending. The parties have commenced discovery.

On October 13, 2006 an action entitled Tasker ProductsCorp. f/k/a Tasker Capital Corp. and Tasker Products IP Holdings Corp. v.Michael R. Stettler was commenced in the United States District Court for theDistrict of Connecticut against a former Field Service Technician allegingbreach of fiduciary duty, breach of loyalty, violation of the Connecticut TradeSecrets Act, unfair competition, violation of the Connecticut Unfair TradePractices Act, diversion of corporate opportunities, tortious interference withbusiness expectations, and breach of contract, seeking injunctive relief anddamages stemming from the employee's employment by a competitor following hisresignation. The defendant has not yet answered the complaint, but hassubmitted a letter to the company asserting that he has not engaged in anywrongful conduct and has requested that the action against him be dropped.

On October 13, 2006 an action entitled Tasker ProductsCorp. f/k/a Tasker Capital Corp. and Tasker Products IP Holdings Corp. v. BurtSookram was commenced in the United States District Court for the District ofConnecticut against a former executive, alleging breach of fiduciary duty,breach of loyalty, violation of the Connecticut Trade Secrets Act, unfaircompetition, violation of the Connecticut Unfair Trade Practices Act, diversionof corporate opportunities, tortious interference with business expectations,and breach of contract, seeking injunctive relief and damages stemming from theformer executive's commencement of employment with a competitor while still inthe company's employ and from his conduct following his resignation. Thedefendant has not yet answered the complaint.

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**Item 1A. RiskFactors**

These risk factors could materially affect ourbusiness, financial condition or future results.

**RISKSRELATED TO OUR BUSINESS**

 

***Unless we obtainnew financing and/or generate revenue growth in the near future, our liquidityposition will become significantly impaired and we could be forced torestructure or discontinue our operations***

 

Weare rapidly depleting our cash resources and our ability to continue to operateand grow our business is dependent upon obtaining new financing and/orgenerating revenue growth from operations. The cost of any new financing may beprohibitive. While we have been in the process of aggressively developing,marketing and selling our products, there can be no assurance that thoseefforts will be met with success in the marketplace or that the timing of ourefforts will be consistent with our cash availability and burn rate. If we areunable to arrange new financing by December 2006, we will not have sufficientcash to support our operations and meet our obligations and we will be forcedto consider the further restructuring of our operations, disposition of variousassets, seeking of protection from our creditors, or ceasing of operations andliquidation. We anticipate that we will need approximately an additional $3 to$5 million to support our operations and meet our obligations over thenext twelve months. We are currently reviewing alternative methods offinancing, including private issuances of debt and/or equity.

 

***We have lost moneyin each fiscal quarter since we changed our business model to the developmentof products in the oral care, food processing, skin care, water purificationand pet industries. We expect future losses and we may never become profitable.***

 

Wehave incurred losses in our operations in each quarter since we changed ourbusiness direction in late 2002. Net loss for the nine months endedSeptember 30, 2006 and the years ended December 31, 2005,December 31, 2004, December 31, 2003 and December 31, 2002 wereapproximately $42.3 million, $18.3 million, $6.1 million,$607,000 and $761,000, respectively. We expect to continue to incur losses inthe short term. We expect operating expense to increase as we work to build ourbrands, expand our customer base and develop new products. To becomeprofitable, we must increase revenue substantially and achieve and maintainpositive gross margins. We may not be able to increase revenue and grossmargins sufficiently to achieve profitability. If we are not able to achieveprofitability, our results of operations and financial condition will bematerially and adversely affected.

 

***To the extent thatfuture impairment charges occur, they will likely have a material impact on ourfinancial results.***

 

Inthe second quarter of 2006, we tested for impairment of our intangible assetsand our goodwill in accordance with Statement of Financial Accounting Standards(SFAS) No. 144 “Accounting for the Impairment or Disposal of Long-LivedAssets” (SFAS No. 144) and Statement of Financial Standards No. 142 “Goodwilland Other Intangible Assets” (SFAS No. 142), respectively. Our testing wastriggered by the following events and circumstances that constitute impairmentindicators under the literature:

 

·                     a preliminaryexpectation that third and fourth quarter 2006 originally projected revenueswill not be attained;

·                     a decrease inexpected future cash flows; and

·                     a decline inthe market price of our common stock

Upon completion of the impairment tests, we recordednon-cash impairment charges to intangible assets and goodwill of$12.2 million and $17.9 million, respectively. Note 8 to ourunaudited condensed consolidated financial statements for the period endedSeptember 30, 2006 describes the impairment tests performed and theirimpact during the second quarter of 2006. There can be no assurance that therewill not be impairment charges in subsequent periods as a result of our futureperiodic impairment reviews. To the extent that future impairment chargesoccur, they will likely have a material impact on our financial results.

***We have a limitedoperating history in our present market and prospective investors have alimited historical basis on which to judge our ability to be successful.***

 

Wewere originally organized for the purpose of engaging in the acquisition andexploration of mineral properties, primarily in the Province of BritishColumbia, Canada. During 2001, we allowed the option on our mineral property tolapse and began to investigate other business opportunities. In late 2002, weentered into an exclusive license to sell, develop, market and distributeconsumer deodorant breath products, animal deodorant breath products and softdrink products using the pHarlo technology. Since late 2002, we have pursuedthis business plan and have expanded it to include the use of the pHarlotechnology in the pre- and post-harvest food processing, skin care, pet care,hangover remedy, alcohol abatement and water purification industries.Additionally, we are investigating the applicability of the pHarlo technologyto other aspects of the seafood industry.

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        Sinceinception, we have suffered recurring losses and net cash outflows fromoperations. We expect to continue to incur substantial losses to complete thedevelopment of our business. In addition, we only recently began shipping ourfirst product, Close Call®, in February of 2005. We thus have a limitedoperating history upon which investors may evaluate our likely futureperformance.

 

***We recentlycompleted a significant acquisition of certain assets of pHarlo CitrusTechnologies, Inc. and other related entities. We cannot guarantee that wewill be able to manage these new assets profitably.***

 

OnJuly 15, 2005, we purchased certain assets of pHarlo CitrusTechnologies, Inc., Indian River Labs, LLC, pHarlo Citrus PropertiesPartnership, LLLP and Coast to Coast Laboratories, LLC, which four entities arereferred to in this prospectus as the “Selling Entities.” This acquisition, orour 2005 Acquisition, represented a highly significant event for our company.Prior to the acquisition, we licensed the use of certain patent applicationscovering various uses for the pHarlo technology and improvements from the SellingEntities and also purchased the pHarlo concentrate, a concentrate made usingthe pHarlo technology from Indian River Labs. As a result of the 2005Acquisition and the purchase of all of the working assets of Indian River Labs,we now control various uses of pHarlo technology in the manufacturing processfor the pHarlo concentrate. Our business, financial condition and results ofoperations could suffer materially if we fail to successfully manage theseassets and the manufacturing process.

 

***Recent restatementsand amendments to our interim financial statements and quarterly reports, aswell as deficiencies in our disclosure controls and procedures and internalcontrol over financial reporting, may present a risk of future restatements anddisclosure compliance errors which could lead to legal exposure.***

 

Wehave recently restated and amended our interim financial statements for theperiods ended June 30, 2004, September 30, 2004 andSeptember 30, 2005 and have recently filed amendments to our quarterlyreports on Form 10-QSB for each of those periods reflecting theserestatements. While in the process of amending our quarterly reports onForm 10-QSB to restate these financial statements, we became aware ofcertain required information that had been omitted and other information thatneeded to be changed or corrected. As a result of the foregoing, we revisedthese quarterly reports to correct this information and to state, among otherthings, that our disclosure controls and procedures were not effective as of June 30,2004, September 30, 2004 and September 30, 2005.

 

Asof December 31, 2005, March 31, 2006, June 30, 2006 andSeptember 30, 2006 our management concluded that our disclosure controls andprocedures were not effective. We are taking what we believe to be reasonableand appropriate steps to correct these deficiencies. We will also continue toassess the adequacy and appropriateness of these actions and adjust ourremediation plan as needed or to reflect changes in our business. However, wecannot be certain when these deficiencies will ultimately be remediated and weexpect that we will need a period of time over which to demonstrate that ourdisclosure controls are functioning appropriately to conclude that we haveadequately remediated the deficiencies. Any failure to implement and maintainimprovements in our disclosure and internal controls may present a risk offuture restatements and disclosure compliance errors and could in turn lead tolegal exposure. Any failure to improve these controls to address the identifieddeficiencies, or any other unidentified deficiencies, could also causeinvestors to lose confidence in our reported financial information, which couldhave a negative impact on the trading price of our common stock. This couldhave a material adverse effect on our business and financial results.

 

***We have limitedexperience in the marketing of our products and may not be able to market themsuccessfully.***

 

Wecurrently market Unifresh® Footbath, a grooming aid that helps clean anddisinfect the hooves of dairy cows, Close Call, an oral hygiene breath drink,Tasker Pacific BlueTM Seafood Wash, a product used in commercial and retailseafood processing to extend shelf life. Shelf life extension is the act ofincreasing the length of the time a product can spend during processing,distribution and retail before becoming unacceptable for consumption. We alsobegan the commercialization phase of the pHarlo technology as an antimicrobialprocessing aid in poultry scalders.

 

Theseare diverse markets and we may not be aware of all the customs and practices andmay not be able to successfully compete in these industries. We believe that wewill need to hire appropriate consultants and staff to reach all of thesemarkets successfully. The consultants that we may retain may not havesufficient experience to enable us to completely understand the characteristicsof these diverse industries. There can be no assurance that we will properlyascertain or assess any and all risks inherent in our proposed markets or thatwe will successfully enter into new markets or grow in our existing markets.

 

***Our ability toreach some of the markets currently set forth in our business plan will requireregulatory approval. In addition, new products that we may develop or acquiremay also require regulatory approval.***

 

Theingredients that we use to produce the pHarlo concentrate are approved asGenerally Recognized as Safe by the FDA. Therefore, we believe that our currentline of products that utilize the pHarlo concentrate, including the intendeduses of these 

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products, do not require further approval by the FDA. However, we maydevelop or acquire future products that use ingredients that will need to beapproved by the FDA, or we may alter the intended uses of our current product,such that those products require additional FDA approval(s). There can be noassurance that FDA approval, if necessary, will be obtained.

 

Theuse of our pHarlo technology in the meat and poultry food processingapplications requires the approval of the USDA. In August 2006, wereceived a Letter of No Objections from the Food Safety and Inspection Servicesagency of the USDA, or FSIS, and we began the commercialization phase of thisapplication of the pHarlo technology. There can be no assurance that we willsuccessfully complete the commercial verification process. If we do notsuccessfully complete the commercial verification process, this may have amaterial adverse effect on our business plan.

 

In addition to the poultry processing industry, wealso intend to market the pHarlo technology for use in seafood processing, andmay resume efforts to introduce the pHarlo technology in skin care and pet careproducts. If marketed in the United States or internationally, each of theseproduct lines could potentially be subject to a variety of federal, state, andinternational regulatory authorities that could require additional testing,registration, pre-market approval, labeling, manufacturing, safety,recordkeeping and other obligations. There can be no assurance that theproducts will obtain the necessary approvals, or, if granted, that theapprovals will not include significant limitations on the indicated uses forwhich the products may be marketed or other restrictions or requirements thatmay reduce the value of the products.

***A key component ofour business strategy is the proprietary nature of the pHarlo concentrate, and,therefore, our inability to protect our intellectual property rights couldmaterially harm our business.***

 

ThepHarlo concentrate that we produce is based upon both the patent applications thatwe purchased in the 2005 Acquisition, as well as on certain base patents andbase patent applications, or patents and applications that we license. We haveentered into an exclusive worldwide royalty free sub-license with pHarlo IP,the exclusive licensee of the base patents and base patent applications, toexploit these base patents and applications in certain fields of use.Protecting this intellectual property, in addition to protecting the patentapplications that we purchased in the 2005 Acquisition, is a key component tothe success of our business. Although we have retained the right to enforce ourrights as a sub-licensor under the base patents and base patent applications,if an infringement occurs within the field of use specified in our sub-licenseagreement, there can be no assurance that we would be successful in any actionto protect our rights under the patent applications that we have purchased. Inaddition, there can be no assurance that the base patent applications or thepatent applications that we have purchased will ultimately be protected by anissued patent.

 

***Intense competitioncould harm our financial performance and the value of your investment.***

 

Some of the industries in which we are or will bemarketing our products are characterized by intense competition.

Our Unifresh Footbath treats a highly infectiousdisease known as digital dermatitis that causes lameness, swelling and fever indairy cows, resulting in a drastic decrease in milk production. Forms oftreatment include antibiotic bandaging and topical sprays using Terramycin®(oxytetracycline—an antibiotic) and footbaths using Formalin (a saturatedsolution of formaldehyde), copper sulfate, Tetracycline (a broad-spectrumantibiotic) or Peracetic Acid (a disinfectant and sanitizer). Unifresh Footbath’sunderlying technology, pHarlo technology, uses a highly acidified form ofcopper sulfate that helps control the bacteria that cause digital dermatitis.Some competing products using copper sulfate include QuickHit, Healthy Foot andHoofPro+ by SSI Corporation; Double-ActionTM Hoof Treatment by WestAgro, Inc.; and Hoofcare Supercharger manufactured by Marabo.

Although our oral hygiene product for humans, CloseCall, is swallowed rather than expelled like mouthwash, our product may competewithin the mouthwash industry generally. The mouthwash industry is a matureindustry with several mass products such as Listerine®, Scope®, Act®, Peroxyl®and Cepacol® from participants, many of which are divisions of largecorporations, such as Pfizer, Procter & Gamble, Johnson &Johnson, Colgate and Combe. These are well-established companies with vastlygreater resources than we have.

Currently, there is little competition for bacterialinhibitors in the scalding process of poultry processors. We intend to expandthe use of the pHarlo technology into the remaining operations of poultryprocessing, specifically the on-line reprocessing area, or an approved processthat allows chicken with fecal material on the skin to be sprayed with achemical disinfectant so that all such material is disinfected and/or removedprior to entry into the chilling process, or freezing process. However, webelieve we will encounter competition in the chill process from manufacturersof sodium hydrochloride or sodium hypochlorite, chemical compound solutionsfrequently used as disinfectants and bleaching agents. The chill process iscold water or air that is used in poultry processing to reduce the temperatureof the carcass to 40 degrees Fahrenheit in order to maintain food safety.

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Currently, our seafood application product, PacificBlueTM, is the treatment in the market that eliminates odors on seafood byreducing the bacteria that causes spoilage. When and if the market for PacificBlueTM develops, additional products created by competitors may enter the marketand compete.

In addition, ammonia is an ever-present element of theatmosphere in poultry houses. The detrimental effects of ammonia in poultryfarming are widely known and several products focused on litter treatment areavailable in the market using sodium bisulfate and aluminum sulfate (Alum) thatconvert litter ammonium to ammonium sulfate, emitting a significantly lowerammonia level. Yucca schidigera extract is also used as an enzyme treatment inthe poultry diet to reduce ammonia evolving from poultry manure. Some productscurrently available in the market include PLT® (Poultry Litter Treatment),Ultra Litter TreatmentTM and Poultry GuardTM, which are granulated products, BZT®and Premium Bio-Treat Poultry Blend.

There may be a number of companies, universities andresearch organizations actively engaged in research and development oftechnology that could be similar to our processes and ultimately become ourcompetitors. We cannot assure you that we will be able to successfully competewith current or future competitors who may have substantially greater assets,technical staff, established market share and greater financial and operatingresources than we have. If we are unable to successfully compete with theseindustry competitors, it may have a material adverse effect on our businessplan.

***Some provisions ofour amended and restated articles of incorporation, bylaws, and Nevada law mayinhibit potential acquisition bids that may be considered favorable to ourstockholders.***

 

Ourcorporate documents contain provisions that may enable our board of directorsto resist a change in control of our company even if a change in control wereto be considered favorable by our stockholders. These provisions include:

·                     limitationson persons authorized to call a special meeting of stockholders;

·                     the abilityof a majority of the directors then in office to fill vacancies indirectorships; and

·                     no cumulativevoting.

These and other provisions contained in our amendedand restated articles of incorporation and bylaws could delay or discouragetransactions involving an actual or potential change in control of us or ourmanagement, including transactions in which our stockholders might otherwisereceive a premium for their shares over then current prices, and may limit theability of stockholders to remove our current management or approvetransactions that our stockholders may deem to be in their best interests and,therefore, could adversely affect the price of our common stock.

In addition, we are subject to control shareacquisitions provisions and affiliated transaction provisions of the NevadaGeneral Corporation Law, the applications of which may have the effect ofdelaying or preventing a merger, takeover or other change of control of us andtherefore could discourage attempts to acquire our company.

**RISKS RELATED TO OUR COMMON STOCK**

*** ***

***If we are unable tocomply with the terms of registration rights agreements to which we are aparty, we may be obligated to pay liquidated damages to some of our securityholders.***

 

In connectionwith our April 2004, July 2004, December 2004,September 2005 and January 2006 private placements, we entered intoregistration rights agreements with certain of our security holders in which weagreed to prepare and file with the SEC registration statements to registercertain shares of common stock, which registration statements must bemaintained effective for certain specified periods. If we are unable to complywith these provisions of these registration rights agreements, we may be obligatedto pay liquidated damages to the holders of the securities covered by suchregistration rights agreements. If we are required to pay such liquidateddamages or other amounts to these holders, our business, financial condition,operating results and cash flows would be materially adversely affected.

 

Registration statements with respect to theApril 2004, July 2004 and December 2004 private placements werefiled and declared effective in a timely manner. However, on June 14,2006, we notified the holders of securities acquired in these privateplacements that the prospectuses contained within these registration statementscontained financial and other information that was not current and that, as aresult, such prospectuses could not be used to offer and sell such securities.Our obligation to accrue liquidated damages under these registration rightsagreements ceased in April 30 and July 22, 2006, respectively.Through July 22, 2006, we have accrued $441,000 in liquidated damagesrelated to these agreements.

We were unable to have the registration statementregistering resale of securities purchased in the September 2005 privateplacement declared effective by the deadline specified in the applicableregistration rights agreement. However, in connection with theJanuary 2006 private placement, we obtained waivers of all claims forliquidated damages relating to our inability to have such 

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registration statement declared effective by thespecified deadline. Under the waiver, the date by which the registrationstatement covering resale of the securities purchased in theSeptember 2005 private placement was required to be declared effective wasextended to May 23, 2006. On April 26, 2006, we filed a registrationstatement registering resale of securities purchased in the September 2005and January 2006 private placements. This registration statement wasdeclared effective by the SEC on October 31, 2006. As it relates to theSeptember 2005 private placement, we believe that we have used our best effortsto cause the registration statement to be declared effective and, therefore,pursuant to the terms of the September 2005 registration rights agreement,we believe that is not currently liable for liquidated damages as a result ofthe registration statement not being declared effective by May 23, 2006.Should the rights holders dispute that the Company used its best efforts, andthe Company either accedes to their assertion or is found to not have used itsbest efforts, the estimated maximum amount of liquidated damages for which theCompany would be liable, assuming (i) ineffectiveness from May 23,2006 to the end of the period covered by the registration agreement and(ii) a stock price of $0.37 for periods subsequent to July 26, 2006,is approximately $270,000.

As it relates to the January 2006 privateplacement, we failed to have the registration statement declared effective bythe SEC on or before October 26, 2006. Consequently, on November 25, 2006 weare required to issue to each holder of the January 2006 privateplacement, shares and warrants equal to one percent of the respective number ofshares and warrants purchased by each holder or an aggregate of 138,859 sharesof common stock and warrants to purchase 138,859 shares of common stock.

***Future sales of ourcommon stock may cause our stock price to decline.***

Since our inception, we have funded operations throughcommon stock issuances in order to meet our strategic objectives. We havecompleted six private sales of common stock and securities convertible into commonstock. We may, in the future, issue more shares of common stock in sales thatmay or may not be registered under the Securities Act of 1933, or theSecurities Act. Our stock price may decline due to future sales of our sharesor even the perception that such sales may occur.

***Our stock price canbe extremely volatile.***

 

Ourcommon stock is traded on the OTC Bulletin Board. There can be no assurancethat an active public market will continue for the common stock, or that themarket price for the common stock will not decline below its current price. Theprice of our common stock may be influenced by many factors, including, but notlimited to, investor perception of us and our industry and general economic andmarket conditions. The trading price of our common stock could be subject towide fluctuations in response to announcements of our business developments orour competitors, quarterly variations in operating results and other events orfactors. In addition, stock markets have experienced extreme price volatilityin recent years. This volatility has had a substantial effect on the marketprices of companies, at times for reasons unrelated to their operatingperformance. Such broad market fluctuations may adversely affect the price ofour common stock.

 

***The large number ofshares available for future sale could adversely affect the price of our commonstock.***

 

Asof September 30, 2006, approximately 21 million shares of commonstock were issuable upon exercise of outstanding stock options with a weightedaverage exercise price of $0.92 per share, and approximately 21.5 millionshares of common stock were issuable upon exercise of outstanding warrants withan exercise price of between $0.01 to $2.00 per share. On April 26, 2006,we filed a registration statement registering resale of securities purchased inthe September 2005 and January 2006 private placements. Thisregistration statement was declared effective by the SEC on October 31, 2006.The registration rights agreement for the January 2006 private placementrequires us to pay liquidated damages in additional common stock and warrantseffective November 25, 2006 since we failed to have the registration statementdeclared effective by October 26, 2006. Consequently, on November 25, 2006 weare required to issue to each holder of the January 2006 privateplacement, shares and warrants equal to one percent of the respective number ofshares and warrants purchased by each holder or an aggregate of 138,859 sharesof common stock and warrants to purchase 138,859 shares of common stock.As ofSeptember 30, 2006, no shares were issuable as liquidated damages underthe terms of the January 2006 registration rights agreement.

 

***Our common stock,which is quoted on the OTC Bulletin Board, has several disadvantages from thosesecurities traded on The Nasdaq Stock Market.***

 

Ourcommon stock, which is quoted on the OTC Bulletin Board, has severaldisadvantages from those securities traded on The Nasdaq Stock Market. Thesedisadvantages include the following:

 

·                     The SEC’s orderhandling rules, which apply to Nasdaq-listed securities, do not apply tosecurities quoted on the OTC Bulletin Board.

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·                     Although TheNasdaq Stock Market has rigorous listing standards to ensure the high qualityof its issuers, and can delist issuers for not meeting those standards, the OTCBulletin Board has no listing standards. Rather, it is the market maker whochooses to quote a security on the system by filing an application with theNASD. The NASD cannot deny an application by a market maker to quote the stockof a company. The only requirement for inclusion in the OTC Bulletin Board isthat the issuer be current in its reporting requirements with the SEC.

·                     Tradingactivity on the OTC Bulletin Board in general is not conducted as efficientlyand effectively as with Nasdaq-listed securities. Investors must contact abroker-dealer to trade OTC Bulletin Board securities. Investors do not havedirect access to the bulletin board service. For bulletin board securities,there only has to be one market maker.

·                     Bulletinboard transactions are conducted almost entirely manually. Because there are noautomated systems for negotiating trades on the bulletin board, they areconducted via telephone. In times of heavy market volume, the limitations ofthis process may result in a significant increase in the time it takes toexecute investor orders. Therefore, when investors place an order to buy orsell a specific number of shares at the current market price, it is possiblefor the price of a stock to go up or down significantly during the lapse oftime between placing a market order and getting execution.

·                     Shares tradedon the OTC Bulletin Board generally are quoted with greater spreads between bidand ask and may be more expensive to buy or sell.

·                     Because bulletinboard stocks are usually not followed by analysts, there may be lower tradingvolume than for Nasdaq-listed securities.

***If we fail toremain current on our reporting requirements, we could be removed from the OTCBulletin Board, which would limit the ability of broker-dealers to sell oursecurities and the ability of stockholders to sell their securities in thesecondary market.***

 

Companieslike us that trade on the OTC Bulletin Board must be reporting issuers underSection 12 of the Exchange Act of 1934, and must be current in theirreports under Section 13, in order to maintain price quotation privilegeson the OTC Bulletin Board. If we fail to remain current on our reportingrequirements, we could be removed from the OTC Bulletin Board. In such event,the market liquidity for our securities could be severely adversely affected bylimiting the ability of broker-dealers to sell our securities and the abilityof stockholders to sell their securities in the secondary market.

 

***Since our commonstock is subject to the SEC’s penny stock rules, broker-dealers may experiencedifficulty in completing customer transactions and trading activity in oursecurities may be adversely affected.***

 

Apublic company’s common stock is subject to the penny stock rules promulgatedunder the Securities Exchange Act of 1934, or Exchange Act, unless its nettangible assets are greater than $2,000,000 or its common stock has a marketprice per share greater than $5.00. Under these rules, broker-dealers whorecommend such securities to persons other than institutional accreditedinvestors must:

 

·                     make aspecial written suitability determination for the purchaser;

·                     receive thepurchaser’s written agreement to a transaction prior to sale;

·                     provide thepurchaser with risk disclosure documents that identify certain risks associatedwith investing in “penny stocks” and that describe the market for these “pennystocks,” as well as a purchaser’s legal remedies; and

·                     obtain asigned and dated acknowledgment from the purchaser demonstrating that thepurchaser has actually received the required risk disclosure document before atransaction in “penny stock” can be completed.

Since our common stock is subject to these rules,broker-dealers may find it difficult to effect customer transactions andtrading activity in our securities may be adversely affected. As a result, themarket price of our securities may be depressed, and you may find it moredifficult to sell our securities

**Item 2.Unregistered Sales of Equity Securities and Use of Proceeds**

During the three-month period ended September 30,2006, we granted the following stock options:

·                     On September28, 2006, stock options to purchase an aggregate of 500,000 shares of commonstock, at an exercise price of $0.12 per share, with a contract term of tenyears and an immediate vesting, were granted to two new members of the board ofdirectors.

The grants of stock options were not registered underthe Securities Act because such grants were exempt from registration pursuantto Section 4(2) of the Securities Act, as they were transactions by anissuer that did not involve a public offering of securities.

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**Item 6. Exhibits**
| 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            |

 

**SIGNATURES**

In accordance with the requirements of the ExchangeAct, the registrant caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|                              |   | TASKER PRODUCTS CORP. |
|------------------------------|--------|-----------------------|
|                         |   |                  |   |   |
|                         |   |                  |   |   |
| Date: November 14, 2006 |   | By:                   |   | /s/ Stathis Kouninis |
|                         |   |                  |   | Stathis Kouninis |
|                         |   |                  |   | Chief Financial Officer, Treasurer and Secretary  (Principal Financial and Accounting Officer) |

 

**ExhibitIndex**
| 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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