** **

**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 June 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, if changed since lastreport)

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. See definitionof “accelerated filer and large accelerated filer” in Rule 12b-2 of theExchange 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 Exchange Act).  Yes  o  No  x

The number ofshares outstanding of the registrant’s common stock as of August 11, 2006 was105,026,704.

 

 

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**TASKERPRODUCTS CORP.**

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

 

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)**
| ** **                                                                                                                                                            | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                            | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| **ASSETS**                                                                                                                                                            |       |              |       |                  |       |
|                                                                                                                                                                  |       |              |       |                  |       |
| Current assets:                                                                                                                                                       |       |              |       |                  |       |
| Cash and cash equivalents                                                                                                                                             |       | $                 | 367        |                  | $          | 1,037 |   |
| Marketable securities                                                                                                                                                 |       | 3,700             |       | —                |       |
| Accounts receivable, net of allowance for doubtful  accounts of $51 and $80 as of June 30, 2006 and December 31, 2005,  respectively                                  |       | 265               |       | 155                   |       |
| Notes receivable                                                                                                                                                      |       | 701               |       | 654                   |       |
| Inventories, net of reserve of $0 and $75 as of June  30, 2006 and December 31, 2005, respectively                                                                    |       | 1,342             |       | 1,351                 |       |
| Prepaid expenses & other current assets                                                                                                                           |       | 211               |       | 192                   |       |
| Total current assets                                                                                                                                                  |       | 6,586             |       | 3,389                 |       |
|                                                                                                                                                                  |       |              |       |                  |       |
| Property and  equipment, net                                                                                                                                          |       | 1,437             |       | 1,525                 |       |
| Investment in  equity investee                                                                                                                                        |       | 656               |       | 665                   |       |
| Intangible  assets, net                                                                                                                                               |       | 8,300             |       | 21,562                |       |
| Goodwill                                                                                                                                                              |       | 23,764            |       | 41,677                |       |
| Deposit, net                                                                                                                                                          |       | 39                |       | 36                    |       |
| Total assets                                                                                                                                                          |       | $                 | 40,782     |                  | $          | 68,854 |   |
|                                                                                                                                                                  |       |              |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                        |       |              |       |                  |       |
| Current liabilities:                                                                                                                                                  |       |              |       |                  |       |
| Convertible debentures                                                                                                                                                |       | $                 | —     |                  | $          | 194 |   |
| Accounts payable                                                                                                                                                      |       | 1,161             |       | 1,740                 |       |
| Notes payable — acquisition of IRL                                                                                                                               |       | 446               |       | 446                   |       |
| Other accrued liabilities                                                                                                                                             |       | 1,487             |       | 1,612                 |       |
| Total current liabilities                                                                                                                                             |       | 3,094             |       | 3,992                 |       |
|                                                                                                                                                                  |       |              |       |                  |       |
| Long-term liabilities:                                                                                                                                                |       |              |       |                  |       |
| Notes payable — shareholders                                                                                                                                     |       | 457               |       | 444                   |       |
| Notes payable — acquisition of IRL                                                                                                                               |       | 595               |       | 1,077                 |       |
| Other long term liabilities                                                                                                                                           |       | 47                |       | 53                    |       |
| Total long-term liabilities                                                                                                                                           |       | 1,099             |       | 1,574                 |       |
|                                                                                                                                                                  |       |              |       |                  |       |
| Stockholders’ equity:                                                                                                                                            |       |              |       |                  |       |
| Common stock, $0.001 par value; 300,000 shares  authorized; 105,002 and 89,167 shares issued and outstanding as of June 30,  2006 and December 31, 2005, respectively |       | 105               |       | 89                    |       |
| Additional paid-in capital                                                                                                                                            |       | 101,163           |       | 89,265                |       |
| Accumulated deficit                                                                                                                                                   |       | (64,679           | )          | (26,066               | )          |
| Total stockholders’ equity                                                                                                                                       |       | 36,589            |       | 63,288                |       |
| Total  liabilities and stockholders’ equity                                                                                                                      |       | $                 | 40,782     |                  | $          | 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  JUNE 30,** | ** **  |
|---------------------------------------------------|------------|-------------------------------------------------|-------------|
| ** **                                        | ** ** | **2006**                                        | ** **  | **2005** | ** ** |
|                                              |       |                                            |        |   |   |
| **Revenues**                                      |       | $                                               | 537         |   | $ | 244 |   |
| **Cost of  goods sold**                           |       | 145                                             |        | 84 |   |
| **Gross  margin**                                 |       | 392                                             |        | 160 |   |
|                                              |       |                                            |        |   |   |
| **Expenses**                                      |       |                                            |        |   |   |
| Selling, general & administrative             |       | 2,860                                           |        | 3,158 |   |
| Product development                               |       | 514                                             |        | 620 |   |
| Depreciation and amortization                     |       | 579                                             |        | 25 |   |
| Impairment of goodwill and intangible asset       |       | 30,152                                          |        | — |   |
| **Total  expenses**                               | ** ** | **34,105**                                      | ** **  | **3,803** |   |
|                                              |       |                                            |        |   |   |
| **Loss  from operations**                         | ** ** | **(33,713**                                     | **)**       | **(3,643** | **)** |
|                                              |       |                                            |        |   |   |
| Other income  (expense):                          |       |                                            |        |   |   |
| Interest income                                   |       | 100                                             |        | 44 |   |
| Interest expense                                  |       | (22                                             | )           | (42 | ) |
| Liquidated damages                                |       | (49                                             | )           | (62 | ) |
| Other                                             |       | (4                                              | )           | (10 | ) |
| **Total  other expense, net**                     | ** ** | **25**                                          |        | **(70** | **)** |
|                                              |       |                                            |        |   |   |
| **Net  loss**                                     | ** ** | **$**                                           | **(33,688** | **)** | **$** | **(3,713** | **)** |
|                                              |       |                                            |        |   |   |
| **Net loss per common share,  basic and diluted** | ** ** | **$**                                           | **(0.32**   | **)** | **$** | **(0.06** | **)** |

 

See accompanying notes

4

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 **TASKERPRODUCTS CORP. AND SUBSIDIARIES**

**UNAUDITEDCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Inthousands except per share data)**
| ** **                                       | ** ** | **SIX MONTHS ENDED   JUNE 30,** | ** **  |
|--------------------------------------------------|------------|-----------------------------------------------------|-------------|
| ** **                                       | ** ** | **2006**                                            | ** **  | **2005** | ** ** |
|                                             |       |                                                |        |   |   |
| **Revenues**                                     |       | $                                                   | 758         |   | $ | 305 |   |
| **Cost of goods sold**                           |       | 213                                                 |        | 110 |   |
| **Gross margin**                                 |       | 545                                                 |        | 195 |   |
|                                             |       |                                                |        |   |   |
| **Expenses**                                     |       |                                                |        |   |   |
| Selling, general  & administrative           |       | 6,941                                               |        | 6,032 |   |
| Product  development                             |       | 889                                                 |        | 986 |   |
| Depreciation and  amortization                   |       | 1,154                                               |        | 37 |   |
| Impairment of  goodwill and intangible asset     |       | 30,152                                              |        | — |   |
| **Total expenses**                               | ** ** | **39,136**                                          | ** **  | **7,055** | ** ** |
|                                             |       |                                                |        |   |   |
| **Loss from operations**                         | ** ** | **(38,591**                                         | **)**       | **(6,860** | **)** |
|                                             |       |                                                |        |   |   |
| Other income  (expense):                         |       |                                                |        |   |   |
| Interest income                                  |       | 138                                                 |        | 90 |   |
| Interest expense                                 |       | (49                                                 | )           | (155 | ) |
| Liquidated  damages                              |       | (136                                                | )           | (62 | ) |
| Loss on disposal  of vehicle                     |       | (50                                                 | )           | — |   |
| Other                                            |       | 75                                                  |        | (10 | ) |
| **Total other expense, net**                     | ** ** | **(22**                                             | **)**       | **(137** | **)** |
|                                             |       |                                                |        |   |   |
| **Net loss**                                     | ** ** | **$**                                               | **(38,613** | **)** | **$** | **(6,997** | **)** |
|                                             |       |                                                |        |   |   |
| **Net loss per common share, basic and diluted** | ** ** | **$**                                               | **(0.38**   | **)** | **$** | **(0.11** | **)** |

 

See accompanying notes

5

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**TASKERPRODUCTS CORP. AND SUBSIDIARIES**

**UNAUDITEDCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In thousands)**
| ** **                                                                    | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                    | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| **Cash flows from operating  activities:**                                    |       |                                              |       |   |   |
| Net loss                                                                      |       | $                                                 | (38,613    | ) | $ | (6,997 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities:  |       |                                              |       |   |   |
| Depreciation and  amortization                                                |       | 1,154                                             |       | 37 |   |
| Non-cash  interest - liquidated damages                                       |       | 136                                               |       | 35 |   |
| Non-cash  interest - interest payable on convertible debentures               |       | 19                                                |       | — |   |
| Non cash - loss  on disposal of vehicle                                       |       | 50                                                |       | — |   |
| Non-cash  interest - note payable and note receivable                         |       | (33                                               | )          | — |   |
| Stock option  compensation expense                                            |       | 2,831                                             |       | 484 |   |
| Impairment  charge of goodwill and intangible asset                           |       | 30,152                                            |       | — |   |
| Allowance for  uncollectible accounts receivable                              |       | 10                                                |       | — |   |
| Loss on equity  investee                                                      |       | 9                                                 |       | 11 |   |
| Common stock,  warrants and options for services                              |       | —                                            |       | 2,577 |   |
| Changes in operating  assets and liabilities:                                 |       |                                              |       |   |   |
| Accounts  receivable                                                          |       | (120                                              | )          | (225 | ) |
| Inventories                                                                   |       | 9                                                 |       | (1,001 | ) |
| Prepaid expenses                                                              |       | (10                                               | )          | (327 | ) |
| Prepaid  commissions                                                          |       | (10                                               | )          | (45 | ) |
| Accounts payable                                                              |       | (489                                              | )          | 706 |   |
| Other accrued  liabilities                                                    |       | (286                                              | )          | (176 | ) |
| Net cash used in  operating activities                                        |       | (5,191                                            | )          | (4,921 | ) |
|                                                                          |       |                                              |       |   |   |
| **Cash flows from investing  activities:**                                    |       |                                              |       |   |   |
| Purchases of  available-for-sale securities                                   |       | (6,350                                            | )          | — |   |
| Proceeds from  available-for-sale securities                                  |       | 2,650                                             |       | — |   |
| Purchases of  property and equipment                                          |       | (93                                               | )          | (430 | ) |
| Repayment of  notes                                                           |       | —                                            |       | (3,486 | ) |
| Payment of  acquisition costs                                                 |       | —                                            |       | (572 | ) |
| Investments in  equity investee                                               |       | —                                            |       | (718 | ) |
| Payments for  deposits and other                                              |       | (2                                                | )          | (16 | ) |
| Net cash used in  investing activities                                        |       | (3,795                                            | )          | (5,222 | ) |
|                                                                          |       |                                              |       |   |   |
| **Cash flows from financing activities:**                                     |       |                                              |       |   |   |
| Proceeds from private  placement                                              |       | 9,335                                             |       | — |   |
| Payment of private  placement broker fees                                     |       | (593                                              | )          | — |   |
| Exercise of  warrants/options                                                 |       | 57                                                |       | 167 |   |
| Repayments on note  payable - IRL                                             |       | (483                                              | )          | — |   |
| Other                                                                         |       | —                                            |       | 1 |   |
| Net cash provided by  financing activities                                    |       | 8,316                                             |       | 168 |   |
|                                                                          |       |                                              |       |   |   |
| **Net decrease in cash and cash  equivalents**                                |       | (670                                              | )          | (9,975 | ) |
| **Cash and cash equivalents,  beginning of period**                           |       | 1,037                                             |       | 14,225 |   |
|                                                                          |       |                                              |       |   |   |
| **Cash and cash equivalents, end  of period**                                 |       | $                                                 | 367        |   | $ | 4,250 |   |
|                                                                          |       |                                              |       |   |   |
| **Supplemental disclosures of  cash flow information:**                       |       |                                              |       |   |   |
| Interest paid                                                                 |       | $                                                 | 13         |   | $ | 27 |   |
| **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        |   | $ | 270 |   |

 

See accompanying notes

6

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**TASKER PRODUCTS CORP. ANDSUBSIDIARIES**

**NOTESTO 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 June 30, 2006 andDecember 31, 2005 and for the three and six month periods ended June 30, 2006and 2005 reflect all adjustments of a normal and recurring nature to presentfairly the consolidated financial position, results of operations and cashflows for the interim periods.  These unaudited condensed, consolidatedfinancial statements have been prepared by the Company pursuant to theinstructions to Form 10-Q, and Article 10 of Regulation S-X.  Pursuant tosuch 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,contained in the Company’s Annual Report on Form 10-KSB for the year endedDecember 31, 2005. The results of operations for the three and six monthperiods ended June 30, 2006 are not necessarily indicative of the results thatmay occur for the year ending December 31, 2006.

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

**2. Liquidity**

The Company has incurredlosses in its operations in each quarter since it changed its businessdirection in late 2002. For the three and six months ended June 30, 2006 theCompany has incurred a net loss of approximately $33.7 million and $38.6 million,respectively, inclusive of an impairment charge for goodwill and intangibleassets of approximately $30.2 million. For the three and six months ended June30, 2005 the Company has incurred a net loss of approximately $3.7 million and7.0 million, respectively. In addition the Company has not generated positivecash flow from operations for the three and six months ended June 30, 2006 and2005. The Company expects to continue to incur losses for atleast the short term. To become profitable, the Company must increaserevenue substantially and achieve and maintain positive gross and operatingmargins. If the Company is not able to increase revenue and gross and operatingmargins sufficiently to achieve profitability, the Company’s results ofoperations and financial condition will be materially and adversely affected.

At June 30, 2006, theCompany had a total of approximately $4.1 million of cash, cash equivalents andmarketable securities as a result of the January 2006 private placement.

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 operationsmay not provide adequate funding for the Company’s working capital over thenext twelve months. The Company is rapidly depleting its cash resourcesand its ability to continue to operate and grow its business is dependent uponobtaining new financing and/or generating revenue growth from operations.  The cost of any new financing may be prohibitive.While the Company has been in the process of aggressively developing, marketingand selling its products, there can be no assurances that those efforts will bemet with success in the marketplace or that the timing of the Company’s effortswill be consistent with its cash availability and burn rate. If by the fourthquarter of 2006 the Company is unable to arrange new financing and/or generatesufficient revenue growth from existing and new business arrangements, itsliquidity position will become significantly impaired and it will be forced toconsider the further restructuring of its operations, the disposition ofvarious assets, the seeking of protection from its creditors, or ceasing ofoperations and liquidation.

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 privateplacements may have an impact on the Company’s future liquidity. To date theCompany has satisfied and/or received waivers for the provisions of a majorityof the agreements that would have otherwise required the Company to payliquidated damages., Although certain of the conditions that may result inliquidated damages are not in its control, the Company does notexpect that any liquidated damage amounts it may be required to pay will bematerial.

7

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**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;

 

·        adecrease in expected future cash flows; and

 

·        adecline in 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”, and the impairment tests performed during the secondquarter of 2006.

**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 six monthsended June 30, 2006, the Company recorded expense of approximately $1.7 millionand approximately $2.8 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 six months ended June 30, 2006 based on the grant dateestimate of fair value for those awards. Prior period financial information hasnot been restated.

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 six months ended June 30, 2005.
| ** **                                                                                                                                    | ** ** | **Three Months  Ended  June 30, 2005**     | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **(In thousands  except per  share data)** | ** ** |
| Net loss, as  reported                                                                                                                        |       | $                                                         | (3,713     | ) |
| 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 |       | $                                                         | (1,246     | ) |
| Pro forma net  loss                                                                                                                           |       | $                                                         | (4,959     | ) |
|                                                                                                                                          |       |                                                      |       |
| Basic and  diluted net loss per share, as reported:                                                                                           |       | $                                                         | (0.06      | ) |
| Pro forma basic and  diluted net loss per share:                                                                                              |       | $                                                         | (0.08      | ) |

 

8

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| ** **                                                                                                                                    | ** ** | **Six Months   Ended  June 30, 2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **(In thousands  except per  share data)** | ** ** |
| Net loss, as  reported                                                                                                                        |       | $                                                         | (6,997     | ) |
| 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 |       | $                                                         | (3,523     | ) |
| Pro forma net  loss                                                                                                                           |       | $                                                         | (10,036    | ) |
|                                                                                                                                          |       |                                                      |       |
| Basic and  diluted net loss per share, as reported:                                                                                           |       | $                                                         | (0.11      | ) |
| Pro forma basic and  diluted net loss per share                                                                                               |       | $                                                         | (0.16      | ) |

 

Compensation costassociated with employee stock options represented approximately $1.1 millionand $2.8 million, respectively, for the three and six months ended June 30,2006. Stock based compensation expense increased by approximately $1.1 millionand $2.3 million during the three and six months ended June 30, 2006 from noexpense and $484,000 for the three and six months ended June 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 6.6% 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 sixmonths ended June 30, 2006 were as follows:
| Dividend yield:                    |   | 0          | %      |
|------------------------------------|--------|------------|--------|
| Expected term of  options (years): |   | 6          |   |
| Risk free  interest rate:          |   | 4.88% -5.0 | 4%     |
| Volatility:                        |   | 132%-13    | 5%     |

 

The Company’s estimate ofan expected option term was derived based on the average of the sum of thevesting term and the original contract term. The estimated stock pricevolatility was derived based on a review of the Company’s actual historicvolatility for a period equal to the expected term of its stock options awardedin the six months ended June 30, 2006, by reference to actual stock pricesduring this period and historic stock prices over the past five years. The riskfree interest rate was based on the five year Treasury note. The specific stockoption valuation assumptions used for awards granted prior to January 1,2006 are as disclosed in the Company’s 2005 annual report on Form 10-KSB, asfiled with the SEC.

9

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A summary of stock option activity for the six monthsended June 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 |   |
| Options exercisable at  June 30, 2006 |       | 16,336                         |       | $                                                          | 0.87       |                                                             | 8.2        |                                | $          | 2,000 |   |

 

The weighted average grant date fair value of optionsgranted during the three months ended June 30, 2006 and 2005 was $0.53 and$2.70, respectively. The total intrinsic value of options exercised during thethree months ended June 30, 2006 was approximately $40,000. No options wereexercised in the three months ended June 30, 2005. As of June 30, 2006 therewas approximately $4.0 million of unrecognized compensation cost related tostock option awards that is expected to be recognized as expense over aweighted average period of 2 years.

The weighted averagegrant date fair value of options granted during the six months ended June 30,2006 and 2005 was $0.69 and $3.00, respectively. The total intrinsic value ofoptions exercised during the six months ended June 30, 2006 and 2005 wasapproximately $122,000 and $1.4 million, respectively.  As of June 30, 2006 there was approximately$4.0 million of unrecognized compensation cost related to stock option awardsthat is expected to be recognized as expense over a weighted average period of2 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 six months ended June 30, 2006 and 2005.
| ** **                                                 | ** ** | **Three Months Ended**                                  | ** ** |
|------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                 | ** ** | **June 30,**                                                 | ** ** |
| ** **                                                 | ** ** | **(in thousands except per share data)** | ** ** |
| ** **                                                 | ** ** | **2006**                                                          | ** ** | **2005** | ** ** |
| **Numerator  for basic & diluted net loss per share:** |       |                                                              |       |   |   |
| Net loss                                                   |       | $                                                                 | (33,688    | ) | $ | (3,713 | ) |
| Net loss available to common stockholders                  |       | $                                                                 | (33,688    | ) | $ | (3,713 | ) |
|                                                       |       |                                                              |       |   |   |
| **Denominator:**                                           |       |                                                              |       |   |   |
| Denominator for basic & diluted net loss               |       |                                                              |       |   |   |
| per share - weighted-average shares                        |       | 104,947                                                           |       | 63,707 |   |
|                                                       |       |                                                              |       |   |   |
| **Basic & diluted earnings  net loss per share:**      |       | $                                                                 | (0.32      | ) | $ | (0.06 | ) |

 

 

10

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|                                                                                   | ** ** | **Six Months Ended**                                    | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                                        | ** ** | **June 30,**                                                 | ** ** |
| ** **                                                                        | ** ** | **(in thousands except per share data)** | ** ** |
| ** **                                                                        | ** ** | **2006**                                                          | ** ** | **2005** | ** ** |
| **Numerator for basic &  diluted net loss per share:**                        |       |                                                              |       |   |   |
| Net loss                                                                          |       | $                                                                 | (38,613    | ) | $ | (6,997 | ) |
| Net loss  available to common stockholders                                        |       | $                                                                 | (38,613    | ) | $ | (6,997 | ) |
| **Denominator:**                                                                  |       |                                                              |       |   |   |
| Denominator for  basic & diluted net loss per share - weighted-average shares |       | 102,749                                                           |       | 61,284 |   |
| **Basic & diluted earnings net loss per share:**                              |       | $                                                                 | (0.38      | ) | $ | (0.11 | ) |

 

As of June 30, 2006,22,440,777 options and 21,497,200 warrants were excluded from the computationof net loss per share because their effect would be anti-dilutive. As of June30, 2005 18,614,999 options, 7,847,350 warrants, and 2,540,000 of convertibledebentures were excluded from the computation of net loss per share because theeffect 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 Equity Securities”(SFAS 115). SFAS 115 establishes the accounting and reporting requirements forall debt securities and for investments in equity securities that havedeterminable fair values. All marketable securities must be classified as oneof the following: held-to-maturity, available-for-sale, or trading.

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 June 30, 2006,the Company had invested $3.7 million in marketable securities.

**7. Inventories**

Inventories consisted of the following:

|                   | ** ** | **June 30,**       | ** ** | **December 31,** | ** ** |
|-------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **        | ** ** | **2006**                | ** ** | **2005**              | ** ** |
| ** **        | ** ** | **(in thousands)** | ** ** |
| Raw Materials     |       | $                       | 921        |                  | $          | 956 |   |
| Finished Goods    |       | 421                     |       | 470                   |       |
| Inventory Reserve |       | —                  |       | (75                   | )          |
|              |       | $                       | 1,342      |                  | $          | 1,351 |   |

 

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

11

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**8. Goodwill and Other IntangibleAssets**

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 ofutility patents, 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 initiated an impairment analysis ofour long-lived assets and determined that the carrying value of these assetsexceeded their projected undiscounted net cash flows. With the assistance of anindependent valuation firm, we calculated the fair values of our long-livedassets. The fair values were determined based on the discounted cash flowmethod and indicated that an impairment of the Company’s intangible assetsexisted. 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 June 30, 2006 andDecember 31, 2005 are as follows:

|                            | ** ** | **June 30, 2006** | ** ** |
|----------------------------|------------|-----------------------------|------------|
| ** **                 | ** ** | **(in thousands)**     | ** ** |
| ** **                 | ** ** | **Gross  carrying  amount** | ** ** | **Impairment  charge** | ** ** | **Accumulated  amortization** | ** ** | **Net  carrying  value** | ** ** |
| Amortized  utility patents |       | $                           | 22,505     |   | $ | 12,239 |   | $ | 1,966 |   | $ | 8,300 |   |
| Unamortized  goodwill      |       | 41,677                      |       | 17,913 |   | — |   | 23,764 |   |
| Total intangible assets    |       | $                           | 64,182     |   | $ | 30,152 |   | $ | 1,966 |   | $ | 32,064 |   |

 

|                            | ** ** | **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 |   |

** **

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For the three and six months ended June 30, 2006, theCompany recorded amortization expense of approximately $489,000 andapproximately $1.0 million respectively, related to the intangible assets.

Estimated amortization expense for the intangibleasset for the remaining two quarters of the current fiscal year, and subsequentfiscal years, is as follows:

|                     | ** ** | **(in thousands)** | ** ** |
|---------------------|------------|-------------------------|------------|
| 2006                |       | $                       | 395        |   |
| 2007                |       | $                       | 790        |   |
| 2008                |       | $                       | 790        |   |
| 2009                |       | $                       | 790        |   |
| 2010                |       | $                       | 790        |   |
| 2011 and thereafter |       | $                       | 4,745      |   |

 

**9. Derivative Instruments**

To date, the Company hasentered into several debt and equity transactions to fund its operations. Anumber of these transactions involved the issuance of convertible debt andwarrants. These transactions also included registration rights agreements thatimpose significant penalties on us if certain conditions are not met. As aresult of these registration rights agreements, we face a number of unique andcomplex accounting issues, such as the ones discussed below.

The Company has issuedand outstanding several financial instruments with embedded derivativefeatures, consisting of convertible debt, which was converted in full in thefirst quarter of 2006, and warrants. The Company analyzes these financialinstruments in accordance with Statement of Financial Accounting Standards (“SFAS”)No. 133 and Emerging Issues Task Force (“EITF”) IssueNos. 00-19 and 05-02 to determine if these hybrid contractshave embedded derivatives that must be bifurcated. In addition, free standingwarrants are accounted for as either equity or liabilities in accordance withthe provisions of EITF Issue No. 00-19.

EITF IssueNo. 05-4 “The Effect of a Liquidated Damages Clause on a FreestandingFinancial Instrument Subject to EITF Issue No. 00-19, “Accountingfor Derivative Financial Instruments Indexed to, and Potentially Settled in, aCompany’s Own Stock” addresses financial instruments, such as convertible debtand 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 of registration rights are discussedin EITF Issue No. 05-4. One alternative treatment discussed in EITF IssueNo. 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 wehave issued would need to be recorded as a liability at fair value and changesin the fair value of the liability would need to be recorded in the statementof operations each period. Implementation of this approach may have a materialnon-cash impact to our consolidated financial statement. Since no consensus onEITF Issue No. 05-4 has been reached, we have adopted View C asdescribed in the EITF Issue No. 05-4 Issue Summary No. 1.  Under View C, registration rights agreementsand the related financial instruments are accounted for as separateinstruments.  Accordingly, we have givenonly prospective application to this guidance.

Further impact on ourconsolidated financial statements of adopting the standard, if any, will followthe transition guidance when released.

In April andJuly 2004, we entered into private placement agreements and registrationrights agreements for convertible debentures and warrants. Based on theinterpretive guidance in EITF Issue No. 05-4 due to an uncappedliquidated damages provision in the registration rights agreements, wedetermined that the registration rights are derivative liabilities that shouldbe bifurcated from the related financial instruments. Accordingly, theestimated fair value of the registration rights derivative of approximately$244,000 was recorded as a liability as of October 1, 2005, the beginning ofthe first fiscal period after September 15, 2005, the date that EITFpostponed further deliberations. In connection with our December 2004 andJanuary 2006 private placements, our estimated fair value of the relatedregistration rights derivative was immaterial at the inception and at eachreporting date since and we have not recorded a liability.  At each reporting period, we calculate theestimated fair value of the registration rights derivatives.  If the underlying assumptions of thecalculation change such that the estimated fair value is not immaterial, wewill record a liability at that time.  Inconnection with our September 2005 private placement, our estimated fair valueof the related registration rights derivative at its inception was immaterialand we did not record a liability. Subsequently, in connection with the January 2006 private placement, weamended our September 2005 agreement with the rights holder to waive theliquidated damages.

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 second quarter of 2006. AtJune 30, 2006, the derivative liability was approximately $150,000 and wasreported under other accrued liabilities.

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In connection with ourexamination of past transactions for application of EITF Issue No. 05-4,we noted that for the period from entering into the April 2004 SecuritiesPurchase Agreement until we increased our authorized shares in August 2004, wehad insufficient shares to meet all potential obligations to issue shares underour convertible notes and exercisable warrants and options. Under EITF IssueNo. 00-19, a liability should be recognized for those financialinstruments for that period, with any changes in the fair value of suchliabilities recognized in our consolidated statement of operations. Based onour analysis of such liabilities, we determined the effect of any such amountsto be immaterial.

**10. Contractual Obligations andCommitments**

The Company has thefollowing commitments as of June 30, 2006, which are comprised primarily of aresearch and development fee contract, consulting and employment contracts,vendor agreements, notes payable, as well as 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) |       | $                             | 139        |   | $ | 139 |   | $ | — |   | $ | — |   | $ | — |   |
| Consulting agreements                                      |       | 136                           |       | 136 |   | — |   | — |   | — |   |
| Employment agreements  (2)                                 |       | 2,284                         |       | 559 |   | 1,725 |   | — |   | — |   |
| Vendor agreements                                          |       | 41                            |       | 10 |   | 31 |   | — |   | — |   |
| Operating leases                                           |       | 1,249                         |       | 183 |   | 957 |   | 109 |   | — |   |
| Note(s) payable                                            |       | 1,543                         |       | 450 |   | 1,085 |   | 8 |   | — |   |
| **Total**                                                  | ** ** | **$**                         | **5,392**  | ** ** | **$** | **1,477** | ** ** | **$** | **3,798** | ** ** | **$** | **117** | ** ** | **$** | **—** | ** ** |

 

(1) On January 26, 2006, R&D fees payable under aPatent and Sub-License Agreement with pHarlo IP were amended so that these feesare (i) payable on a quarterly basis within 30 days after the end of eachcalendar quarter and (ii) are based on gross sales of the Company (or itsaffiliates) of products using the pHarlo technology. For fiscal year 2006, theR&D Fees must not be less than $150,000 and are capped at $500,000. TheR&D Fees have no minimum amounts payable after 2006; however, they arecapped at $2,000,000 for 2007, $4,000,000 for 2008, $8,000,000 for 2009 and$10,000,000 for 2010 and beyond. In the second quarter of 2006 the Companypaid, under this agreement, approximately $11,000 of R&D fees related tothe revenue generated in the first quarter of 2006.

(2) In the first quarter of fiscal 2006, the Companyterminated several of its existing employment agreements with some of itssenior management and entered into new employment agreements with its currentexecutive management. As of June 30, 2006 the revised estimated future minimum annualcompensation under these employment agreements, including the new andterminated agreements for 2006, 2007, 2008 and 2009, is approximately $558,900,$892,800, $782,800 and $49,000, respectively.

**11. Related Party Transactions**

In 2004, we entered intoan Exclusive Field of Use License Agreement and Product Sale Agreement withWynn Starr Special Products, LLC. Under the terms of this agreement and itssubsequent amendments, we granted Wynn Starr the exclusive, worldwide right tomarket and distribute products used as post-harvesting processing aids, orchemicals that assist with microbial reduction and shelf life extension withoutchanging food characteristics, for the poultry industry based on the pHarlotechnology. Wynn Starr is also responsible for taking the pHarlo concentrateprovided by us and blending it with liquids to create the finished product thatis ultimately distributed by Wynn Starr. In return for this license, Wynn Starrhas agreed to pay us a royalty of $70.00 per gallon on all net sales (asdefined in the Exclusive Field of Use License Agreement and Product SaleAgreement) sold by Wynn Starr for which payment is received from customers. Asof June 30, 2006 no royalties were due and none had been paid to us under thisroyalty arrangement. The Company is currently renegotiating an amendment tothis royalty arrangement to align its terms to the current market demand forthe product. Steven B. Zavagli, one of the Companys’s directors, is thefounder, 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 $50,000 for consulting services during the six monthsended June 30, 2006.

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**12. Sale of Equity Securities**

In connection with theJanuary 2006 private placement, the Company obtained waivers of all claims forliquidated 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, the Company filed aregistration statement registering resale of securities purchased in theSeptember 2005 and January 2006 private placements.  The Company believes that it has used itsbest efforts to cause this registration statement to be declared effective and,therefore, pursuant to the terms of the applicable registration rightsagreements, the Company believes that is not currently liable for liquidateddamages as a result of this registration statement not being declared effectiveby May 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 to July 26,2006, is approximately $270,000.

## **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. In the second fiscal quarter of 2006 the Company paid $92,000 of the$107,000 severance obligation accrual that remained as of March 31, 2006. Theremaining $15,000 of severance obligation outstanding as of June 30, 2006 waspaid in July 2006. The severance obligation accrual is included on theunaudited condensed consolidated balance sheets as a part of other accruedliabilities.

**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 Call.The Chief Operating Decision Maker (CODM) of the Company is the President andCEO. The operating results of each product application, other than for revenue,are not separately tracked or reported. Operating results by productapplication are not reviewed by the CODM because discrete financial informationis not available. Consequently, as permitted by the provisions of SFAS No. 131,“Disclosure About Segments of an Enterprise and Related Information,” theCompany has one reportable segment for financial statement purposes.

*Revenueby Product*

The Company’s revenue byproduct is as follows:

|                         | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **              | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **              | ** ** | **(in thousands)**                             | ** ** |
| Unifresh® Footbath |       | $                                                   | 477        |                                              | $          | — |   | $ | 606 |   | $ | — |   |
| Close CallTM        |       | 60                                                  |       | 244                                               |       | 152 |   | 305 |   |
|                    |       | $                                                   | 537        |                                              | $          | 244 |   | $ | 758 |   | $ | 305 |   |

##  

15

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## *Dependence on Certain Customers*

The Company’s dependenceon certain customers as a percentage of total revenue is as follows:

|            | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended   June 30,** | ** ** |
|------------|------------|-------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** ** | ** ** | **2006**                                        | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Customer A |       | 39.8                                            | %          | —                                              | %          | 30.9 | % | — | % |
| Customer B |       | 24.7                                            | %          | —                                              | %          | 19.9 | % | — | % |
| Customer C |       | —                                          | %          | 33.6                                                | %          | — | % | 26.9 | % |
| Customer D |       | —                                          | %          | 14.5                                                | %          | — | % | 11.6 | % |
| Customer E |       | —                                          | %          | 14.5                                                | %          | — | % | 11.6 | % |

 

**15.Subsequent Events**

In August 2006, werevised the salary structure of three of our employees and we terminated sixother employees. In relation to these reductions we recorded severance costs ofapproximately $15,000. We expect that these severance costs will be paid in fullin the third quarter of 2006.

 

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**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,growth opportunities, 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 “Risk Factors” in our annual report of Form 10-KSB for theyear ended December 31, 2005 and in Part II, Item 1A of this Form 10-Q. Some ofthe risks that current and potential investors should be aware of include, butare not limited to, the following:

·                     If we are unable to ****obtain new financingand/or generate revenue growth by the fourth quarter of  2006, our liquidity position will becomesignificantly impaired****;

·                     We do not maintain effectivecontrols and procedures and we consistently had material weaknesses in our internalcontrols over financial reporting;

·                     Our limited operating history inour present markets;

·                     Our limited experience inmarketing our products;

·                     Our need to obtain regulatoryapproval for the manufacturing and sale of some of our current products andproducts under development;

·                     Our ability to protect ourintellectual property rights;

·                     Intense competition in our currentmarkets; and

·                     Our products, like most regulatedproducts, may be subject to various enforcement actions, which could require,among other things, the relabeling, reformulation or recall of products and/orthe submission of additional information in support of product claims orsafety, or punitive actions, any of which could harm our reputation andbusiness.

The identification in thisdocument 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 withbacteriostatic properties, to remain active throughout a wide range of pHvalues. We own the utility patent applications and provisional patentapplications associated with the pHarlo technology and have entered into asub-license agreement for the base patents associated with the pHarlotechnology, in the following fields of use:

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

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

·                     AntimicrobialProcessingAid and Food Additive (US Provisional Application)

·                     Oral HealthCare Drink and Method for Reducing Malodors

·                     Skin CareComposition for Dermatological Disorders including burn and wrinkle creams (USProvisional Application) Hangover Remedy and Alcohol Abatement Composition

We currently market:

·                     Unifresh ® Footbath, a groomingaid for dairy cows;

·                     Close CallTM, an oral hygienebreath drink;

·                     Tasker Pacific BlueTM Seafood Wash;and

·                     Tasker Blue, an antimicrobialprocessing aid in poultry scalders.

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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.

### *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 an antimicrobialprocessing aid in poultry scalders. This letter enables us to begincommercialization 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 $33.7 million in the three months ended June 30, 2006 compared toa net loss of $3.7 million in the three months ended June 30, 2005. Excludingthe charge for the impairment of goodwill and intangible assets ofapproximately $30.2 million and the stock based compensation expense ofapproximately $1.1 million, our net loss for the three months ended June 30,2006 decreased by approximately $1.3 million to $2.4 million as compared to anet loss of $3.7 million for the three months ended June 30, 2005. There was nostock based compensation expense for the three months ended June 30, 2005.

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We had a net loss ofapproximately $38.6 million in the six months ended June 30, 2006 compared to anet loss of $7.0 million in the six months ended June 30, 2005. Excluding thecharge for the impairment of goodwill and intangible assets of approximately$30.2 million and the stock based compensation expense of $2.8 million our netloss for the six months ended June 30, 2006 decreased by approximately $880,000to $5.6 million as compared to a net loss of $6.5 million for the three monthsended June 30, 2005, excluding stock based compensation expense ofapproximately $484,000. The increase in stock based compensation expense is dueto the adoption of SFAS 123R “Share Based Payment” on January 1, 2006. As aresult of the adoption of SFAS 123(R), the fair value of all stock-basedcompensation is now recorded as expense in our financial statements, ratherthan as a footnote disclosure.

*Liquidity*

Based upon our forecastof future revenues from our products in conjunction with the cash andmarketable securities on hand, cash expected to be generated from operationsmay not provide adequate funding for our working capital over the next twelvemonths. We are rapidly depleting our cash resources and our ability tocontinue to operate and grow our business is dependent upon obtaining new financingand/or generating 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 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 by thefourth quarter of 2006 we are unable to arrange new financing and/or generatesufficient revenue growth from existing and new business arrangements, ourliquidity position will become significantly impaired and we will be forced toconsider the further restructuring of our operations, the disposition ofvarious assets, the seeking of protection from our creditors, or ceasing ofoperations and liquidation.

**Impairment of goodwill and intangible assets**

In the secondquarter of 2006, we tested for impairment of our intangible assets and ourgoodwill in accordance with Statement of Financial Accounting Standards (SFAS)No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”(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 ofthe impairment tests, we recorded non-cash impairment charges to intangibleassets and goodwill of $12.2 million and $17.9 million, respectively.  Note 8 to our unaudited condensedconsolidated financial statements describes the impact of accounting for theadoption of SFAS No. 142, “Goodwill and Other Intangible Assets”, and theimpairment tests performed during the second quarter of 2006.

**Related Party Transactions**

In 2004, we entered intoan Exclusive Field of Use License Agreement and Product Sale Agreement withWynn Starr Special Products, LLC. Under the terms of this agreement and itssubsequent amendments, we granted Wynn Starr the exclusive, worldwide right tomarket and distribute products used as post-harvesting processing aids, orchemicals that assist with microbial reduction and shelf life extension withoutchanging food characteristics, for the poultry industry based on the pHarlotechnology. Wynn Starr is also responsible for taking the pHarlo concentrateprovided by us and blending it with liquids to create the finished product thatis ultimately distributed by Wynn Starr. In return for this license, Wynn Starrhas agreed to pay us a royalty of $70.00 per gallon on all net sales (asdefined in the Exclusive Field of Use License Agreement and Product SaleAgreement) sold by Wynn Starr for which payment is received from customers. Asof June 30, 2006 no royalties were due and none had been paid to us under thisroyalty arrangement. We are currently renegotiating this royalty arrangement toalign its terms to the current market demand for the product. Steven B.Zavagli, one of our directors, is the founder, Chairman and the Chief ExecutiveOfficer of Wynn Starr and Wynn Starr’s ultimate parent company, Wynn StarrFlavors, Inc.

TheCompany paid Mr. Gordon O. Davis, the former Chairman of the board ofdirectors, approximately $30,000 for consulting services during the quarterended June 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 

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time we make the estimate, and differentestimates—which also would have been reasonable—could have been used, whichwould have resulted in different financial results.

The critical accountingpolicies we identified in our most recent Annual Report on Form 10-KSB for thefiscal year ended December 31, 2005 related to goodwill and intangible assets,valuation of acquired intangible assets, derivative liabilities and inventoryvaluation and classification. With the adoption of SFAS 123(R) on January 1, 2006,we have identified the estimates and assumptions that accompany the fair valuedetermination of our stock option awards as critical, as discussed below. It isimportant that the discussion of our operating results that follows be read inconjunction with the critical accounting policies discussed below as well asthose disclosed in our Annual Report on Form 10-KSB, as filed with the SEC onMarch 31, 2006.

**Stock-Based Compensation**

Effective January 1,2006, we adopted accounting rules (SFAS 123(R), “Share-Based Payment”)requiring the expense recognition of the estimated fair value of 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 six monthsended June 30, 2006, we recorded approximately $2.8 million of stock basedcompensation expense, with approximately $1.7 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 stock option exercise price,

·                     the expected term of the option,

·                     the grant date price of our commonstock, which is issuable upon exercise of the option,

·                     the expected volatility of ourcommon stock,

·                     expected dividends on our commonstock (we do not anticipate paying dividends for the foreseeable future), and

·                     the risk free interest rate forthe 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 6 years and was derived based on the average ofthe sum of the vesting term and the original contract term. In estimating ourstock price volatility, we analyzed our historic volatility for a period equalto the expected term of our stock options awarded in the six months ended June30, 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.

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 six months ended June 30, 2006 relates tooptions granted in the six months ended June 30, 2006. We expect that stockcompensation expense will continue to have a material impact on our financialresults for the remainder of the fiscal year. For the remainder of fiscal 2006we expect to incur stock compensation expenses of approximately $885,000 perquarter.

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

**Revenues**

Revenues for the threemonths ended June 30, 2006 were approximately $537,000 compared withapproximately $244,000 for the corresponding period in 2005. This increase isprimarily due to increased sales in Unifresh ® Footbath. The revenue for thethree months ended June 30, 2005, was entirely due to sales of Close CallTM. Weexpect that revenue will continue to increase throughout fiscal year 2006primarily due to the increased sales in Unifresh® Footbath and to a lesserextent due to the sales of our new products for the poultry and seafoodprocessing industries.

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**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 June 30, 2006 decreased by approximately$300,000 from approximately $3.2 million for the three months ended June 30,2005, to approximately $2.9 million for the three months ended June 30, 2006.We anticipate that SGA costs will continue to decrease, as a percentage ofrevenues and in absolute dollars, 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 increased by approximately$79,000 due to marketing research, branding and promotion for our Unifresh®Footbath product line roll-out, as well as increased compensation expense dueto the hiring of additional sales personnel.

Compensation expenseconsists primarily of salaries and other related costs for senior management,finance and administrative employees of our company. Compensation expensedecreased by approximately $239,000 primarily due to a reduction inadministrative and warehouse personnel. In August 2006, we revised the salarystructure of three of our employees and we terminated six other employees. As aresult of these reductions we expect that we will experience cost savings ofapproximately $150,000 starting late in the third quarter of 2006.

Professional fees for thethree months ended June 30, 2006 decreased by $1.3 million primarily due to anon-cash charge for stock options issued to an investor relations consultantfor services provided in the three months ended June 30, 2005.

General andadministrative expenses consist primarily of rent, insurance and travel andentertainment expenses. The increase in general administrative costs for thethree months ended June 30, 2006 by approximately $58,000 was attributable toan increase in travel costs of approximately $105,000, insurance costs ofapproximately $106,000, and rent and associated utility expenses for our Texasfacility, acquired in the July 2005 acquisition, of approximately $35,000. Theincrease was partially offset by an expense reduction of approximately $169,000due to the settlement of vendor trade obligations at amounts lower than thoseoriginally invoiced to us and a decrease of approximately $13,000 in boarddirectors fees.

Stock based compensationexpense increased by approximately $1.1 million for the three months ended June30, 2006. There was no compensation expense for the same period in 2005. Thisincrease is the result of implementing SFAS 123(R) in January 2006. The expenseassociated with these awards is recorded as expense within the same functionalexpense category as cash compensation for the respective employee is recorded.For the three months ended June 30, 2006, stock compensation expense wasallocated as follows:

|                             | ** ** | **(in thousands)** | ** ** |
|-----------------------------|------------|-------------------------|------------|
| Sales and  marketing        |       | $                       | 38         |   |
| Product  development        |       | 118                     |       |
| General and  administrative |       | 968                     |       |
|                        |       | $                       | 1,124      |   |

**Product Development**

Product developmentconsists primarily of personnel costs to support product development. Productdevelopment and research costs for the three months ended June 30, 2006decreased by approximately $106,000 or 17% to approximately $514,000 fromapproximately $620,000 for the three months ended June 30, 2005. This decreaseis primarily due to our decision to focus our development efforts in a selectsmaller number of products, which were closer to commercialization rather thanthe larger number of products we were developing in the same time period in2005.  The decrease in the number ofproducts we are developing and testing in the three months ended June 30, 2006resulted in the decrease in consulting expenses of approximately $209,000 andthe decrease in third party laboratory testing cost of approximately $124,000,partially offset by an increase in stock based compensation of approximately$118,000 and an increase of warehouse expenses of approximately $62,000. Weexpect that in fiscal 2006 product development expense will increase inabsolute dollars but decrease as a percentage of revenue.

**Depreciation and Amortization Expense**

Depreciation andamortization expense, which includes the amortization of identifiableintangible assets, increased by approximately $554,000 from approximately$25,000 in the three months ended June 30, 2005, to approximately $579,000 forthe three months ended June 30, 2006, primarily due to the amortization of our utilitypatent intangible acquired in the July 15, 2005 acquisition. This patentintangible, after the impairment charge of approximately $12.2 million recordedin the second quarter of 2006, has a current estimated value of approximately$8.3 million and is being amortized over 11.5 years.

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**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 three month period in 2005. Also, seediscussion under “Financial Overview.”

**Interest Expense**

Interest expensedecreased by approximately $20,000 from $42,000 for the three months ended June30, 2005 to approximately $22,000 for the three months ended June 30, 2006   primarily dueto a reduction in interest payable for convertible debt that was converted infull in January 2006.

**Interest Income**

Interest income increasedby approximately $56,000 from $44,000 for the three months ended June 30, 2005to approximately $100,000 for the three months ended June 30, 2006 primarilydue to an increased interest received on the Company’s investments inmarketable securities in the three months ended June 30, 2006, as compared tothe same period ending June 30, 2005.

**Other expenses, net**

We incurred otherexpenses, net of approximately $49,000 for the three months ended June 30, 2006as compared to $62,000 for the three months ended June 30, 2005. The decreaseis solely due to the decrease in the accrual of liquidated damages for failureto have a current prospectus available for the resale of common stock sold inthe April 2004 and July 2004 private placements. The decrease in the accrual isdue to the fact that the prospectus was current in April 2006 and ourobligation to accrue liquidated damages under the April 2005 agreement ceasedin April 2006.

**Six Months Ended June 30, 2006Compared to Six Months Ended June 30, 2005**

**Revenues**

Revenues for the sixmonths ended June 30, 2006 were approximately $758,000 compared withapproximately $305,000 for the corresponding period in 2005. This increase isprimarily due to increased sales in Unifresh® Footbath.  The revenue for the six months ended June 30,2005, was entirely due to sales of Close CallTM. 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 six months ended June30, 2006 increased by approximately $900,000 from $6.0 million for the sixmonths ended June 30, 2005, to $6.9 million for the six months ended June 30,2006. We anticipate that SGA costs will continue to decrease, as a percentageof revenues and in absolute dollars, in fiscal year 2006.

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 increased byapproximately $130,000 due to marketing research, branding and promotion forour Unifresh®Footbath product line roll-out, as well as increasedcompensation expense due to the hiring of additional sales personnel.

Compensation expenseconsists primarily of salaries and other related costs for senior management,finance and administrative employees of our company. Compensation expenseincreased by approximately $178,000 primarily due to an increase in severancecosts associated with a reduction in administrative and warehouse personnel,and to a lesser extent due to salaries for personnel acquired through the July2005 acquisition. In August 2006, we revised the salary structure of three ofour employees and we terminated six other employees. As a result of thesereductions we expect that we will experience cost savings of approximately$150,000 starting late in the third quarter of 2006.

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Professional fees for thesix months ended June 30, 2006 decreased by $2.3 million primarily due to anon-cash charge of approximately $2.5 million for stock options issued to aninvestor relations consultant for services provided in the six months endedJune 30, 2005, partially offset by an increase of approximately $200,000 inlegal fees associated with our SEC filings for the six months ended June 30,2006.

General andadministrative expenses consist primarily of rent, insurance and travel andentertainment expenses. The increase in general and administrative costs forthe six months ended June 30, 2006, as compared to the six months ended June30, 2005, was approximately $694,000. This increase was attributable to asettlement fee of approximately $249,000 for the termination of minimumpurchase commitment obligations for Close CallTM bottles, increase in travel andentertainment expenses of  approximately$155,000, increase in general insurance costs of approximately $104,000,increase in rent and associated utility expenses for the Texas facility,acquired in the July 2005 acquisition, of approximately $72,000, 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$10,000.

Stock based compensation expense increased byapproximately $2.2 million for the six months ended June 30, 2006. Thisincrease is the result of implementing SFAS 123(R) in January 2006. The expenseassociated with these awards is recorded as expense within the same functionalexpense category as cash compensation for the respective employee is recorded.For the six months ended June 30, 2006, stock compensation expense wasallocated as follows :

|                             | ** ** | **(in thousands)** | ** ** |
|-----------------------------|------------|-------------------------|------------|
| Sales and  marketing        |       | $                       | 221        |   |
| Product  development        |       | 175                     |       |
| General and  administrative |       | 2,448                   |       |
|                        |       | $                       | 2,844      |   |

**Product Development**

Product developmentconsists primarily of personnel costs to support product development. Productdevelopment and research costs for the six months ended June 30, 2006 decreasedby approximately $97,000 or 10% to approximately $889,000 from approximately$986,000 for the six months ended June 30, 2005. This decrease is primarily dueto our decision to focus our development efforts in a select smaller number ofproducts, which were closer to commercialization rather than the larger numberof products we were developing in the same time period in 2005.  The decrease in the number of products we aredeveloping and testing in the six months ended June 30, 2006 resulted in thedecrease in consulting expenses of approximately $361,000 and a decrease inthird party laboratory testing costs of approximately $146,000 decrease.  This decrease was partially offset by anincrease in stock based compensation of approximately $158,000, an increase incompensation costs of approximately $92,000, an increase in warehouse costs ofapproximately $91,000 and an increase in production supplies of approximately$70,000.  We expect that in fiscal 2006product development expense will increase in absolute dollars as we continue todevelop and enhance our product lines, but should decrease as a percentage oftotal revenues.

 **Depreciationand Amortization Expense**

Depreciation andamortization expense, which includes the amortization of identifiableintangible assets, increased by approximately $1.1 million from approximately$37,000 in the six months ended June 30, 2005, to approximately $1.2 millionfor the six months ended June 30, 2006, primarily due to the amortization ofour utility patent intangible. This patent intangible, after the impairmentcharge of approximately $12.2 million recorded in the second quarter of 2006,has a current estimated value of approximately $8.3 million and is being amortizedover 11.5 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-cash impairmentcharges to intangible assets and goodwill of $12.2 million and $17.9 million,respectively.  We did not record animpairment charge for the same six month period in 2005. Also, see discussionunder “Financial Overview.”

**Interest Expense**

Interest expense decreasedby approximately $106,000 from $155,000 for the six months ended June 30, 2005to approximately $49,000 for the six months ended June 30, 2006   primarily dueto a reduction in interest payable for convertible debt that was converted infull in January 2006.

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**Interest Income**

Interest income increasedby approximately $48,000 from $90,000 for the six months ended June 30, 2005 toapproximately $138,000 for the six months ended June 30, 2006 primarily due toan increase in interest earned from the Company’s investments in marketablesecurities, as compared to the same period ending June 30, 2005.

**Other expenses, net**

We incurred otherexpenses, net of approximately $102,000 for the six months ended June 30, 2006as compared to $62,000 of accrued liquidated damages for the six months endedJune 30, 2005. We accrued approximately $136,000 for (i) liquidateddamages for failure to have a current prospectus available for the resale ofcommon stock sold in the April 2004 and July 2004 private placements, and (ii)a loss on a disposal of a vehicle in the amount of $50,000 as a result of theSettlement and Release Agreement we entered into with a former executive. Thisincrease in expense was partially offset by the reduction of the fair marketvalue of the registration rights liability by approximately $85,000.

**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. Although the conditionsthat may result in liquidated damages are not in our control, we do not expectthat any liquidated damage amounts we may be required to pay will be material.

Based upon ourforecast of future revenues from our products in conjunction with the cash andmarketable securities on hand, cash expected to be generated from operationsmay not provide adequate funding for our working capital over the next twelvemonths. We are rapidly depleting our cash resources and our ability tocontinue to operate and grow our business is dependent upon obtaining newfinancing and/or generating 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 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 by thefourth quarter of 2006 we are unable to arrange new financing and/or generatesufficient revenue growth from existing and new business arrangements, ourliquidity position will become significantly impaired and we will be forced toconsider the further restructuring of our operations, the disposition ofvarious assets, the seeking of protection from our creditors, or ceasing ofoperations and liquidation.

**Operating Activities**

At June 30, 2006 ourcash, cash equivalents and marketable securities balances were approximately$4.0 million compared with $1.0 million at December 31, 2005.

Net cash used inoperating activities for the six months ended June 30, 2006 was approximately$5.2 million, compared to net cash used in operating activities ofapproximately $4.9 million for the six months ended June 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 six months ended June 30, 2006 was approximately$3.8 million as compared to approximately $5.2 million for the six months endedJune 30, 2005. The decrease in net cash used in investing activities wasprimarily due to the repayment of loans in the six months ended June 30, 2005.

**Financing Activities**

Net cash provided byfinancing activities during the six months ended June 30, 2006 wasapproximately $8.3 million, as compared to approximately $168,000 for the sixmonths ended June 30, 2005.

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The net cash provided byfinancing activities for the six months ended June 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 six months ended June 30, 2006 we paid approximately $483,000 underthe IRL promissory note.

**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 the applicableregistration rights agreement. We received these waivers from shareholdersrepresenting more than a majority of all outstanding securities issued inconnection with the September 2005 private placement. In consideration forobtaining the waiver, we repriced the warrants issued to shareholdersproviding the waiver such that the exercise price of the warrants issued inconnection with the September 2005 private placement was reduced from $3.00 to$1.00.  Under the waiver, the date by which the registration statementcovering resale of the securities purchased in the September 2005 privateplacement was required to be declared effective was extended to May 23,2006.  On April 26, 2006, we filed a registration statement registeringresale of securities purchased in the September 2005 and January 2006 privateplacements.  We believe that we have usedour best efforts to cause this registration statement to be declared effectiveand, therefore, pursuant to the terms of the applicable registration rights agreements,we believe that we are not currently liable for liquidated damages as a resultof this registration statement not being declared effective by May 23,2006.  Should the rights holders disputethat our best efforts were used, and we either accede to their assertion or arefound to not have used our best efforts, the estimated maximum amount ofliquidated damages for which we would be liable, assuming (i) ineffectivenessfrom May 23, 2006 to the end of the period covered by the registration agreementand (ii) a stock price of $0.37 for periods subsequent to July 26, 2006, isapproximately $270,000.

**Off-BalanceSheet Arrangements**

During the three and sixmonths ended June 30, 2006, we did not engage in material off-balance sheetactivities, including the use of structured finance, special purpose entities;material trading activities in non-exchange traded commodity contracts; ortransactions with persons or entities that benefit from their non-independentrelationship with us.

In April 2005, we purchasedfrom Electric Aquagenies Unlimited, Inc. 359,000 common shares of Biofilm,representing 27% of Biofilm’s outstanding common stock, for cash considerationof $718,000. We believe that our 27% equity interest in Biofilm is asignificant 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 thefollowing commitments as of June 30, 2006, which are comprised primarily of aresearch and development fee contract, consulting and employment contracts, avendor agreement, notes payable, as well as 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) |       | $                         | 139        |   | $ | 139 |   | $ | — |   | $ | — |   | $ | — |   |
| Consulting  agreements                                     |       | 136                       |       | 136 |   | — |   | — |   | — |   |
| Employment  agreements (2)                                 |       | 2,284                     |       | 559 |   | 1,725 |   | — |   | — |   |
| Vendor  agreements                                         |       | 41                        |       | 10 |   | 31 |   | — |   | — |   |
| Operating leases                                           |       | 1,249                     |       | 183 |   | 957 |   | 109 |   | — |   |
| Note(s) payable                                            |       | 1,543                     |       | 450 |   | 1,085 |   | 8 |   | — |   |
| **Total**                                                  | ** ** | **$**                     | **5,392**  | ** ** | **$** | **1,477** | ** ** | **$** | **3,798** | ** ** | **$** | **117** | ** ** | **$** | **—** | ** ** |

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(1) On January 26, 2006,R&D fees payable under a Patent and Sub-License Agreement with pHarlo IPwere amended so that these fees are (i) payable on a quarterly basis within 30days after the end of each calendar quarter and (ii) are based on gross salesof our Company (or 

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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 the secondquarter of 2006 we paid, under this agreement, approximately $11,000 of R&Dfees related to the revenue generated in the first quarter of 2006.

(2) Subsequent toDecember 31, 2005, we terminated several of our existing employment agreementswith some of our senior management and entered into new employment agreementswith our current executive management. As of June 30, 2006 the revisedestimated future minimum annual compensation under these employment agreements,including the new and terminated agreements for 2006, 2007, 2008 and 2009, isapproximately $558,900, $892,800, $782,800 and $49,000, respectively.

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

**Interest Rate Risk**

Our exposure to marketrisk, including changes in interest rates, relates primarily to changes in themarket value of our investment in marketable securities. These investments bearinterest at a variable interest rate, which is subject to market changes. Wehave not entered into any interest rate swap agreements, or other instrumentsto minimize our exposure to interest rate fluctuations. We have not had anyderivative instruments in the past and do not presently plan to in the future.Our investment portfolio consists of demand deposits and marketable securities.Due to the highly liquid nature of our investment, a sudden sharp change ininterest rates would not have a material adverse effect on the value of theportfolio.

**Item 4. Controls and Procedures**

As required by Rule13a-15 under the Securities Exchange Act of 1934 (the “Exchange Act”), wecarried out an evaluation of the effectiveness of the design and operation ofour disclosure controls and procedures as of the end of the period covered bythis report. This evaluation was carried out under the supervision and with theparticipation of our Chief Executive Officer, Richard Falcone, and ChiefFinancial Officer, Stathis Kouninis.

Disclosure controls andprocedures are controls and other procedures that are designed to ensure thatinformation required to be disclosed in our reports filed or submitted underthe Exchange Act is recorded, processed, summarized and reported, within thetime periods specified in the Securities and Exchange Commission’s rules andforms. Disclosure controls and procedures include, without limitation, controlsand procedures designed to ensure that information required to be disclosed inour reports filed under the Exchange Act is accumulated and communicated tomanagement, including our Chief Executive Officer and Chief Financial Officer,to allow timely decisions regarding required disclosure.

Based upon thatevaluation, our Chief Executive Officer and Chief Financial Officer concludedthat our disclosure controls and procedures as of the end of the period coveredby this report were not effective. As described in the our Quarterly Reportsthroughout 2005 and under Item 9A of Part II in our Annual Report on Form10-KSB for the year ended December 31, 2005, we have already institutedand are continuing to implement, corrective actions with respect to thedeficiencies in our disclosure controls and procedures.

Although we haveinstituted and are continuing to implement corrective actions with respect tothe deficiencies in our disclosure controls and procedures, such correctiveactions were not sufficient to detect an error in our Excel spreadsheet for thecalculation of certain line items in the column captioned “May 13, 1996(inception) to December 31, 2005” in our Consolidated Statements of Operationsfor the three years ended December 31, 2005 (the “Inception Column”). As aresult of this error, we reported incorrect values in the Inception Column asfollows:

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

·                  Althoughthe amount 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 bythe lack of an automated financial reporting system and a small accountingstaff that does not allow for a thorough review process. We have engaged aconsultant to design financial reports so that we do not rely on spreadsheetsand we will add additional accounting staff when our financial condition allowsus to do so.

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As noted above and underItem 9A of Part II in the our Annual Report on Form 10-KSB for the year endedDecember 31, 2005, there were changes to the our internal control over financialreporting that occurred during the our last fiscal quarter that have materiallyaffected, or are reasonably likely to materially affect, our internal controlsover financial reporting.

While every effort willbe made to ensure the financial reporting system will adhere to our internalcontrols, we cannot be certain that additional material weaknesses will not beidentified prior to the filing of management’s annual report on internalcontrol over financial reporting.

**PARTII — OTHER INFORMATION**

**Item 1. Legal Proceedings**

On October 26, 2005, acivil action captioned The BOC Group, Inc. v. Tasker Capital Corp., RandyCable, and Shaun Porter was filed in the United States District Court forthe District of Connecticut.  In the complaint, The BOC Group alleges thatMr. Porter and Mr. Cable, employees of Tasker, have breached certainrestrictive covenants contained in their employment agreements with The BOCGroup, and that we tortuously interfered with The BOC Group’s agreements withMr. Porter and Mr. Cable. The BOC Group also claimed that we, Mr. Porter andMr. Cable violated Connecticut’s statutes governing trade secrets and unfairtrade practices. In July 2006, the matter was resolved by our payment of$50,000 to The BOC Group.

On January 18, 2006, a civil action captioned DallasXXIX Corporate Square, L.P., v. Coast to Coast Laboratories and Tasker CapitalCorp. was filed in the Circuit Court of Pinellas County, Florida. Theplaintiff alleged that Coast to Coast Laboratories Corp., a wholly owned subsidiaryof our company, breached a lease agreement and that we breached a guaranty. InJune 2006 the matter was resolved by our payment of $25,000 to Dallas XXIXCorporate Square, L.P. The settlement and the stipulation of dismissal withprejudice was filed with the Court.

On May 25, 2006, acivil action captioned James Collins v. Tasker Products Corp. was filedin the Connecticut 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.

**Item 1A.Risk Factors**

The following revises inits entirety the risk factors discussed in “ Risk Factors” in our Annual Reporton Form 10-KSB for the year ended December 31, 2005. These risk factors couldmaterially affect our business, financial condition or future results.

**RISKSRELATED TO OUR BUSINESS**

*****Unless we obtain new financingand/or generate revenue growth in the near future, our liquidity position willbecome significantly impaired and we could be forced to restructure ordiscontinue our operations*****

We are rapidly depleting our cash resources and ourability to continue to operate and grow our business is dependent uponobtaining new financing and/or generating 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 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 by thefourth quarter of 2006 we are unable to arrange new financing and/or generatesufficient revenue growth from existing and new business arrangements, ourliquidity position will become significantly impaired and we will be forced toconsider the further restructuring of our operations, the disposition ofvarious assets, the seeking of protection from our creditors, or ceasing ofoperations and liquidation.

##### ***Wehave lost money in each fiscal quarter since we changed our business model tothe development of products in the oral care, food processing, skin care, waterpurification and pet industries. We expect future losses and we may neverbecome profitable.***

We have incurred lossesin our operations in each quarter since we changed our business direction inlate 2002. Net loss for the quarter ended June 30, 2006 and March 31, 2006 wereapproximately $33.7 million and $4.9 million, respectively and for the yearsended December 31, 2005, December 31, 2004, December 31, 2003and December 31, 2002 were approximately $4,925,000, $18,269,000,$6,072,000, $607,000 and $761,000, respectively. We expect to continue to incurlosses in the short term. We expect operating expense to 

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increase as we work tobuild our brands, 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.

##### ***Wehave a limited operating history in our present market and prospectiveinvestors have a limited historical basis on which to judge our ability to besuccessful.***

We were originallyorganized for the purpose of engaging in the acquisition and exploration ofmineral properties, primarily in the Province of British Columbia, Canada.During 2001, we allowed the option on our mineral property to lapse and beganto investigate other business opportunities. In late 2002, we entered into anexclusive license to sell, develop, market and distribute consumer deodorantbreath products, animal deodorant breath products and soft drink products usingthe pHarlo technology. Since late 2002, we have pursued this business plan andhave expanded it to include the use of the pHarlo technology in the pre- andpost-harvest food processing, skin care, pet care, hangover remedy, alcoholabatement and water purification industries. Additionally, we are investigatingthe applicability of the pHarlo technology to other aspects of the seafoodindustry.

Since inception, we havesuffered recurring losses and net cash outflows from operations. We expect tocontinue to incur substantial losses to complete the development of ourbusiness. In addition, we only recently began shipping our first product, CloseCall®, inFebruary of 2005. We thus have a limited operating history upon which investorsmay base an evaluation of our likely future performance.

##### ***Werecently completed a significant acquisition of certain assets of pHarlo CitrusTechnologies, Inc. and other related entities. We cannot guarantee that we willbe able to manage these new assets profitably.***

On July 15, 2005, wepurchased certain assets of pHarlo Citrus Technologies, Inc., Indian RiverLabs, LLC, pHarlo Citrus Properties Partnership, LLLP and Coast to CoastLaboratories, LLC, which four entities are referred to in this prospectus asthe “Selling Entities.” This acquisition, or our 2005 Acquisition, representeda highly significant event for our company. Prior to the acquisition, welicensed the use of certain patent applications covering various uses for thepHarlo technology and improvements from the Selling Entities and also purchasedthe pHarlo concentrate, a concentrate made using the pHarlo technology fromIndian River Labs. As a result of the 2005 Acquisition and the purchase of allof the working assets of Indian River Labs, we now control various uses ofpHarlo technology in the manufacturing process for the pHarlo concentrate. Ourbusiness, financial condition and results of operations could suffer materiallyif we fail to successfully manage these assets and the manufacturing process.

##### ***Recentrestatements and amendments to our interim financial statements and quarterlyreports, as well deficiencies in our disclosure controls and procedures andinternal control over financial reporting, may present a risk of futurerestatements and disclosure compliance errors and could in turn lead to legalexposure.***

We have recently restatedand amended our interim financial statements for the periods endedJune 30, 2004 and September 30, 2004 and have recently filedamendments to our quarterly reports on Form 10-QSB for each of thoseperiods reflecting these restatements. While in the process of amending ourquarterly reports on Form 10-QSB to restate these financialstatements, we became aware of certain required information that had beenomitted and other information that needed to be changed or corrected. As aresult of the foregoing, we revised these quarterly reports to correct thisinformation and to state, among other things, that our disclosure controls andprocedures were not effective as of June 30, 2004 and September 30,2004.

As of December 31,2005, March 31, 2006 and June 30, 2006, our management concluded that ourdisclosure controls and procedures were not effective. We are taking what webelieve to be reasonable and appropriate steps to correct these deficiencies.We will also continue to assess the adequacy and appropriateness of theseactions and adjust our remediation plan as needed or to reflect changes in ourbusiness. However, we cannot be certain when these deficiencies will ultimatelybe remediated and we expect that we will need a period of time over which todemonstrate that our disclosure controls are functioning appropriately toconclude that we have adequately remediated the deficiencies. Any failure toimplement and maintain improvements in our disclosure and internal controls maypresent a risk of future restatements and disclosure compliance errors andcould in turn lead to legal exposure. Any failure to improve these controls toaddress the identified deficiencies, or any other unidentified deficiencies,could also cause investors to lose confidence in our reported financialinformation, which could have a negative impact on the trading price of ourcommon stock. This could have a material adverse effect on our business andfinancial results.

##### ***Wehave limited experience in the marketing of our products and may not be able tomarket them successfully.***

We currently market CloseCall, an oral hygiene breath drink, Tasker Pacific BlueTM Seafood Wash, aproduct used in commercial and retail seafood processing to extend shelf life,and Unifresh® Footbath, a grooming aid that helps clean anddisinfect the hooves of dairy cows. We have also begun clinical testing of thepHarlo technology in the poultry scalding process and in various seafoodapplications. We are continuing our clinical research and hope to developfuture products using the pHarlo technology in the pre- and post-harvest foodprocessing, oral care, skin care, pet care, hangover remedy, alcohol abatementand water treatment industries.

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These are diverse marketsand we may not be aware of all the customs and practices and may not be able tosuccessfully compete in these industries. We believe that we will need to hireappropriate consultants and staff to reach all of these markets successfully.The consultants that we may retain may not have had sufficient experience toenable us to completely understand the characteristics of these diverseindustries. There can be no assurance that we will properly ascertain or assessany and all risks inherent in our proposed markets or that we will successfullyenter into new markets or grow in our existing markets.

##### ***Ourability to reach some of the markets currently set forth in our business planwill require regulatory approval. In addition, new products that we may developor acquire may also require regulatory approval.***

The ingredients that weuse to produce the pHarlo concentrate are approved as Generally Recognized asSafe by the FDA. Therefore, we believe that our current line of products thatutilize the pHarlo concentrate, including the intended uses of these products, donot require further approval by the FDA. However, we may develop or acquirefuture products that use ingredients that will need to be approved by the FDA,or we may alter the intended uses of our current product, such that thoseproducts require additional FDA approval(s). There can be no assurance that FDAapproval, if necessary, will be obtained.

The use of our pHarlotechnology in the meat and poultry food processing applications requires theapproval of the USDA. In August 2006 we received a Letter of No Objections fromthe Food Safety and Inspection agency of the USDA and we began thecommercialization phase of this application of the pHarlo technology. There canbe no assurance that we will successfully complete the commercial verificationprocess. If we do not successfully complete the commercial verificationprocess, this may have a material adverse effect on our business plan.

In addition to thepoultry processing industry, we also intend to market the pHarlo technology foruse in seafood processing, and may resume efforts to introduce the pHarlotechnology in skin care and pet care products. If marketed in the United Statesor internationally, each of these product lines could potentially be subject toa variety of federal, state, and international regulatory authorities thatcould require additional testing, registration, pre-market approval, labeling,manufacturing, safety, recordkeeping and other obligations. There can be noassurance that the products will obtain the necessary approvals, or, ifgranted, that the approvals will not include significant limitations on theindicated uses for which the products may be marketed or other restrictions orrequirements that may reduce the value of the products.

##### ***Akey component of our business strategy is the proprietary nature of the pHarloconcentrate, and, therefore, our inability to protect our intellectual propertyrights could materially harm our business.***

The pHarlo concentratethat we produce is based upon both the patent applications that we purchased inthe 2005 Acquisition, as well as on certain base patents and base patentapplications, or patents and applications that we license. We have entered intoan exclusive worldwide royalty free sub-license with pHarlo IP, the exclusivelicensee of the base patents and base patent applications, to exploit thesebase patents and applications in certain fields of use. Protecting thisintellectual property, in addition to protecting the patent applications thatwe purchased in the 2005 Acquisition, is a key component to the success of ourbusiness. Although we have retained the right to enforce our rights as asub-licensor under the base patents and base patent applications, if aninfringement occurs within the field of use specified in our sub-license agreement,there can be no assurance that we would be successful in any action to protectour rights under the patent applications that we have purchased. In addition,there can be no assurance that the base patent applications or the patentapplications that we have purchased will ultimately be protected by an issuedpatent.

##### ***Intensecompetition could harm our financial performance and the value of yourinvestment.***

The industries in whichwe will be marketing our products are characterized by intense competition.Through our acquisition of Coast to Coast Laboratories Corp., in the 2005Acquisition from Coast to Coast Laboratories, we are currently marketingUnifresh Footbath concentrate, a grooming aid for dairy cows. Competitors inthis product market usually contain Formaldehyde or other chemicals, which areharmful to the environment.

Although our oral hygieneproduct for humans, Close Call, is swallowed rather than emitted likemouthwash, our product may compete within the mouthwash industry generally. Themouthwash industry is a mature industry with several mass products such asListerine®,Scope®, Act®, Peroxyl® andCepacol® from participants, many of which are divisionsof large corporations, such as Pfizer, Procter & Gamble, Johnson &Johnson, Colgate and Combe. These are well-established companies with vastlygreater resources than we have.

Currently, there islittle competition for bacterial inhibitors in the scalding process of poultryprocessors. We intend to expand the use of the pHarlo technology into theremaining operations of poultry processing, specifically the on-linereprocessing area, or an approved process that allows chicken with fecalmaterial on the skin to be sprayed with a chemical disinfectant so that allsuch material is disinfected and/or removed prior to entry into the chillingprocess, or freezing process. However, we believe we will encounter competitionin the chill process from manufacturers of sodium hydrochloride or sodiumhypochlorite, chemical compound solutions frequently used as disinfectants andbleaching agents.

Currently, our product,Pacific BlueÔ, is the treatmentin the market that eliminates odors on seafood by reducing the bacteria thatcauses spoilage. When and if the market for Pacific BlueÔdevelops, additional products created by competitors may enter the market andcompete.

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Ammonia is anever-present element of the atmosphere in poultry houses. The detrimentaleffects of ammonia in poultry farming are widely known and several productsfocused on litter treatment are available in the market using sodium bisulfateand aluminum sulfate (Alum) that convert litter ammonium to ammonium sulfate,emitting a significantly lower ammonia level. Yucca schidigera extract is alsoused as an enzyme treatment in the poultry diet to reduce ammonia evolving frompoultry manure. Some products currently available in the market include PLTÒ(Poultry Litter Treatment), Ultra Litter TreatmentÔand Poultry GuardÔ, which are granulated products, BZTÒand Premium Bio-Treat Poultry Blend.

Our Unifresh Footbathtreats a highly infectious disease known as digital dermatitis that causeslameness, swelling and fever in dairy cows, resulting in a drastic decrease inmilk production. Forms of treatment include antibiotic bandaging and topicalsprays using TerramycinÒ (oxytetracycline —an antibiotic) and footbaths using Formalin (a saturated solution offormaldehyde), copper sulfate, Tetracycline (a broad-spectrum antibiotic) orPeracetic Acid (a disinfectant and sanitizer). Unifresh Footbath’s underlyingtechnology, pHarlo technology, uses a highly acidified form of copper sulfatethat helps control the bacteria that cause digital dermatitis. Some competingproducts using copper sulfate include QuickHit, Healthy Foot and HoofPro+ bySSI Corporation; Double-ActionÔ Hoof Treatment byWest Agro, Inc.; and Hoofcare Supercharger manufactured by Marabo.

There may be a number ofcompanies, universities and research organizations actively engaged in researchand development of technology that could be similar to our processes andultimately become our competitors. We cannot assure you that we will be able tosuccessfully compete with current or future competitors who may havesubstantially greater assets, technical staff, established market share andgreater financial and operating resources than we have. If we are unable tosuccessfully compete with these industry competitors, it may have a materialadverse effect on our business plan.

##### ***Someprovisions of our amended and restated articles of incorporation, bylaws, andNevada law may inhibit potential acquisition bids that you may considerfavorable.***

Our corporatedocuments contain provisions that may enable our board of directors to resist achange in control of our company even if a change in control were to be consideredfavorable by our stockholders. These provisions include:

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

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

·                  nocumulative voting.

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 aresubject to control share acquisitions provisions and affiliated transactionprovisions of the Nevada General Corporation Law, the applications of which mayhave the effect of delaying or preventing a merger, takeover or other change ofcontrol of us and therefore could discourage attempts to acquire our company.

**RISKSRELATED TO OUR COMMON STOCK**

##### ***Futuresales of our common stock may cause our stock price to decline.***

Since our inception, wehave funded operations through common stock issuances in order to meet ourstrategic objectives. We have completed six private sales of common stock andsecurities convertible into common stock. We may, in the future, issue more sharesof common stock in sales that may or may not be registered under the SecuritiesAct of 1933, or the Securities Act. Our stock price may decline due to futuresales of our shares or even the perception that such sales may occur.

##### ***Ourstock price can be extremely volatile.***

Our common stock istraded on the OTC Bulletin Board. There can be no assurance that an activepublic market will continue for the common stock, or that the market price forthe common stock will not decline below its current price. The price of ourcommon stock may be influenced by many factors, including, but not limited to,investor perception of us and our industry and general economic and marketconditions. The trading price of our common stock could be subject to widefluctuations in response to announcements of our business developments or ourcompetitors, 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.

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##### ***Thelarge number of shares available for future sale could adversely affect theprice of our common stock.***

As of June 30, 2006,approximately 16.3 million shares of common stock were issuable upon exerciseof outstanding stock options with a weighted average exercise price of $0.87per share, and approximately  21.5million shares of common stock were issuable upon exercise of outstandingwarrants with an exercise price of between $0.01 to $2.00 per share.Substantially all of the shares underlying these options and warrants have beenregistered for resale, and none of them are subject to any contractualrestrictions on resale. Future sales of any of these shares, or theanticipation of such sales, could adversely affect the market price of ourcommon stock and could materially impair our future ability to raise capitalthrough an offering of equity securities. Further, any issuance of asubstantial number of these shares would dilute the ownership interest ofexisting stockholders and could result in increased volatility in the price ofour common stock.

##### ***Ourcommon stock, which is quoted on the OTC Bulletin Board, has severaldisadvantages from those securities traded on The Nasdaq Stock Market.***

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

·**                 **TheSEC’s order handling rules, which apply to Nasdaq-listed securities, do notapply to securities quoted on the OTC Bulletin Board.

·**                 **AlthoughThe Nasdaq Stock Market has rigorous listing standards to ensure the highquality of its issuers, and can delist issuers for not meeting those standards,the OTC Bulletin Board has no listing standards. Rather, it is the market makerwho chooses 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.

·**                 **Sharestraded on the OTC Bulletin Board generally are quoted with greater spreadsbetween bid and ask and may be more expensive to buy or sell.

·**                 **Becausebulletin board stocks are usually not followed by analysts, there may be lowertrading volume than for Nasdaq-listed securities.

##### ***Ifwe fail to remain current on our reporting requirements, we could be removedfrom the OTC Bulletin Board, which would limit the ability of broker-dealers tosell our securities and the ability of stockholders to sell their securities inthe secondary market.***

Companies trading on theOTC Bulletin Board, such as us, must be reporting issuers under Section 12of the Exchange Act of 1934, and must be current in their reports underSection 13, in order to maintain price quotation privileges on the OTCBulletin Board. If we fail to remain current on our reporting requirements, wecould be removed from the OTC Bulletin Board. In such event, the marketliquidity for our securities could be severely adversely affected by limitingthe ability of broker-dealers to sell our securities and the ability of stockholdersto sell their securities in the secondary market.

##### ***Ifwe are unable to comply with the terms of registration************rights agreements to which we are aparty, we may be obligated to pay liquidated************damages to some of our security holders.***

In connection with ourApril 2004, July 2004, December 2004, September 2005 and January 2006 privateplacements, we entered into registration rights agreements with certain of oursecurity holders in which we agreed to prepare and file with the SECregistration statements to register certain shares of common stock, whichregistration statements must be maintained effective for certain specifiedperiods.  If we are unable to comply withthese 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 liquidated damages or other amounts tothese holders, our business, financial condition, operating results and cashflows would be materially adversely affected.

Registration statementswith respect to the April 2004, July 2004 and December 2004 private placementswere filed and declared effective in a timely manner.  However, on June 14, 2006, we notified theholders of securities acquired in these private placements that theprospectuses contained within these registration statements contained financialand other information that was not current and that, as a result, suchprospectuses could not be used to offer and sell such securities.  Our obligation to accrue liquidated damagesunder these registration 

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rights agreements ceasedin April 30 and July 22, 2006, respectively. Through July 22, 2006, we have accrued $361,000 in liquidated damagesrelated to these agreements.

We were unable to havethe registration statement registering resale of securities purchased in theSeptember 2005 private placement declared effective by the deadline specifiedin the applicable registration rights agreement.  However, in connection with the January 2006private placement, we obtained waivers of all claims for liquidated damagesrelating to our inability to have such registration statement declaredeffective by the specified deadline. 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, we filed a registration statement registering resale of securitiespurchased in the September 2005 and January 2006 private placements.  We believe that we have used our best effortsto cause this registration statement to be declared effective and, therefore,pursuant to the terms of the applicable registration rights agreements, we believethat we are not currently liable for liquidated damages as a result of thisregistration statement not being declared effective by May 23, 2006. Should therights holders dispute that our best efforts were used, and we either accede totheir assertion or are found to not have used our best efforts, the estimatedmaximum amount of liquidated damages for which we would be liable, assuming (i)ineffectiveness from May 23, 2006 to the end of the period covered by theregistration agreement and (ii) a stock price of $0.37 for periods subsequentto July 26, 2006, is approximately $270,000.

##### ***Sinceour common stock is subject to the SEC’s penny stock rules, broker-dealers mayexperience difficulty in completing customer transactions and trading activityin our securities may be adversely affected.***

A public company’s commonstock is subject to the penny stock rules promulgated under the SecuritiesExchange Act of 1934, or Exchange Act, unless its net tangible assets aregreater than $2,000,000 or its common stock has a market price per sharegreater than $5.00. Under these rules, broker-dealers who recommend suchsecurities to persons other than institutional accredited investors must:

·                  makea special written suitability determination for the purchaser;

·                  receivethe purchaser’s written agreement to a transaction prior to sale;

·                  providethe purchaser with risk disclosure documents that identify certain risksassociated with investing in “penny stocks” and that describe the market forthese “penny stocks,” as well as a purchaser’s legal remedies; and

·                  obtaina signed 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 issubject to these rules, broker-dealers may find it difficult to effect customertransactions and trading activity in our securities may be adversely affected.As a result, the market price of our securities may be depressed, and you mayfind it more difficult to sell our securities.

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

During the three-monthperiod ended June 30, 2006, we granted the following stock options:

·                     On May 11,2006, stock options to purchase an aggregate of 530,000 shares of common stock,at an exercise price of $1.00 per share, with a contract term of ten years anda vesting term of two year, were granted to six non-executive employees

The grant of such stockoptions to the above-listed persons was not registered under the Securities Actof 1933, because the stock options either did not involve an offer or sale forpurposes of Section 2(a)(3) of the Securities Act, in reliance on the fact thatthe stock options were granted for no consideration, or were offered and soldin transactions not involving a public offering, exempt from registration underthe Securities Act pursuant to Section 4(2).

**Item 4.    Submission of Matters to a Vote of SecurityHolders**

We held our 2006 Annual Meeting of Stockholders onJune 16, 2006. The following matters were voted upon at the Annual Meeting:

Holdersof 76,303,187 shares of our common stock voted to elect James Burns to servefor a term of one year and holders of 3,869,649 shares of our common stockwithheld votes from this director.

Holdersof 66,118,754 shares of our common stock voted to elect Albert Canosa to servefor a term of one year and holders of 14,054,082 shares of our common stockwithheld votes from this director.

Holdersof 79,382,472 shares of our common stock voted to elect Richard Falcone toserve for a term of one year and holders of 790,364 shares of our common stockwithheld votes from this director.

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Holdersof 79,496,972 shares of our common stock voted to elect William Miller to servefor a term of one year and holders of 675,864 shares of our common stockwithheld votes from this director.

Holdersof 79,175,562 shares of our common stock voted to elect Steven Zavagli to servefor a term of one year and holders of 3,997,274 shares of our common stockwithheld votes from this director.

Holdersof 79,210,878 shares of our common stock voted to amend the Company’s Articlesof Incorporation to increase the maximum size of the Company’s Board ofDirectors from five to seven, holders of 940,358 shares of our common stockvoted against this resolution and holders of 21,600 shares of our common stockwithheld votes from this resolution.

Holdersof 79,662,119 shares of our common stock voted to amend the Company’s Articles ofIncorporation to change the Company name from Tasker Capital Corp. to TaskerProducts Corp., holders of 217,031 shares of our common stock voted againstthis resolution and holders of 293,686 shares of our common stock withheldvotes from this resolution.

Holdersof 32,793,063 shares of our common stock voted to approve the Company’s 2006Stock Plan, authorizing the issuance of 2,500,000 shares of our common stock,holders of 2,294,484 shares of our common stock voted against this resolution,holders of 3,127,705 shares of our common stock withheld votes from thisresolution and holders of 41,957,854 shares of our common abstained fromvoting.

Holders of 78,868,487shares of our common stock voted to ratify the appointment of Rothstein, Kass& Company, P.C. as our independent auditors for the current fiscal year,holders of 976,847 shares of our common stock voted against ratifying thisappointment and holders of 327,502 shares withheld votes from thisratification.

**Item 6. Exhibits**

| 3.1  |   | Articles of Incorporation of Tasker Products Corp.,  as amended (incorporated by reference to Exhibit 4.2 to our Registration  Statement on Form S-8 filed on July 20, 2006) |
|------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1 |   | Termination Agreement with James Burns as of August  1, 2006                                                                                                                 |
| 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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**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: August 14, 2006 |   | By:                   |   | /s/ Stathis Kouninis |
|                       |   |                  |   | Stathis Kouninis |
|                       |   |                  |   | Chief Financial Officer, Treasurer and Secretary  (Principal Financial and Accounting Officer) |

 

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**ExhibitIndex**

| 3.1  |   | Articles of Incorporation of Tasker Products Corp.,  as amended (incorporated by reference to Exhibit 4.2 to our Registration  Statement on Form S-8 filed on July 20, 2006) |
|------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1 |   | Termination Agreement with James Burns as of August  1, 2006                                                                                                                 |
| 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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