UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549





Form
10-Q





(Mark
One)





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





For
the quarterly period ended September 30, 2008





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





For the
transition period from _______________ to _______________.





Commission
file number: 000-23617





Matech
Corp.


(Exact
name of registrant as specified in its charter)





Delaware


(State or
other jurisdiction of


incorporation
or organization)





95-4622822


(I.R.S.
Employer


Identification
No.)





11661 San Vicente Boulevard,
Suite 707,Los
Angeles,CA90049


(Address
of principal executive offices)





(310)
208-5589


(Issuer’s
telephone number)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.   Yes x   No
o





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of large accelerated filer,” accelerated
filer” and smaller reporting company” in Rule 12b-2 of the Exchange
Act.





Large
      accelerated filer
            o
            
            Accelerated
      filer
            oNon-accelerated
      filer
            o
            
            Smaller
      reporting company
            x





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





As of
November 13, 2008, there were 27,459,213 shares of our Class A common stock
issued and outstanding.





MATECH
CORP.





TABLE OF
CONTENTS








PART I – FINANCIAL INFORMATIONItem 1.  Financial Statements
      (unaudited)
            1Condensed Consolidated Balance Sheet – September 30,
      2008
            1-3Condensed Consolidated Statement of Operations
      –
              For
      the three and nine months ended September 30, 2008 and
      2007
            4-5Consolidated Statements of Comprehensive Income (Loss)
      –
              For
      the nine months ended September 30, 2008 and 2007
            6Condensed Consolidated Statements of Cash Flows
      –
              For
      the nine months ended September 30, 2008 and 2007
            7-11Notes to Condensed Consolidated Financial
      Statements
            12Item 2.  Management’s Discussion and Analysis of
      Financial Condition and Results of Operations
            39Item 3.  Quantitative and Qualitative Disclosures
      about Market Risk
            46Item 4.  Controls and
    Procedures
            46Item 4T.  Controls and
    Procedures
            48PART II – OTHER INFORMATIONItem 1.  Legal Proceedings
            49Item 1A.  Risk Factors
            50Item 2.  Unregistered Sales of Equity Securities
      and Use of Proceeds
            50Item 3.  Defaults Upon Senior
      Securities
            51Item 4.  Submission of Matters to a Vote of
      Security Holders
            51Item 5.  Other Information
            51Item 6.  Exhibits
            52SIGNATURES
            53











i
 Table of Contents


PART I – FINANCIAL INFORMATION




Item 1.  Financial Statements






MATECH
      CORP.(A
      Development Stage Company)CONDENSED
      CONSOLIDATED BALANCE SHEETSeptember
      30,2008(Unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
            
            $
            441,076Accounts
      receivable
            
            
            15,620Inventories
            
            
            156,054Prepaid
      expenses and other current assets
            
            
            70,423Total
      current assets
            
            
            683,173Property
      and equipment, net
            
            
            84,590Deferred
      loan fees
            
            
            356,708Intangible
      assets, net
            
            
            2,033Deposit
            
            
            2,348$
            1,128,852


































1
 Table of Contents




MATECH
      CORP.(A
      Development Stage Company)CONDENSED
      CONSOLIDATED BALANCE SHEET - ContinuedSeptember
      30,2008(Unaudited)LIABILITIES
      AND STOCKHOLDERS'  DEFICITCurrent liabilities:Accounts payable and accrued expenses
            
            $
            646,208Current portion of research and development sponsorship
      payable
            
            
            25,000Notes payable - current portion
            
            
            294,567Total current liabilities
            
            
            965,775Accrued legal settlement
            
            
            222,852Research and development sponsorship payable, net of current
      portion
            
            
            768,934Convertible debentures and accrued interest payable, net of
      discounts
            
            
            1,280,201Derivative and warrant liabilities
            
            
            3,500,0355,772,022Total liabilities
            
            
            6,737,797Minority interest in consolidated subsidiary
            
            
            825Commitments and contingenciesStockholders' deficit:Class A preferred stock, $0.001 par value, liquidation
      preferenceof  $720 per share; 350,000 shares authorized; 337 shares
      issuedand outstanding as of September 30, 2008
            
            
            -Class
      B preferred stock, $0.001 par value, liquidation preference
    of$10,000 per share; 15 shares authorized;  none issued
      andoutstanding as of September 30, 2008
            
            
            -Class C preferred stock, $0.001 par value, liquidation preference
      of$0.001 per share; 25,000,000 shares authorized; 1,517 shares
      issuedand outstanding as of September 30,2008
            
            
            1Class D preferred stock, $0.001 par value, liquidation preference
      of$0.001 per share; 20,000,000 shares authorized; none shares
      issuedand outstanding as of September 30,2008
            
            
            -Class E  convertible preferred stock, $0.001 par value, no
      liquidationpreference; 60,000 shares authorized; 49,200 shares issued
    andoutstanding as of September 30,2008
            
            
            49Class A Common Stock, $0.001 par value, 600,000,000 shares




2
 Table of Contents




authorized; 205,736,018 shares issued and 186,567,253 shares
      outstandingat
      September 30,2008
            
            
            186,567Class B Common Stock, $0.001 par value, 600,000 shares
      authorized,issued
      and outstanding as of September 30,2008
            
            
            600Warrants subscribed
            
            
            10,000Additional paid-in-capital
            
            
            326,742,387Deficit accumulated during the development stage
            
            
            (332,547,374
            )Treasury stock (200,000 shares at cost at September 30,
    2008)
            
            
            (2,000
            )Total stockholders' deficit
            
            
            (5,609,770
            )$
            1,128,852













































3
 Table of Contents


MATECH
      CORP.(A
      Development Stage Company)CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONSFrom
      October 21, 1983For
      the Three Months Ended
            
            
            For
      the Nine Months Ended
            
            
            (Inception)September
      30,
            
            
            September
      30,
            
            
            through2007
            
            
            2008
            
            
            2007
            
            
            2008
            
            
            September
      30, 2008(Unaudited)
            
            
            (Unaudited)
            
            
            (Unaudited)
            
            
            (Unaudited)
            
            
            (Unaudited)Revenues:Research
      and development
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            5,392,085Revenue
      from bridge testing
            
            
            80,000
            
            
            
            29,269
            
            
            
            146,745
            
            
            
            30,359
            
            
            
            348,983Other
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            274,125Total
      revenues
            
            
            80,000
            
            
            
            29,269
            
            
            
            146,745
            
            
            
            30,359
            
            
            
            6,015,193Costs
      and expensesResearch
      and development
            
            
            21,266
            
            
            
            113,588
            
            
            
            3,533,343
            
            
            
            423,428
            
            
            
            20,986,417General
      and administrative
            
            
            20,133,368
            
            
            
            773,334
            
            
            
            82,608,673
            
            
            
            26,619,102
            
            
            
            330,114,343Modification
      of research and development sponsorship agreement
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            5,963,120Loss
      on Settlement of lawsuits
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,267,244Total
      Costs and expenses
            
            
            20,154,634
            
            
            
            886,922
            
            
            
            86,142,016
            
            
            
            27,042,530
            
            
            
            358,331,124Loss
      from operations
            
            
            (20,074,634
            )
            
            
            (857,653
            )
            
            
            (85,995,271
            )
            
            
            (27,012,171
            )
            
            
            (352,315,931
            )Other
      income (expense):Loss
      on modification of convertible debt
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (964,730
            )
            
            
            (378,485
            )Loss
      on subscription receivables
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (1,368,555
            )Interest
      expense
            
            
            (423,510
            )
            
            
            (831,678
            )
            
            
            (2,014,161
            )
            
            
            (1,808,697
            )
            
            
            (13,548,890
            )




4
 Table of Contents




Other-than-temporary
      impairment of marketable securities available for sale
            
            
            (2,310,000
            )
            
            
            -
            
            
            
            (10,254,000
            )
            
            
            -
            
            
            
            (9,785,947
            )Net
      unrealized and realized loss of marketable securities
            
            
            (335
            )
            
            
            
            
            
            
            (612,553
            )
            
            
            (8
            )
            
            
            (9,398,226
            )Change
      in fair value of investments derivative liability
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (210,953
            )Change
      in fair value of derivative and warrant liabilities
            
            
            (8,414,694
            )
            
            
            72,975,655
            
            
            
            14,505,323
            
            
            
            10,431,555
            
            
            
            54,018,644Interest
      income
            
            
            19,304
            
            
            
            356
            
            
            
            35,270
            
            
            
            15,879
            
            
            
            482,761Other
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (25,992
            )Other
      income (expense), net
            
            
            (11,129,235
            )
            
            
            72,144,333
            
            
            
            1,659,879
            
            
            
            7,673,999
            
            
            
            19,784,357Income
      (loss) before provision for income taxes
            
            
            (31,203,869
            )
            
            
            71,286,680
            
            
            
            (84,335,392
            )
            
            
            (19,338,172
            )
            
            
            (332,531,574
            )Provision
      for income taxes
            
            
            -
            
            
            
            -
            
            
            
            (800
            )
            
            
            (800
            )
            
            
            (15,800
            )Net
      Income (loss)
            
            $
            (31,203,869
            )
            
            $
            71,286,680
            
            
            $
            (84,336,192
            )
            
            $
            (19,338,972
            )
            
            $
            (332,547,374
            )Per
      share data:Basic
      and diluted net loss per share
            
            $
            (0.25
            )
            
            $
            0.41
            
            
            $
            (0.83
            )
            
            $
            (0.12
            )Weighted
      average Class A common shares outstanding - basic and
    diluted
            
            
            124,276,444
            
            
            
            175,239,753
            
            
            
            101,671,169
            
            
            
            156,873,303















5
 Table of Contents


MATECH
      CORP.(A
      Development Stage Company)CONSOLIDATED
      STATEMENTS OF COMPREHENSIVE INCOME
      (LOSS)From
      October 21, 1983For
      the Nine Months Ended
            
            
            (Inception)September
      30,
            
            
            through2007
            
            
            2008
            
            
            September
      30, 2008(Unaudited)
            
            
            (Unaudited)
            
            
            (Unaudited)Net
      income (loss)
            
            $
            (31,203,869
            )
            
            $
            71,286,680
            
            
            $
            (332,547,374
            )Other
      comprehensive loss:Temporary
      increase (decrease) in marketvalue of securities available for sale
            
            
            -
            
            
            
            
            
            
            
            -Reclassification
      to other-than-temporaryimpairment
      of marketable securitiesavailable
      for sale
            
            
            -
            
            
            
            -
            
            
            
            --
            
            
            
            -
            
            
            
            -Net
      comprehensive income (loss)
            
            $
            (31,203,869
            )
            
            $
            71,286,680
            
            
            $
            (332,547,374
            )





























6
 Table of Contents





MATECH
      CORP.(A
      Development Stage Company)CONDENSED
      CONSOLIDATED STATEMENTS OF CASH
    FLOWS


From
      October 21, 1983For
      the Nine Months Ended
            
            
            (Inception)September
      30,
            
            
            through2007
            
            
            2008
            
            
            September
      30, 2008(Unaudited)
            
            
            (Unaudited)
            
            
            (Unaudited)(Restated)Cash
      flows from operating activities:Net
      loss
            
            $
            (84,336,192
            )
            
            $
            (19,338,972
            )
            
            $
            (332,547,374
            )Adjustments
      to reconcile net loss to net cash used in
      operating activities:(Gain)
      loss  on modification of convertible debt
            
            
            -
            
            
            
            964,730
            
            
            
            378,485Impairment
      loss
            
            
            19,294,877
            
            
            
            -
            
            
            
            21,391,528Loss
      on charge off of subscription receivables
            
            
            -
            
            
            
            -
            
            
            
            1,368,555Issuance
      of common stock for services
            
            
            19,519,168
            
            
            
            4,729,541
            
            
            
            211,214,381Increase
      in debt for services and fees
            
            
            -
            
            
            
            
            
            
            
            4,456,625Officer's
      stock based compensation
            
            
            45,000,000
            
            
            
            19,885,333
            
            
            
            86,460,675Issuance
      of common stock for modification ofresearch and development sponsorship agreement
            
            
            -
            
            
            
            -
            
            
            
            7,738,400Change
      in fair value of derivative and warrant liabilities
            
            
            (14,505,323
            )
            
            
            (10,431,555
            )
            
            
            (51,783,444
            )Net
      realized and unrealized loss on marketable securities
            
            
            612,553
            
            
            
            -
            
            
            
            7,895,705Other-than-temporary
      impairment of marketablesecurities available for
    sale
            
            
            10,254,000
            
            
            
            -
            
            
            
            9,785,946Legal
      fees incurred for note payable
            
            
            
            
            
            
            
            
            
            
            1,456,142Accrued
      interest expense added to principal
            
            
            -
            
            
            
            272,077
            
            
            
            1,767,082Amortization
      of discount on convertible debentures
            
            
            1,765,110
            
            
            
            1,497,617
            
            
            
            11,603,894Change
      in fair value of investments derivative liability
            
            
            -
            
            
            
            -
            
            
            
            3,223,323Accrued
      interest income added to principal
            
            
            -
            
            
            
            (656
            )
            
            
            (305,654
            )Depreciation
      and amortization
            
            
            6,605
            
            
            
            15,931
            
            
            
            243,715




7
 Table of Contents




Other
      non-cash adjustments
            
            
            -
            
            
            
            -
            
            
            
            (114,730
            )(Increase)
      decrease in trade receivables
            
            
            14,787
            
            
            
            93,041
            
            
            
            (65,948
            )(Increase)
      decrease in inventories
            
            
            (69,266
            )
            
            
            (93,838
            )
            
            
            (156,054
            )(Increase)
      decrease in prepaid expenses and othercurrent
assets
            
            
            7,659
            
            
            
            5,483
            
            
            
            248,056Increase
      in deposits
            
            
            -
            
            
            
            -
            
            
            
            (2,348
            )(Decrease)
      increase in accounts payable and accruedexpenses
            
            
            (14,942
            )
            
            
            19,443
            
            
            
            2,528,338Net
      cash used in operating activities
            
            
            (2,450,964
            )
            
            
            (2,381,825
            )
            
            
            (13,214,702
            )Cash
      flows from investing activities:Proceeds
      from the sale of marketable securities
            
            
            137,174
            
            
            
            300,000
            
            
            
            3,758,476Purchase
      of marketable securities
            
            
            (302,038
            )
            
            
            -
            
            
            
            (2,206,379
            )Investment
      in certificate of deposits and commercial paper
            
            
            (1,650,000
            )
            
            
            (565,000
            )
            
            
            (1,965,000
            )Maturities
      of certificate of deposits and commercial paper
            
            
            400,000
            
            
            
            1,565,000
            
            
            
            1,965,000Payment
      received on officer loans
            
            
            -
            
            
            
            -
            
            
            
            876,255Funds
      advanced to officers
            
            
            -
            
            
            
            -
            
            
            
            (549,379
            )Proceeds
      received in acquisition of consolidated subsidiaries
            
            
            600,000
            
            
            
            -
            
            
            
            600,000Purchase
      of property and equipment
            
            
            (50,469
            )
            
            
            (17,167
            )
            
            
            (373,419
            )Investment
      in joint ventures
            
            
            -
            
            
            
            -
            
            
            
            (102,069
            )Proceeds
      from foreclosure
            
            
            -
            
            
            
            -
            
            
            
            44,450Proceeds
      from the sale of property and equipment
            
            
            -
            
            
            
            -
            
            
            
            19,250Payment
      for license agreement
            
            
            -
            
            
            
            -
            
            
            
            (6,250
            )Net
      cash provided (used) by investing activities
            
            
            (865,333
            )
            
            
            1,282,833
            
            
            
            2,060,935









8
 Table of Contents


MATECH
      CORP.(A
      Development Stage Company)CONSOLIDATED
      STATEMENTS OF CASH FLOWS - ContinuedFrom
      October 21, 1983For
      the Nine Months Ended
            
            
            (Inception)September
      30,
            
            
            through2007
            
            
            2008
            
            
            September
      30, 2008(Unaudited)
            
            
            (Unaudited)
            
            
            (Unaudited)(Restated)Cash
      flow from financing activities:Proceeds
      from the sale of  common stock and warrants
            
            $
            4,079,935
            
            
            $
            18,624
            
            
            $
            9,464,577Proceeds
      from convertible debentures and othernotes
      payable
            
            
            200,000
            
            
            
            1,115,000
            
            
            
            3,162,766Proceeds
      from the sale of preferred stock
            
            
            -
            
            
            
            -
            
            
            
            473,005Loan
      fees incurred on debt financing
            
            
            
            
            
            
            (375,000
            )
            
            
            (375,000
            )Costs
      incurred in offerings
            
            
            -
            
            
            
            -
            
            
            
            (1,130,932
            )Capital
      contributions
            
            
            -
            
            
            
            -
            
            
            
            301,068Purchase
      of treasury stock
            
            
            (55,650
            )
            
            
            (3,266
            )
            
            
            (170,641
            )Principal
      reduction on notes payable
            
            
            (50,000
            )
            
            
            (25,000
            )
            
            
            (125,000
            )Payment
      on proposed reorganization
            
            
            -
            
            
            
            -
            
            
            
            (5,000
            )Net
      cash provided by (used in) financing activities
            
            
            4,174,285
            
            
            
            730,358
            
            
            
            11,594,843Net
      change in cash and cash equivalents
            
            
            857,988
            
            
            
            (368,634
            )
            
            
            441,076Cash
      and cash equivalents, beginning of period
            
            
            129,296
            
            
            
            809,710
            
            
            
            -Cash
      and cash equivalents, end of period
            
            $
            987,284
            
            
            $
            441,076
            
            
            $
            441,076Supplemental
      disclosure of cash flow information:Interest
      paid during the period
            
            $
            2,669
            
            
            $
            20,281Income
      taxes paid during the period
            
            $
            800
            
            
            $
            800




9
 Table of Contents




Supplemental
      disclosures of non-cash investing and financing
activities:2008Effective
      June 16, 2008, the Company entered into an agreement with Palisades
      Capital, LLC to modify the terms ofthe
      convertible debt due them. In connection with the modification, the
      Company recorded a loss from themodification
      of the debt in the amount of $964,730. The Company also accrued a
      derivative liability inconnection
      with the modification in the amount of $4,254,301. (See Note
      10.)During
      the nine months ended September 30, 2008, the Company issued 34,229,612
      shares of its Class A common shares inthe
      conversion of $633,271 of convertible debt.During
      the nine months ended September 30, 2008, the Company issued 13,249,167
      shares of its Class A common stockfor
      consulting  services valued at $3,674,940.During
      the nine months ended September 30, 2008, the Company issued 378,491
      shares of its Class A common stockpursuant
      to the anti-dilution provisions of a settlement agreement.During
      the nine months ended September 30, 2008. a former employee and consultant
      returned a total of 700,000 sharesof
      the Company's Class A common stock to treasury which were subsequently
      cancelled.During
      the nine months ended September 30, 2008. the Company's president returned
      30,000,000  shares of the Company'sClass
      A common stock to treasury which were subsequently
    cancelled.During
      the nine months ended September 30, 2008, the Company issued 34,500,000
      shares of its Class A common stockin
      consideration of the exercise of cashless warrants. The Company accrued a
      derivative liability in connection with thegranting
      of the warrants, which had a balance of $1,151,900 on the date of
      exercise. The liability balance was credited to equity.During
      the nine months ended September 30, 2008, the Company issued 77,600 shares
      of its Class A common stock for $18,624.During
      the nine months ended September 30, 2008, the Company issued 8,577,907
      shares of the Company's common stockthrough
      the conversion of 5,750 shares of the Company's Class E preferred
      shares.During
      the nine months ended September 30, 2008, the Company's contingent
      obligation to StephenMr. Beck under a settlementagreement
      was reduced to $0, therefore the Company reduced its legal settlement
      liability by the remaining accrued provision of$230,000,
      which was credited to equity.During
      the nine months ended September 30, 2008, the Company obtained $55,000
      through the issuance of convertible debt. In connectionwith
      this debt, the Company recognized a beneficial conversion feature of
      $28,140 that was credited to equity.During
      the nine months ended September 30, 2008, the Company obtained $1,000,000
      through the issuance of convertible debt. In connectionwith
      this debt, the Company recognized a beneficial conversion feature of
      $715,266 that was credited to derivative and warrant
      liabilities.During
      the nine months ended September 30, 2008, the Company recognized
      compensation expense of $8,800 on the grant ofoptions
      to its employees and officers for the purchase of 800.000 shares of Class
      A common stock. In addition, during the nine monthsthe
      Company granted options to its President for the purchase of 400,000,000
      shares of its Class A common stock and  granted
      optionsto
      a consultant to purchase 15,390,546 shares of its Class A common stock.
      The Company recognized a derivative liability of
$6,400,000on
      the granting of these options. In September 2008, the Company's President
      returned options for 30,000,000 shares for cancellation.During
      the nine months ended September 30, 2008, Palisades Capital, LLC paid
      $60,000 on behalf of the Companyto
      a consultant. The $60,000 was added to the outstanding balance owed by the
      Company to Palisades(See
      Note 10.)




10
 Table of Contents




2007During
      the nine months ended September 30, 2007, the Company issued 11,311,424
      shares of its Class A common stockfor
      consulting  and other services valued at $13,039,167. Included
      in the 11,311,424 shares issued, 2,970,000 shares wereissued
      to current officers of the company which were valued at
      $4,398,500.During
      2007, the Company received $1,000,000 in consideration for issuing
      2,500,000 units.Each
      unit consists of one share of the Company's Class A common stock and a
      warrant to purchaseone
      share of the Company's common stock at a price of $.60 per share. In
      connection with private offeringthe
      Company paid $239,065 in fees and issued warrants to purchase 2,118,334
      shares of the Company'scommon
      stock at a price of $.60 per share. In other private offerings, the
      Company received $1,146,458through
      the issuance of 3,658,400 shares of common stock and warrants. Also during
      the nine month period,4,500,000
      of common stock were issued through the exercise of the 4,500,000
      warrants. Through the exerciseof
      the warrants, the Company received $2,171,542 net of $528,458 in closing
      costs.In
      connection with the above indicated private offering and related exercise
      of the warrants, , the Company issued1,507,500
      shares of its Class A common stock. The 1,507,500 shares were valued at
      $1,787,962 and charged against theproceeds
      received.During
      2007, the Company issued 50,000 shares its Class E Series convertible
      preferred stockin
      exchange for receiving all of the outstanding shares of Stress Analysis
      Technologies, Inc.  ("SATI")The
      Company valued the acquisition at $975,000 and charged off $875,000 as it
      deemed the intangibleassets
      acquired  to be fully impaired. In connection with this
      transaction, the Company issued an additional5,000
      preferred shares valued at $97,500 for fees in connection with the
      purchase. The $97,500 waswas
      charged to equity.During
      2007, the Company issued 13,912,500 shares its common stock in the
      acquisition of two subsidiaries.The
      assets acquired included $500,000 cash and licenses originally valued at
      $18,880,875. The Companycharged
      of the full costs assigned to the licenses as being
    impaired.In
      connection with the above indicated private offering and related exercise
      of the warrants, , the Company issued1,507,500
      shares of its Class A common stock. The 1,507,500 shares were valued at
      $1,787,962 and charged against theproceeds
      received.During
      2007, the Company issued 10,000,000 shares its common stock in exchange
      for 3,000,000 shares ina
      company whose shares are traded on the over-the-counter pink sheets. The
      Company valued the shares receivedat
      $13,832,000. Subsequently, the transaction was rescinded and the
      10,000,000 shares was returned to treasuryfor
      cancellation.During
      2007, the Company issued 10,800,000 shares in escrow pursuant to an
      agreement it has with its Convertible debentureholders.
      During 2007, 10,050,000 shares of Class A common stock was
      issued  to certain debenture holders in the conversion
      of$1,005,000
      of indebtedness. In addition, for services rendered by certain debenture
      holders, the amount due on the debentureswas
      increased by $1,100,000.During
      2007, the Company received 400,000 shares of prior issued common stock
      which was subsequently cancelled.During
      2007, the Company acquired all of the outstanding shares of Bridge Concept
      Inc., (“Bridge”) a corporation wholly owned by to its chief
      engineer.In
      consideration for the shares received in Bridge, the Company issued
      1,500,000 of its common stock and $37,500 which was paid
inOctober
      2007. The Company treated the acquisition as a related party transaction
      and valued the entire acquisition at $39,000. The $39,000was
      assigned to the intellectual property of Bridge which was charged off to
      operations as being impaired at September 30, 2007.During
      2007, the Company issued 2,352,249 shares of its common stock pursuant to
      anti-dilution provisions in two agreements.









11
 Table of Contents
 MATECH
CORP.
 (A
DEVELOPMENT STAGE COMPANY)
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 For
the three months and nine months ended September 30, 2008 and 2007




NOTE 1 - BASIS
OF PRESENTATION




The
accompanying unaudited condensed financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and pursuant to the rules and
regulations of the Securities and Exchange Commission.  Certain
information and footnote disclosures normally included in annual financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been omitted pursuant to such rules and
regulations.





In the
opinion of management, all adjustments, consisting of normal and recurring
adjustments, necessary for a fair presentation of the financial position and the
results of operations for the periods presented have been
included.  The operating results of the Company on a quarterly basis
may not be indicative of operating results for the full year.  For
further information, refer to the financial statements and notes included in
Matech Corp.’s (the Company’s) Form 10-KSB for the year ended December 31,
2007.





The
accompanying financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. As shown in the accompanying financial
statements, the Company is in the development stage and, at September 30, 2008,
has an accumulated deficit of $332,547,374, continues to sustain operating
losses on a monthly basis, and expects to incur operating losses for the
foreseeable future.  Management of the Company will need to raise
additional debt and/or equity capital to finance future
activities.  However, no assurances can be made that current or
anticipated future sources of funds will enable the Company to finance future
periods’ operations.  In light of these circumstances, substantial
doubt exists about the Company’s ability to continue as a going concern. These
condensed consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded assets or
liabilities that might be necessary should the Company be unable to continue as
a going concern.












12
 Table of Contents
 MATECH
CORP.
 (A
DEVELOPMENT STAGE COMPANY)
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 For
the three months and nine months ended September 30, 2008 and 2007




NOTE 2 – RECENT ACCOUNTING
PRONOUNCEMENTS





In
March 2008, the FASB issued Statement of Financial Accounting Standards
No. 161, “Disclosures about Derivative Instruments and Hedging Activities”
(“SFAS 161”). SFAS 161 amends and expands the disclosure requirements of SFAS
133, “Accounting for Derivative Instruments and Hedging.” SFAS 161 is effective
for fiscal years beginning after November 15, 2008. The Company will adopt
SFAS 161 in the first quarter of 2009 and currently expect such adoption to have
no impact on its results of operations, financial position, or cash
flows.





In
April 2008, the FASB issued Staff Position No. 142-3, “Determination
of the Useful Life of Intangible Assets” (“FSP 142-3”). FSP 142-3 amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under FASB
Statement of Financial Accounting Standards No. 142, “Goodwill and Other
Intangible Assets”. The Company will adopt FSP 142-3 in the first quarter of
2009 and currently expect such adoption to have no impact on its results of
operations, financial position, or cash flows.





In
May 2008, the FASB issued Statement of Financial Accounting Standards
No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS
162”). SFAS 162 identifies the sources of accounting principles and the
framework for selecting the principles to be used in the preparation of
financial statements of nongovernmental entities that are presented in
conformity with generally accepted accounting principles in the United States.
SFAS 162 will become effective 60 days following Securities and Exchange
Commission (“SEC”) approval of the Public Company Accounting Oversight Board
(PCAOB) amendments to AU Section 411, “The Meaning of Present Fairly
in Conformity With Generally Accepted Accounting Principles.” The Company does
not anticipate the adoption of SFAS 162 to have a material impact on its results
of operations, financial position, or cash flows.





In
June 2008, the FASB issued Staff Position No. EITF 03-6-1,
“Determining Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities” (“EITF 03-6-1”). EITF 03-6-1 addresses whether
instruments granted in share-based payment transactions are participating
securities prior to vesting, and therefore, need to be included in the earnings
allocation in calculating earnings per share under the two-class method
described in FASB Statement of Financial Accounting Standards No. 128,
“Earnings per Share.” EITF 03-6-1 requires companies to treat unvested
share-based payment awards that have non-forfeitable rights to dividend or
dividend equivalents as a separate class of securities in calculating earnings
per share. EITF 03-6-1 is effective for fiscal years beginning after
December 15, 2008. EITF 03-6-1 is effective for Format, Inc. in the first
quarter of 2009. The Company is currently assessing the impact of EITF 03-6-1,
but does not expect that such adoption will have a material effect on its
results of operations, financial position, or cash flows.





13
 Table of Contents
 MATECH
CORP.
 (A
DEVELOPMENT STAGE COMPANY)
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 For
the three months and nine months ended September 30, 2008 and 2007




NOTE 3 – ACCOUNTS
RECEIVABLE





Accounts
receivable are reported at the customers’ outstanding balances less any
allowance for doubtful accounts.  The Company does not accrue interest
on overdue accounts receivable.





The
allowance for doubtful accounts is charged to income in amounts sufficient to
maintain the allowance for uncollectible accounts at a level management believes
is adequate to cover any probable losses.  Management determines the
adequacy of the allowance based on historical write-off percentages and
information collected from individual customers.  As of September 30,
2008, management believes all accounts receivable are
collectible.  Accordingly, no allowance for doubtful accounts is
included in the accompanying consolidated balance sheet.





NOTE 4–INVESTMENTS





Commercial
Paper





During
the nine months ended September 30, 2008, the Company received $2,992,952
including accrued interest of $13,521, on maturities of various investments in a
bank’s commercial paper. Also during the nine months, the Company reinvested
$1,580,000. The balance of the Company’s investment in commercial paper at
September 30, 2008 was $0.




NOTE 5 -
INVENTORIES





Inventories
at September 30, 2008 consist of the following:




Finished
      goods
              $156,054


Inventories
consist of sensors and other parts used in the Company’s bridge testing
operations.








14
 Table of Contents
 MATECH
CORP.
 (A
DEVELOPMENT STAGE COMPANY)
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 For
the three months and nine months ended September 30, 2008 and 2007




NOTE 6 – PROPERTY AND
EQUIPMENT





Property
and equipment at September 30, 2008 consisted of the following:




Office
      and computer equipment
            
            $
            27,645Manufacturing
      equipment
            
            
            230,522258,167Less
      accumulated depreciation
            
            
            (173,577
            )$
            84,590





Depreciation
charged to operations for the three months ended September 30, 2008 and 2007
amount to $5,041 and $4,385, respectively.  Depreciation charged to
operations for the nine months ended September 30, 2008 and 2007 amount to
$15,124 and $5,798, respectively.





NOTE 7 – INTANGIBLE
ASSETS





Intangible
assets consist of the following at September 30, 2008:




Period
      of

              AmortizationPatent
      costs
            17
      years
            
            $
            28,494License
      agreement (see Note 7)
            17
      years
            
            
            6,250Website
            5
      years
            
            
            5,20039,944Less
      accumulated amortization
            
            
            
            (37,911
            )$
            2,033





Amortization
charged to operations for the three months ended September 30, 2008 and 2007 was
$269, and $269, respectively. Amortization charged to operations for the nine
months ended September 30, 2008 and 2007 was $807, and $807,
respectively.




Estimated
amortization expense for remaining life of the intangibles is as
follows:





15
 Table of Contents
 MATECH
CORP.
 (A
DEVELOPMENT STAGE COMPANY)
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 For
the three months and nine months ended September 30, 2008 and 2007


2008
              
              $
              2692009
              
              $
              1,0762010
              
              $
              688


NOTE
8 – LICENSE AGREEMENTS




University
of Pennsylvania




In 1993,
the Company has entered into a license agreement with the University of
Pennsylvania (the “University”) for the development and marketing of
EFS.





Under the
terms of the agreement, the Company issued to the University 1 share of its
common stock, and a 5% royalty on sales of the product.  The Company valued
the license agreement at $6,250.  The license terminates upon the
expiration of the underlying patents, unless sooner terminated as provided in
the agreement.  The Company is amortizing the license over 17
years.





In
addition to the license agreement, the Company also agreed under a modified
workout agreement relating to a prior sponsorship agreement to pay the
University, retroactive to January 1, 2005, the balance of $760,831, which
accrues interest at a monthly rate of 0.5% simple interest.  The Company is
obligated to pay $25,000 annually due on the anniversary date of the Workout
Agreement.  Further, the Company is also obligated to pay within ten days
following the filing of the Company’s Forms 10-QSB or 10-KSB an amount equal to
10% of the Company’s operating income (as defined) as reflected in the quarterly
and annual filings.  Under the revised terms of the Workout Agreement, the
Company’s CEO’s annual cash salary is capped at $250,000.  The Company
agreed to pay the University an amount equal to any cash salary paid to Mr.
Bernstein in excess of the $250,000, which will be credited against the balance
of the amounts due under the agreement.





Interest
expense charged to operations during the three months ended September 30, 2008
and 2007 amounted $9,833 and $10,232, respectively.  Interest expense
charged to operations during the nine months ended September 30, 2008 and 2007
amounted $33,284, and $30,638, respectively.  The balance of the obligation
(including accrued interest) at September 30, 2008 was $793,934 and is reflected
in research and development sponsorship payable in the accompanying condensed
consolidated balance sheet.  The current portion represents the minimum
annual payment under the Workout Agreement, while the remaining balance is
reflected as non-current as the Company does not expect to be required to make
additional payments during the next twelve months.






16
 Table of Contents
 MATECH
CORP.
 (A
DEVELOPMENT STAGE COMPANY)
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 For
the three months and nine months ended September 30, 2008 and 2007




North
Carolina Agricultural and Technical State University
(“NCAT”)


The
Company acquired this sublicense in its purchase of Monitoring.  The
license allows the Company to utilize technology covered through two patents
licensed to NCAT.  Under the license, the Company is required to support
collaborative research under the direction of the actual inventor of the
patented processes and to deliver to NCAT within three months of theeffective date of the license a report indicating the Company’s plans for
commercializing the subject technology.





In
partial consideration for the license, the Company must pay to NCAT a royalty
equal to 3.5% of net sales of licensed products sold by the Company, its
affiliates and from sublicensees.  In the case of sub-licensees, the
Company must pay NCAT 25% of any income, revenue, or other financial
consideration received on any sublicense including but not limited to, advance
payments, license issue fees, license maintenance fees, and option fees. 
Minimum royalties are due as follows:





Year
beginning




August 2,
      2009
            
            $
            30,000August 2,
      2010
            
            $
            30,000August 2, 2011 and each year
      thereafter
            
            $
            50,000





The
license remains in full force for the life of the last-to-expire patent.
 The license can be terminated by the Company by giving 90-day written
notice and thereupon stop the manufacturing, use, or sale of any
product developed under the license.  In addition, the license
terminates if the Company defaults under the royalty provisions of the license
or files for bankruptcy protection.





ISIS Innovation Limited
(“ISIS”)





In the
2007 acquisition of SATI, the Company acquired a license to develop and market
the patented process known as “X-Ray diffraction method”. Under the terms of the
exclusive license with ISIS Innovation Limited, the licensor was granted back
the right to utilize the process on a perpetual, royalty-free basis. The
licensee is responsible for all costs associated with maintaining and protecting
the patent. In the case of sub-licensees, the Company must pay ISIS 25% of any
income, revenue, or other financial consideration received on any sublicense
including but not limited to, advance payments, license issue fees, license
maintenance fees, and option fees, In addition, a 2.5% royalty on net sales is
due with minimum royalties as follows:







17
 Table of Contents
 MATECH
CORP.
 (A
DEVELOPMENT STAGE COMPANY)
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 For
the three months and nine months ended September 30, 2008 and 2007




Year
beginning




January 29, 2010
            
            $
            21,000January 29, 2011
            
            $
            32,000January 29, 2012
            
            $
            42,000





Iowa State University
Research Foundation (“ISURF”)





In the
2007 acquisition of NATI, the Company acquired a license to develop and market
the patented process known as “Nondestructive evaluation and stimulate
industrial innovation”. Under the terms of the non-exclusive license with ISURF,
the Company is required to develop products for sale in the commercial market
and to provide ISURF with a development plan and bi-annual development report
until the first commercial product sale. The Company has the right to sublicense
the patented process to third companies, but is required to pay a royalty fee of
25% of amounts earned by the Company under the sublicenses. For each product
sold under the license, the Company is required to pay ISURF a royalty equal to
3% of the selling price with the following minimum royalty
payments:





Year
beginning




January 1,
      2009
            
            $
            10,000January 1,
      2010
            
            $
            20,000January 1, 2011 and each year
      thereafter
            
            $
            30,000





The
Company abandoned the license in October 2008.





NOTE 9 – NOTES
PAYABLE





On May
27, 1994, the Company borrowed $25,000 from a shareholder.  The loan is
evidenced by a promissory note bearing interest at 6.5 percent.  The note
is secured by the Company’s patents and matured on May 31, 2002.  The loan
has not been paid and is now in default.  As additional consideration for
the loan, the Company granted to the shareholder a 1% royalty interest in the
Fatigue Fuse and a 0.5% royalty interest in EFS (see Note 11).  The balance
due on this loan as of September 30, 2008 was $57,978.  Interest charged to
operations during the three months ended September 30, 2008 and 2007 was $406
and $406, respectively.  Interest charged to operations during the nine
months ended September 30, 2008 and 2007 was $1,217 and $1,217,
respectively.





18
 Table of Contents
 MATECH
CORP.
 (A
DEVELOPMENT STAGE COMPANY)
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 For
the three months and nine months ended September 30, 2008 and 2007




On April
28, 2003, the Company borrowed $10,000 from an unrelated third party.  The
loan is unsecured, non-interest bearing and due on demand.





On March
5, 2007, the Company borrowed $200,000 from a shareholder. The loan is evidenced
by an unsecured promissory note which is assessed interest at an annual rate of
8%. The note matures on March 5, 2009 when the principal and accrued interest
becomes fully due and payable. The balance of the loan including accrued
interest at September 30, 2008 is $226,589.  Interest charged to
operations during the three months ended September 30, 2008 and 2007 was $4,478
and $4,137, respectively.  Interest charged to operations during the nine
months ended September 30, 2008 and 2007 was $13,080 and $9,288,
respectively.





NOTE 10 – CONVERTIBLE
DEBENTURES





Palisades





On
September 23, 2003, the Company entered into a Class A Secured Convertible
Debenture (the “Debentures”) with Palisades, pursuant to which Palisades agreed
to loan the Company up to $1,500,000.  On December 1, 2003, after Palisades
had funded $240,000 of the original Debentures, the Company entered into
additional Class A Secured Convertible Debentures with two additional investors,
pursuant to which such investors would loan the Company up to $650,000 each, and
the Company agreed that Palisades would not make additional advances under the
Debentures.  The Company received a total of $1,125,000 under the
Debentures. The debentures and accrued interest were fully due and payable in
November 2008.





Effective
June 16, 2008, the Company and Investor Group (“Palisades’) entered into
Settlement Agreement and General Release whereby Palisades agreed to extend the
maturity date of the convertible debentures to December 31, 2009. Under the
modified terms of the underlying Notes,  the Company is required to
make minimum monthly interest payments totaling $10,000, the first payment being
made in August 2008.  Under the settlement and related escrow
agreement, the Company is required to deposit a number of shares equal to 9.99%
of its issued and outstanding Class A Common Stock into a brokerage account in
the name of Agent at a firm to be determined from time to time by
Agent.  The Company also agreed to modify the terms of the notes to
include the following restrictions:





·
            If
      an Event of Default occurs under the Notes, and, if such Event of Default
      is curable, such Event of Default continues for a period of 30 days
      without being cured, then the 10% interest rate set forth in the Notes
      will be increased to a Default Interest Rate of 18% per annum, and the
      total balance of principal and accrued interest of the debentures shall
      bear interest at the Default Interest Rate from the date of the occurrence
      of such Event of Default.






19
 Table of Contents
 MATECH
CORP.
 (A
DEVELOPMENT STAGE COMPANY)
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 For
the three months and nine months ended September 30, 2008 and 2007




·
            In
      addition, the entry of any judgment against the Company in excess of
      $150,000, regardless of where, how, to whom or under what agreement such
      liability arises, shall be an Event of Default under the Debentures,
      unless (i) the Company pays such judgment within 60 days, or (ii) the
      Company duly files an appeal of such judgment and execution of such
      judgment is stayed.  Finally, the entry of any order or judgment
      in favor of any judgment creditor or other creditor attaching the assets
      of the Company shall be an Event of Default under these
      debentures.  The conversion price of the debentures shall not be
      at any time more than $0.10 per share, regardless of any combination of
      shares of the Common Stock of the Company by reverse split or
      otherwise.





·
            If
      an Event of Default occurs which is not cured within its applicable cure
      period, if it is curable, the conversion price of these debentures after
      such cure period has expired shall be reduced to half of the pre-Event of
      Default conversion price.  For clarification, if the conversion
      price before an Event of Default were the lesser of 50% of market price or
      $0.10, then the new conversion price would be the lesser of 25% of market
      price or $0.05.





·
            The
      Company shall not issue any shares of its Class A Common Stock without a
      legend stating that such shares may not be sold, transferred, pledged,
      assigned or alienated for a period of at least one year following the date
      of the issuance of such certificate, other than shares issued to or with
      the written consent of the Holder.  Notwithstanding the
      foregoing, this provision shall not apply to (i) any shares issued to
      purchasers in a financing where the Company receives net proceeds of at
      least Five Hundred Thousand Dollars ($500,000) and the shares are sold for
      not less than fifty percent (50%) of the closing price of the Company’s
      common stock reported as of the closing date of such financing, and (ii)
      any shares issued in connection with an acquisition of assets by the
      Company where (a) the Company provides to the Holder a fairness opinion as
      to the value of the acquired assets, and (b) the Company receives assets
      that are worth at least fifty percent (50%) of the closing price per share
      of the Company’s common stock as of the closing date of the
      acquisition.





·
            The
      Company shall not enter into any agreement pursuant to which any party
      other than the Holder has pre-emptive rights, the right to receive shares
      of any class of securities of the Company for no additional consideration,
      the right to receive a set, pre-determined percentage of the outstanding
      shares of the Company for any period of time, or any other similar right
      that has the effect of maintaining a set percentage of the issued and/or
      outstanding shares of any class or classes of the capital stock of the
      Company.






20
 Table of Contents
 MATECH
CORP.
 (A
DEVELOPMENT STAGE COMPANY)
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 For
the three months and nine months ended September 30, 2008 and 2007




·
            The
      Company shall not enter into any agreement giving another party
      anti-dilution protection unless (1) all shares received pursuant to such
      provision are subject to a two-year lock-up from the date of issuance, and
      (2) all such shares received are subject to a “dribble-out,” following the
      two-year lock-up, restricting their sale to not more than 1/20th
      of 5% of the previous month’s total trading volume in any single trading
      day.





·
            The
      Company will not file any Registration Statement on Form S-8 nor issue any
      shares registered on Form S-8, exclusive of shares currently registered on
      Form S-8.  However, when the total capital in the Company’s cash
      account drops below $500,000, the Company may issue up to $30,000 worth of
      securities registered on Form S-8, valued at the market price of the
      common stock on the date of issuance, per month,
      non-cumulative.  Any issuance of S-8 shares will be supported by
      an opinion of the Company’s counsel that such issuance complies in all
      respects with federal securities laws.  This opinion will be
      provided to the legal representative of the Holder upon
      request.  Further, the Company will ensure that every entity or
      individual that receives S-8 shares will be subject to a “dribble-out”
      restricting their sale to not more than 1/20th
      of 2% of the previous month’s total trading volume in any single trading
      day, non-cumulative.  The above described dribble-out is not an
      aggregate sale restriction for all entities and individuals receiving S-8
      shares;





·
            The
      Company has informed the Holder that it is considering completing a
      one-for-one-thousand reverse split of its common stock, as described in an
      Information Statement filed by the Company on or about April 25,
      2008.  The Company acknowledges that the conversion price of the
      Debenture shall not be effected by any such reverse split, and that after
      giving effect to such reverse split, the conversion price shall remain the
      lesser of (i) 50% of the averaged ten closing prices for the Company’s
      Common Stock for the ten trading days immediately preceding the Conversion
      Date or (ii) $0.10.  The Holder consents to this
      action.  The parties acknowledge that the Company is not
      obligated to complete this reverse-split, or any reverse
      split.





·
            The
      shareholder lockup provisions will not apply to up to any shares held by
      Mr. Robert Bernstein, and sold by him personally in a bona-fide sale to an
      unrelated, unaffiliated third party; provided, that (i) the number of
      shares sold shall not exceed Two Million Five Hundred Thousand Dollars
      ($2,500,000) worth of stock, calculated based on the number of shares sold
      multiplied by the closing price of the stock on the date such shares are
      sold (if a market trade) or transferred on the books of the transfer agent
      (if a private transfer).  Once Two Million Five Hundred Thousand
      Dollars ($2,500,000) worth of




21
 Table of Contents
 MATECH
CORP.
 (A
DEVELOPMENT STAGE COMPANY)
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 For
the three months and nine months ended September 30, 2008 and 2007




stock
      has been sold as calculated above, the lockup on whatever remains of the
      shares owned by Mr. Bernstein (if any) goes back into effect. 
      In this regard, if Mr. Bernstein sells any of his shares without legend,
      then he may only sell up to 1/20th of 5% of the previous month’s total
      trading volume in any single trading day, and he may not sell more than 1%
      of the issued and outstanding shares of Matech during any 90 day
      period.  Further, if Mr. Bernstein sells any of his shares, he must
      have such shares transferred on the books of the transfer agent within
      five business days of the sale.  Mr. Bernstein shall comply with
      all reporting requirements under Section 16 of the Securities Exchange Act
      of 1934, as amended.






As
further consideration for the Note Holders to extend the maturity date of the
debentures and to enter into the Settlement Agreement, the Company agreed to pay
an extension fee and a settlement fee totaling $554,910, which was added to the
outstanding balance of the debentures as of June 16, 2008 and grant the holders
warrants to purchase 35,000,000 shares of the Company’s Class A common stock at
an exercise price of the lesser of (i) $0.001 per share, or (ii) 50% of market
price   The warrants expire on October 16, 2016. Payment of the
warrant price may be in cash or cashless, at the option of the warrant
holder.





The Company accounted for
the modification of the convertible debt pursuant to EITF 96-19 “Debtor's
Accounting for a Modification or Exchange of Debt Instruments” and recognized a
loss on the modification of $964,730 that was charged to
operations.





Further,Per EITF
00-19, paragraph 4, these convertible debentures do not meet the definition of a
“conventional convertible debt instrument” since the debt is not convertible
into a fixed number of shares.  The debt can be converted into common stock
at a conversions price that is a percentage of the market price; therefore, the
number of shares that could be required to be delivered upon “net-share
settlement” is essentially indeterminate. Therefore, the convertible debenture
is considered “non-conventional,” which means that the conversion feature must
be bifurcated from the debt and shown as a separate derivative liability. The
Company recognized a derivative liability of $4,254,301 on June 16, 2008, with
an offset to debt discount in the same amount.





In
addition, since the convertible debenture is convertible into an indeterminate
number of shares of common stock, it is assumed that the Company could never
have enough authorized and unissued shares to settle the conversion of the
warrants into common stock.  Therefore, the warrants issued in connection
with this transaction are also shown as a derivative liability.





In
connection with the settlement agreement, the Company entered into a consulting
agreement with an affiliate of the debenture holders for a term commencing on
May 1, 2008 and





22
 Table of Contents
 MATECH
CORP.
 (A
DEVELOPMENT STAGE COMPANY)
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 For
the three months and nine months ended September 30, 2008 and 2007





terminating
no earlier than May 1, 2010. For the duration of the agreement, the Consultant
agrees to assist the Company with implementing the Company’s business plan,
assist it in identifying, analyzing, structuring and negotiating acquisitions
and related activities. Under the terms of the consulting agreement, the Company
agreed to pay a fee of $20,000 per month and reimburse the Consultant for
reasonable expenses it incurred relating to the Company’s business. As further
consideration, the Company granted warrants to the consultant to purchase
5,000,000 shares of the Company’s Class A common stock at an exercise price of
the lesser of (i) $0.10 per share, or (ii) 50% of market
price   The warrants expire on October 16, 2013. Payment of the
warrant price may be in cash or cashless, at the option of the warrant holder.
the Warrant Shares are stated after giving effect to a one for one-thousand
reverse stock split completed in October 2008.





During
the third quarter of 2008, the Company paid $20,000 and issued 30,000,000 shares
of its Class A common stock through the conversion of $114, 000 of
indebtedness.





The
balance of the Debenture, including accrued interest, at September 30, 2008 was
$905,884 (net of unamortized discount of $3,398,311).  Interest charged to
operation in on the face amount of the debentures for the three months ended
September 30, 2008 and 2007 was $107,576 and $73,713,
respectively.  Interest charged to operation on the face amount of the
debentures for the nine months ended September 30, 2008 and 2007 was $226,909
and $204,181, respectively.  Amortization expense of the discount also
charged to operations as interest expense for the three months ended September
30, 2008 and 2007 amounted to $630,357 and $330,697, respectively. Amortization
expense of the discount charged to operations as interest expense for the nine
months ended September 30, 2008 and 2007 amounted to $1,439,401 and $1,155,111,
respectively.





At
September 30, 2008, the fair value of the derivative liabilities relating to the
above indicated convertible debt and warrants amounted to $3,126,644. As the
modification has an effective date of June 16, 2008, it impacted the Company’s
June 30, 2008 financial statements. A restatement of these financial statements
that include the effect of the above-indicated modifications is provided in Note
16.





GGI





During
the nine months ended September 30, 2008, the Company issued 122,512 shares of
its Class A common stock through the conversion of the total balance due on the
convertible debt amounting to $91,384.  Interest charged to operations
relating to this debt during the nine months ended September 30, 2008 and 2007
amounted to $281 and $2,356, respectively.





In
addition, since the Debentures allow the holders to convert the outstanding
principal amount into shares of the Company’s common stock at a discount to fair
value, the Company recorded





23
 Table of Contents
 MATECH
CORP.
 (A
DEVELOPMENT STAGE COMPANY)
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 For
the three months and nine months ended September 30, 2008 and 2007





the fair
value of the conversion feature of $40,000 in 2005.  Amortization expense
of the discount also charged to operations as interest expense for the nine
months ended September 30, 2008 and 2007 amounted to $13,333 and $6,666,
respectively.





Mitchell





On April
25, 2008, the Company borrowed $55,000 from an individual in exchange for
issuing a convertible promissory note. The note is assessed interest at an
annual rate of 4.71%. Principal and accrued interest is fully due and payable on
April 25, 2011. Until the note and accrued interest are fully paid, the lender
has the right to convert the amount due him into shares of the Company’s Class A
common stock equaling 3,5% of the shares outstanding on date of
conversion.





As the
number of shares that could be required to be delivered upon “net-share
settlement” is essentially indeterminate, the convertible debenture must be
bifurcated from the debt and shown as a separate derivative liability. The
Company recognized a beneficial conversion feature of $28,140 and a derivative
liability of $31,658 at June 30, 2008.





The
balance of the Debenture, including accrued interest, at September 30, 2008 was
$32,048 (net of unamortized discount of $24,079).  Interest charged to
operations for the three and nine months ended September 30, 2008 amounted to
$659 and 1,127, respectively. The beneficial conversion feature is treated as a
discount against the face amount of the debt and is amortized into interest
expense over the term of note. Amortization expense on the discount charged to
operations for the three and nine months ended September 30, 2008 amounted to
$2,364 and $4,060, respectively.





The
Company’s market price of its common stock at September 30, 2008 was below the
exercise price and therefore no derivative liability was recorded at September
30, 2008.





Kreuzfeld





In July
2008, the Company entered into a financing agreement to borrow a total of
$1,000,000 through the issuance of a convertible note. Interest accrues on the
outstanding loan balance at an annual rate of 10% per annum. Principal is due on
the maturity date with accrued interest due quarter; however,  the
Company has the right to defer interest payments until the maturity date so long
as it does not have positive earnings  before interest, taxes,
depreciation and amortization (“EBITDA”).  The maturity date of the
note is December 31, 2011.  The balance owed on the note, including
accrued interest, is convertible at the election of the holder into so many free
trading shares of the Company’s common stock based upon a conversion price of
the lesser of (i) 50% of the averaged ten closing prices for the Company’s
common stock for the ten (10) trading





24
 Table of Contents
 MATECH
CORP.
 (A
DEVELOPMENT STAGE COMPANY)
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 For
the three months and nine months ended September 30, 2008 and 2007





days
immediately preceding the conversion date or (ii) $0.10.  The Company
is required to reserve the number of  free trading shares of Common
Stock required pursuant to and upon the terms set forth in the Subscription
Agreement (approximately 100,000,000 shares), to permit the conversion of this
Debenture. The Company has pledged significantly all of its assets as collateral
on this loan.





As the
number of shares that could be required to be delivered upon “net-share
settlement” is essentially indeterminate, the convertible debenture must be
bifurcated from the debt and shown as a separate derivative liability. Company
recognized a beneficial conversion feature of $715,266 and a derivative
liability of the same amount upon receipt of the loan.





The
balance of the Debenture, including accrued interest, at September 30, 2008 was
$342,270 (net of unamortized discount of $674,443).  Interest charged to
operations on the debenture for the three and nine months ended September 30,
2008 amounted to $16,712, respectively. The beneficial conversion feature is
treated as a discount against the face amount of the debt and is amortized into
interest expense over the term of note. Amortization expense on the discount
charged to operations for the three and nine months ended September 30, 2008
amounted to $40,823, respectively.





The
Company incurred fees in connection with obtaining the loan totaling $375,000.
The $375,000 is being amortized into interest expense over the term of the note.
The amount charged to interest expense during the three months and nine months
ended September 30, 2008 amounted to $18,292. The unamortized balance of
deferred loan fees is reflected on the balance sheet as an asset and its balance
as of September 30, 2008 amounted to $356,708.





At
September 30, 2008, the fair value of the derivative liability was
$373,391.





NOTE
11 – COMMITMENTS AND CONTINGENCIES




Royalties





A summary
of royalty interests that the Company has granted and are outstanding as of
September 30, 2008 follows:




25
 Table of Contents
 MATECH
CORP.
 (A
DEVELOPMENT STAGE COMPANY)
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 For
the three months and nine months ended September 30, 2008 and 2007




Fatigue
      Fuse
            EFS
            Server
              Array
              System
            X-Ray
              Diffraction
              Method
            Nondestructive
              evaluation
      and
              stimulate
              industrial
              innovationVariety
      Investments, Ltd.
            5.00%
            -
            -
            -
            -University
      of Pennsylvania (see Note 7)Net
      sales of licensed products
            -
            7.00%
            -
            -
            -Net
      sales of services
            -
            2.50%
            -
            -
            -NCAT
      (see Note 7)Net
      sales of licensed products
            -
            -
            3.50%
            -
            -Sublicensing
      income
            -
            -
            25.00%
            -
            -ISIS  (see
      Note 7)Net
      sales of licensed products
            -
            -
            -
            2.5%
            -Sublicensing
      income
            -
            -
            -
            25.00%
            -ISURF
      (see Note 7) **Net
      sales of licensed products
            -
            -
            -
            -
            3.0%Sublicensing
      income
            -
            -
            -
            -
            25.00%Shareholder
            1.00%
            0.50%
            -
            -
            -





**
      License cancelled in October 2008





Litigation





In
December 2006, the Company entered into a settlement agreement and release
agreement, as well as irrevocable escrow instructions, to settle the lawsuit
filed on March 8, 2006.  As consideration under the settlement, the
Company issued 5,000,000 shares of its common stock to Mr. Beck, with the shares
to be held by an escrow agent and distributed to Mr. Beck monthly with a trading
limit equal to 8% of the previous month’s trading volume of the Company’s common
stock, until Mr. Beck has received a total of $800,000.  As the Company has
guaranteed this debt to Mr. Beck in the amount of $800,000, the Company
originally recorded a liability for this amount at the time of the
settlement.  As Mr. Beck receives proceeds from the sale of his shares
through the public market, the Company is reducing its guarantee by that
amount.  As of September 30, 2008, the Company believes its guarantee
to Mr. Beck was $0.





Mr. Beck
has alleged that additional amounts are due him and filed suit against the
Company. As of September 30, 2008, the suit is on-going.




26
 Table of Contents
 MATECH
CORP.
 (A
DEVELOPMENT STAGE COMPANY)
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 For
the three months and nine months ended September 30, 2008 and 2007


The
Company has also been named as a defendant in a lawsuit alleging breach of
contract due to the Company’s failure to pay certain amounts due to a consultant
for services.  The Company settled with the plaintiff in October 2008.
Under the terms of the settlement, the Company agreed to pay $250,000 with a
down payment of $15,000 due by November 30, 2008. The remaining balance is
payable in monthly installments of $5,000. In addition, the Company is required
to the Plaintiff a percentage of any net sums/dollars received by the Company
for any equity or debt instrument,
including sale by Robert Bernstein of his stock, as follows to reduce the
$250,000 settlement amount:





5% up to the first 2 million dollars


4% for $2,000,001 to $4,000,000


3% over $4,000,000




In the
event the Company is determined to be in default under the settlement agreement,
it is required to pay the plaintiff $250,000 less any amounts already paid, plus
10% interest on the remaining amount of the $250,000 settlement (commencing
October 7, 2008 to the date of default), plus $36,000 as a penalty. As September
30, 2008, the Company valued the obligation at its fair value of $222,852, based
upon the present value of the required future cash flows using an annual
interest rate of 6%.





In the
ordinary course of business, the Company may from time to time be involved in
other various pending or threatened legal actions.  The litigation process
is inherently uncertain and it is possible that the resolution of such matters
might have a material adverse effect upon its financial condition and/or results
of operations.  However, in the opinion of its management, matters
currently pending or threatened against the Company are not expected to have a
material adverse effect on its financial position or results of
operations.





Indemnities and
Guarantees





During
the normal course of business, the Company has made certain indemnities and
guarantees under which it may be required to make payments in relation to
certain transactions.  These indemnities include certain agreements with
the Company’s officers under which the Company may be required to indemnify such
person for liabilities arising out of their employment relationship.  They
also include indemnities made to the holders of the convertible debentures, Mr.
Beck, with regards to his settlement with the Company, and the sellers of
investments in securities.  The duration of these indemnities and
guarantees varies, and in certain cases, is indefinite.  The majority of
these indemnities and guarantees do not provide for any limitation of




27
 Table of Contents
 MATECH
CORP.
 (A
DEVELOPMENT STAGE COMPANY)
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 For
the three months and nine months ended September 30, 2008 and 2007




the
maximum potential future payments the Company would be obligated to make. 
Historically, the Company has not been obligated to make significant payments
for these obligations and no liability has been recorded for these indemnities
and guarantees in the accompanying consolidated balance sheet.




NOTE
12 – EMPLOYEE BENEFIT PLAN




On
December 14, 2007, the Company adopted a 401k retirement plan for its employees.
To beeligible
to participate in the plan, an employee must be at least 21 years for age and
work for the Company for six consecutive months. Company contributions and
employee match are discretionary. During the nine months ended September 30,
2008, the Company did not contribution to the plan.




NOTE
13–STOCKHOLDERS'
EQUITY




Class A Preferred
Stock




The
holders of the Class A convertible preferred stock have a liquidation preference
of $720 per share.  Such amounts shall be paid on all outstanding Class A
preferred shares before any payment shall be made or any assets distributed to
the holders of the common stock or any other stock of any other series or class
ranking junior to the shares as to dividends or assets.




These
shares are convertible to shares of the Company's common stock at a conversion
price of $0.72 (“initial conversion price”) per share of Class A preferred stock
that will be adjusted depending upon the occurrence of certain events.  The
holders of these preferred shares shall have the right to vote and cast that
number of votes which the holder would have been entitled to cast had such
holder converted the shares immediately prior to the record date for such
vote.  The holders of these shares shall participate in all dividends
declared and paid with respect to the common stock to the same extent had such
holder converted the shares immediately prior to the record date for such
dividend.




Class B Preferred
Stock




The
Company has designated 15 shares of Class B preferred stock, of which no shares
have been issued.  The holders of Class B preferred shares are entitled to
a liquidation preference of $10,000 per share.  Such amounts shall be paid
on all outstanding Class B preferred shares before any payment shall be made or
any assets distributed to the holders of common stock or of any other stock of
any series or class junior to the shares as to dividends or assets, but junior
to Class A preferred shareholders.  Holders of Class B preferred shares are
not entitled to any liquidation distributions in excess of $10,000 per
share.




28
 Table of Contents
 MATECH
CORP.
 (A
DEVELOPMENT STAGE COMPANY)
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 For
the three months and nine months ended September 30, 2008 and 2007




The
shares are redeemable by the holder or the Company at $10,000 per share. 
The holders of these shares shall have the right to vote at one vote per Class B
preferred share and shall participate in all common stock dividends declared and
paid according to a formula as defined in the series designation.





Class C Preferred
Stock




Each
shareholder of Class C preferred stock is entitled to receive a cumulative
dividend of 8% per annum for a period of two years.  Dividends do not
accrue or are payable except out of earnings before interest, taxes,
depreciation and amortization.  At September 30, 2007, no dividends are
payable to Class C preferred shareholders.  Holders of the Class C
preferred stock are junior to holders of the Company’s Class A and B preferred
stock, but hold a higher position than common shareholders in terms of
liquidation rights.  Holders of Class C preferred stock have no voting
rights.  Holders of Class C preferred stock have the right to convert their
shares to common stock on a 300-to-1 basis.





The
Company requires an approval of at least two-thirds of the holders of Class C
preferred shareholders to alter or change their rights or privileges by way of a
reverse stock split, reclassification, merger, consolidation or otherwise, so as
to adversely affect the manner by which the shares of Class C preferred stock
are converted into common shares.





Class D Preferred
Stock





Holders
of Class D preferred stock have a $0.001 liquidation preference, no voting
rights and are junior to holders of all classes of preferred stock but senior to
common shareholders in terms of liquidation rights.  Class D preferred
stockholders are entitled to dividends as declared by the Company’s Board of
Directors, which have not been declared as of September 30, 2008.  Holders
of Class D preferred stock have the right to convert their shares to common
stock on a 300-to-1 basis. As of September 30, 2008, there were no Class D
Preferred shares outstanding.





Class E Convertible
Preferred Stock





On
January 26, 2007, the Company amended its certificate of incorporation by filing
a certificate of designation of rights, preferences, privilege and restrictions
of the Company’s new created Class E convertible preferred stock.  The
Company has authorized 60,000 shares, each with an original issue price of
$19.50 per share.  In each calendar quarter, the holders of the then
outstanding Class E Convertible Preferred Stock shall be entitled to receive




29
 Table of Contents
 MATECH
CORP.
 (A
DEVELOPMENT STAGE COMPANY)
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 For
the three months and nine months ended September 30, 2008 and 2007




non-cumulative
dividends in an amount equal to 5% of the original purchase price per annum. All
dividends may be accrued by the Corporation until converted into common shares.
After one year from the issuance date, the holders of Class E convertible
preferred stock have the right to convert the preferred shares held into shares
of the Company’s common stock at the average closing bid price of the ten days
prior to the date of conversion. Class E Preferred Shares have no liquidation
preference, and has ten votes per share.




In
connection with the acquisition of SATI, the Company issued 50,000 shares of
Class E convertible preferred which were valued at the shares original purchase
price of $19.50 per share. The Company also issued an additional 5,000 shares to
a consultant in connection with the SATI
acquisition, which were valued at $97,500 and charged to equity as costs of the
offering.





During
the nine months ended September 30, 2008, 5,750 shares of Class E convertible
preferred stock were converted into 8,577,907 shares of the Company’s Class A
common stock.




Class A Common
Stock





The
holders of the Company's Class A common stock are entitled to one vote per share
of common stock held.





During
the nine months ended September 30, 2008, the Company issued 91,012,777 and
cancelled 30,792,977 shares of its common stock.





From time
to time, the Company issues its common shares and holds the shares in escrow on
behalf of another party until consummation of certain transactions.  The
following is a reconciliation of shares issued and outstanding as of September
30, 2008:




Issued
    shares
              
              
              205,736,018Less shares held in
      escrow:Shares issued to the
      Company and held in escrow
              
              
              (3,357,397
              )hares held in
      escrow pursuant to agreement debenture holders
              
              
              (8,000,000
              )Contingent shares
      held related to the Beck settlementfor
      antidilution purposes (see Note 10)
              
              
              (7,805,368
              )Other
              
              
              (6,000
              )(19,168,765
              )Outstanding shares
      (including shares committed)
              
              
              186,567,253


30
 Table of Contents
 MATECH
CORP.
 (A
DEVELOPMENT STAGE COMPANY)
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 For
the three months and nine months ended September 30, 2008 and 2007





Class B Common
Stock





The
holders of the Company's Class B common stock are not entitled to dividends, nor
are they entitled to participate in any proceeds in the event of a liquidation
of the Company.  However, the holders are entitled to 600,000 votes for
each share of Class B common stock held.





Common Shares Issued for Non
Cash Consideration





The value
assigned to shares issued for services were charged to operations in the period
issued.





2008





During
the nine months ended September 30, 2008, the Company issued 91,012,777 shares
of its Class A common stock, of which 34,229,612 shares were issued in the
conversion of $631,271 of convertible debt, 13,249,167 shares for consulting and
other services valued at $3,669,025, 378,491 shares issued pursuant to an
anti-dilutive provision of a settlement agreement, valued at par, and 34,500,000
shares issued on the exercise of 34,500,000 warrants. Upon the issuing of the
34.500.000 shares, the Company credited its related derivative warrant liability
of $1,151,900 to equity. In addition, during the nine-month period, the Company
issued 8,577,907 shares of common stock on the conversion of 5,750 shares of
Class E preferred shares, and recognized compensation of $3,715 on the granting
of warrants to purchase 18,750,200 shares of the Company’s common
stock.





During
the nine-months ended September 30, 2008, the Company’s President returned
30,000,000 shares of common stock for cancellation. Also during the same
nine-month period, another 792,977 common shares were returned for
cancellation.





Stock
Options





The
Company has the following stock option plans:  The 2003 Stock Option, SAR
and Stock Bonus Consultant Plan (“the 2003 Plan”), the 2006 Non-Qualified Stock
Grant and Option Plan (the “2006 Plan”), and the 2006/2007 Non-Qualified Stock
Grant and Option Plan (the “2006/2007 Plan”), and the 2008 Incentive and
Nonstatutory Stock Option Plan..





In April
2006, the Company adopted the 2006 Plan and reserved 100,000 shares of its
common stock for grant.  Eligible plan participants include independent
consultants, and the Company may issue shares of stock or options may be granted
at any price. The plan expires upon the  earlier of all reserved
shares being granted or April 18, 2016.










31
 Table of Contents
 MATECH
CORP.
 (A
DEVELOPMENT STAGE COMPANY)
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 For
the three months and nine months ended September 30, 2008 and 2007





In
December 2006, the Company adopted the 2006/2007 Plan and reserved 3,000,000
shares of its common stock for grant.  Eligible plan participants
include independent consultants, and the Company may issue the shares of the
stock or option may be granted at any price.  The plan expires upon
the earlier of all reserved shares being granted or December 1,
2016.





On April
22, 2008, the Board of Directors adopted the 2008 Incentive and Nonstatutory
Stock Option Plan for its employees, directors, and consultants. The Company
initially reserved 100,000,000 shares of its Class A common shares to be issued
under the plan. The plan was later amended to increase the number of shares
reserved to 400,000,000. On April 22, 2008, the Company granted Mr. Bernstein
options under the plan to purchase 30,000,000 shares of the Company’s Class A
common stock at a price of $.04 per share. The options expire ten years after
grant. On April 23, 2008, the Company granted Mr. Bernstein options under the
plan to purchase 300,000,000 shares of the Company’s Class A common stock at a
price of $.00462 per share. These options were returned by Mr. Bernstein on
September 4, 2008 for cancelation. On May 4, 2008, the Company granted Mr.
Bernstein options under the plan to purchase 70,000,000 shares of the Company’s
Class A common stock at a price of $.0077 per share. The options expire ten
years after grant.





These
option agreements allow for cashless exercises when the fair market value of the
Company’s common stock exceeds the respective exercise price. The Company deemed
these options to be derivatives based upon their terms. At September 30, 2008,
the exercise price was higher than the market price of the Company’s underlying
common stock and therefore no liabilities were recorded.





On April
30, 2008, the Company granted options under its 2006/2007 Non-Qualified Stock
Grant and Option Plan to purchase a total of 800,000 shares of its common stock
to three officers and its Corporate Secretary. The exercise price of the options
is $.011 per share and they expire on April 30, 2016. The options were valued
using the Black-Scholes option-pricing model using the following assumptions:
term of 8 years, a risk-free interest rate of 3.29%, a dividend yield of 0% and
volatility of 659%.  Compensation recognized on the above option
grants was $8,800 and was charged to operations.





On April
9, 2008, pursuant to a consulting agreement, the Company granted options to a
consultant to purchase 15,390,546 shares of Class A common stock at a price of
$.025 per share. The options expire on April 9, 2018. The terms of the grant
allow for cashless exercises when the fair market value of the Company’s common
stock exceeds the respective exercise price. The Company deemed these options to
be derivatives based upon their terms but at September 30, 2008, the exercise
price was higher than the market price of the Company’s underlying common stock
and therefore no liabilities were recorded.




32
 Table of Contents
 MATECH
CORP.
 (A
DEVELOPMENT STAGE COMPANY)
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 For
the three months and nine months ended September 30, 2008 and 2007





Stock
Warrants




During the year ended
December 31, 2006 the Company issued 35,000,000 warrants to Palisades as part of
the Company’s modification of Palisades’ convertible debentures (see Note
10).  The Company has valued these warrants using a market
capitalizationmethod in accordance with its established accounting
policy.  The warrants are exercisable at a price of the lesser of: (a)
$0.001 per share; (b) 50% of the market price on the date of exercise. During
the nine months ended September 30, 2008, 34,500,000 warrants were
exercised.





In
addition to the 500,000 warrants as indicated above, the Company has granted as
part of a private offering, warrants to purchase 4,618,334 shares of its Class A
Common Stock. The Company was obligated to register the underlying 4,618,334
shares, but failed to do so, On August 19,, 2008, in settlement for the failure
to file the registration statement. The Company cancelled the 4,618,334 warrants
and granted to the holders warrants to purchase 18,575,200 shares of its common
stock at a purchase price of $0.20 per share. These warrants expire on August
19, 2009.





Under the
terms of its June 16, 2008 settlement agreement with Palisades, the Company
granted warrants to the debenture holders to purchase a total of 35,000,000
shares of the Company’s common stock at a price per share of the lesser of (i)
$0.001 per share, or (ii) 50% of market price   The Warrants
expire on October 16, 2016. The Company also granted warrants to purchase
5,000,000 shares if its common stock to an affiliate of the debenture holders as
part consideration for consultant services. The 5,000,000 warrants are
exercisable at a price per share of the lesser of (i) $0.10 per share, or (ii)
50% of market price   The Warrants expire on October 16, 20136.
The terms of the respective warrant agreements allow the warrant holder certain
piggyback registration rights.




On
September 15, 2008, the Company granted warrants to a consultant purchase
6,000,000 shares of the Company’s Class A Common Stock at a purchase price of
$.10 per share. The warrants expire on September 15, 2009.
  The
following table summarizes the warrants and options outstanding at September 30,
2008:
  33
 Table
of Contents
 MATECH
CORP.
 (A
DEVELOPMENT STAGE COMPANY)
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 For
the three months and nine months ended September 30, 2008 and 2007





WeighedOptions/
            
            
            AverageWarrants
            
            
            ExerciseOutstanding
            
            
            PriceBalance
      – December 31, 2007
            
            
            5,118,334
            
            
            $
            0.460Granted
      *
            
            
            456,190,546
            
            
            $
            0.007Exercised
            
            
            -
            
            
            
            -Forfeited
            
            
            -
            
            
            
            -


Balance
      – June 30, 2008
            
            
            461,308,880
            
            
            $
            . 012Granted
            
            
            24,575,200
            
            
            $
            0.176Exercised
            
            
            -
            
            
            
            -Forfeited
            
            
            (304,618,334
            )
            
            $
            (.004
            )Balance–
      Sept 30, 2008
            
            
            181,265,746
            
            
            $
            0.034








*
            Restated
      to include the 40,000,000 warrants granted to Palisades and affiliate with
      an effective date of June 16, 2008.





NOTE 14 – RELATED PARTY
TRANSACTIONS





As of
September 30, 2008, the Company was owed $9,180 from its President.  The
loan is assessed interest at an annual rate of 10%.  Interest credited to
operations relating to this loan during the three months ended September 30,
2008 and 2007 amounted to $225 and $204, respectively Interest credited to
operations relating to this loan during the nine months ended September 30, 2008
and 2007 amounted to $655 and $592, respectively





On
November 21, 2006, the Company entered into a stock grant and general release
agreement with the Company’s CEO, for the purpose of showing the Company’s
appreciation for the CEO’s work over the past several years.  Under
the agreement, the CEO was issued 30,000,000 shares of the Company’s Class A
common stock, restricted in accordance with Rule 144, and subject to forfeiture
back to the Company in accordance with the terms of the agreement, if he is not
employed by the Company for 3 years from the date of the
agreement.  Additionally under the terms of the agreement, the CEO has
released the Company from any and all claims he may have against the


34
 Table of Contents
 MATECH
CORP.
 (A
DEVELOPMENT STAGE COMPANY)
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 For
the three months and nine months ended September 30, 2008 and 2007




Company
for any monies owed to him as of the date of the agreement.  The value
assigned to the shares issued to the CEO has been determined to be $180,000,000
based on the Company’s trading price of the shares on date of
issuance.  The value will be recorded as additional compensation
expense over the 36 month term of the agreement.  On April 29, 2008,
the President returned the 30,000,000 shares to the Company for cancellation.
The Company ceased recognizing compensation when these shares were returned.
During the nine months ended September 30, 2008 and 2007, the Company charged to
operations $19,833,333 and $30,000,000, respectively.




NOTE
15 – SUBSEQUENT EVENTS




Effective
October 3, 2008, the Company authorized a 1000 to 1 reverse stock split. In
addition, the Company changed its name to Matech Corp. 
Pro forma lossper share assuming the reverse stock split took effect at
the beginning of each period presented are as follows:




For
      the Three Months Ended
              
              
              For
      the Nine Months EndedSeptember
      30,
              
              
              September
      30,2007
              
              
              2008
              
              
              2007
              
              
              2008(Unaudited)
              
              
              (Unaudited)
              
              
              (Unaudited)
              
              
              (Unaudited)Net
      Income (loss)
              
              $
              (31,203,869
              )
              
              $
              5,629,997
              
              
              $
              (84,336,192
              )
              
              $
              (18,755,905
              )Per
      share data:Basic
      and diluted net loss per share
              
              $
              (251.08
              )
              
              $
              32.13
              
              
              $
              (829.50
              )
              
              $
              (119.56
              )Weighted average Class A common shares outstanding - basic and
      diluted
              
              
              124,276
              
              
              
              175,240
              
              
              
              101,671
              
              
              
              156,873





NOTE 16 – RESTATEMENT OF
PREVIOUSLY ISSUED FINANCIAL STATEMENTS





As
discussed in Note 10, the Company entered into a settlement agreement with
Palisades that has an effective date of June 16, 2008. The modified terms had a
significant impact on the Company’s activity for the period ended June 30, 2008.
Therefore, the Company has restated its June 30, 2008 financial statements. The
net effect of the restatements is as follows:




35
 Table
of Contents
 MATECH
CORP.
 (A
DEVELOPMENT STAGE COMPANY)
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 For
the three months and nine months ended September 30, 2008 and 2007





For
      the Three Months EndedJune
      30, 2008As
      Originally Stated
            
            
            
            Adjustments
            
            
            As
      CorrectedRevenues:Research
      and development
            
            $
            -
            
            
            
            
            -
            
            
            $
            -Revenue
      from bridge testing
            
            
            -
            
            
            
            
            -
            
            
            
            -Other
            
            
            -
            
            
            
            
            -
            
            
            
            -Total
      revenues
            
            
            -
            
            
            
            
            -
            
            
            
            -Costs
      and expenses:Research
      and development
            
            
            150,847
            
            
            
            
            -
            
            
            
            150,847General
      and administrative
            
            
            5,517,443,
            
            
            
            
            -
            
            
            
            5,517,443Total
      costs and expenses
            
            
            5,668,290
            
            
            
            
            -
            
            
            
            5,668,290Loss
      from operations
            
            
            (5,668,290
            )
            
            
            
            -
            
            
            
            (5,668,290
            )Other
      income (expense):Interest
      expense
            
            
            (397,973
            )
            1)
            
            
            (208,055
            )
            
            
            (606,028
            )


Loss
      on modification of convertible debt
            
            
            -
            
            
            2)
            
            
            (964,730
            )
            
            
            (964,730
            )Change
      in fair value of derivative liabilities
            
            
            (6,036,711
            )
            
            3)
            
            
            (65,066,965
            )
            
            
            (71,103,676
            )Interest
      income
            
            
            3,080
            
            
            
            
            
            
            -
            
            
            
            3,080Other
      expense, net
            
            
            -
            
            
            
            
            
            
            -
            
            
            
            -Loss
      before provision for income taxes
            
            
            (12,099,894
            )
            
            
            
            
            
            (66,239,750
            )
            
            
            (78,339,644
            )Provision
      for income taxes
            
            
            -
            
            
            
            
            
            
            -
            
            
            
            -Net
      loss
            
            $
            (12,099,894
            )
            
            
            
            
            $
            (66,239,750
            )
            
            $
            (78,339,644
            )Per
      share data:Basic
      and diluted net loss per share
            
            $
            (0.08
            )
            
            
            
            
            $
            (0.42
            )
            
            $
            (0.50
            )Weighted
      average Class A common sharesoutstanding - basic and
      diluted
            
            
            156,616,668
            
            
            
            
            
            
            156,616,668
            
            
            
            156,616,6681)
      To record additional interest on the increased balance of debt totaling
      $16,597 and amortization of increased discount totaling
      $191,458.2)
      To record loss on modification of convertible debt.3)
      To expense increase in derivative liability due to the reduction in
      conversion price of convertible debt and granting of warrants to purchase
      40M shares of common shares.






36
 Table of Contents
 MATECH
CORP.
 (A
DEVELOPMENT STAGE COMPANY)
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 For
the three months and nine months ended September 30, 2008 and 2007




For
      the Six Months EndedJune
      30, 2008As
      Originally Stated
            
            
            
            
            
            Adjustments
            
            
            As
      CorrectedRevenues:Research
      and development
            
            $
            -
            
            
            
            
            
            
            -
            
            
            $
            -Revenue
      from bridge testing
            
            
            1,090
            
            
            
            
            
            
            -
            
            
            
            1,090Other
            
            
            -
            
            
            
            
            
            
            -
            
            
            
            -Total
      revenues
            
            
            1,090
            
            
            
            
            
            
            -
            
            
            
            1,090Costs
      and expenses:Research
      and development
            
            
            309,840
            
            
            
            
            
            
            -
            
            
            
            309,840General
      and administrative
            
            
            25,845,768
            
            
            
            
            
            
            -
            
            
            
            25,845,768Total
      costs and expenses
            
            
            26,155,608
            
            
            
            
            
            
            -
            
            
            
            26,155,608Loss
      from operations
            
            
            (26,154,518
            )
            
            
            
            
            
            -
            
            
            
            (26,154,518
            )Other
      income (expense):Interest
      expense
            
            
            (768,964
            )
            
            
            1
            )
            
            
            (208,055
            )
            
            
            (977,019
            )Gain
      on modification of convertible debt
            
            
            -
            
            
            
            2
            )
            
            
            (964,730
            )
            
            
            (964,730
            )Other-than-temporary
      impairment of marketablesecurities available for
    sale
            
            
            -
            
            
            
            
            
            
            
            -
            
            
            
            -Net
      unrealized and realized loss of marketable securities
            
            
            (8
            )
            
            
            
            
            
            
            -
            
            
            
            (8
            )Change
      in fair value of derivative liabilities
            
            
            2,522,864
            
            
            
            3
            )
            
            
            (65,066,965
            )
            
            
            (62,544,101
            )Interest
      income
            
            
            15,523
            
            
            
            
            
            
            
            
            
            
            
            15,523




37
 Table of Contents
 MATECH
CORP.
 (A
DEVELOPMENT STAGE COMPANY)
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 For
the three months and nine months ended September 30, 2008 and 2007


Loss
      before provision for income taxes
            
            
            (24,385,103
            )
            
            
            
            (66,239,750
            )
            
            
            (90,624,853
            )Provision
      for income taxes
            
            
            (800
            )
            
            
            
            -
            
            
            
            (800
            )Net
      loss
            
            $
            (24,385,903
            )
            
            
            $
            (66,239,750
            )
            
            $
            (90.625.653
            )Per
      share data:Basic
      and diluted net loss per share
            
            $
            (0.17
            )
            
            
            $
            (44
            )
            
            $
            (0.61
            )Weighted
      average Class A common sharesoutstanding - basic and
      diluted
            
            
            147,589,164
            
            
            
            
            147,589,164
            
            
            
            147,589,1641)
      To record additional interest on the increased balance of debt totaling
      $16,597 and amortization of increased discount totaling
      $191,458.2)
      To record loss on modification of convertible debt.3)
      To expense increase in derivative liability due to the reduction in
      conversion price of convertible debt and granting of warrants to purchase
      40M shares of common shares.




















38
 Table of Contents




Item 2.  Management’s Discussion and Analysis of
Financial Condition and Results of Operations





Disclaimer
Regarding Forward Looking Statements





Our
Management’s Discussion and Analysis contains not only statements that are
historical facts, but also statements that are forward-looking (within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934).  Forward-looking statements are, by
their very nature, uncertain and risky.  These risks and uncertainties
include international, national and local general economic and market
conditions; demographic changes; our ability to sustain, manage, or forecast
growth; our ability to successfully make and integrate acquisitions; raw
material costs and availability; new product development and introduction;
existing government regulations and changes in, or the failure to comply with,
government regulations; adverse publicity; competition; the loss of significant
customers or suppliers; fluctuations and difficulty in forecasting operating
results; changes in business strategy or development plans; business
disruptions; the ability to attract and retain qualified personnel; the ability
to protect technology; and other risks that might be detailed from time to time
in our filings with the Securities and Exchange Commission.





Although
the forward-looking statements in this report reflect the good faith judgment of
our management, such statements can only be based on facts and factors currently
known by them.  Consequently, and because forward-looking statements
are inherently subject to risks and uncertainties, the actual results and
outcomes may differ materially from the results and outcomes discussed in the
forward-looking statements.  You are urged to carefully review and consider
the various disclosures made by us in this report and in our other reports as we
attempt to advise interested parties of the risks and factors that may affect
our business, financial condition, and results of operations and
prospects.





Overview





We
research and develop technologies that detect and measure metal
fatigue.  We have developed two products: (1) the Fatigue Fuse; and
(2) the Electrochemical Fatigue Sensor.  We generate very little
revenue from the sale and licensing of our products, and thus we are a
development stage company.





Our
biggest challenge is funding the commercialization of our products until we can
generate sufficient revenue to support our operations.  We try to keep our
overhead low and utilize outside consultants as much as possible in order to
reduce expenses, and thus far we have been successful in raising enough capital
through loans and financing to fund operations.  For the foreseeable
future, we plan to continue to raise capital in this manner.





Our
consolidated financial statements are prepared using the accrual method of
accounting in accordance with accounting principles generally accepted in the
United States of America and have been prepared on a going concern basis, which
contemplates the realization of assets and


39
 Table of Contents


the
settlement of liabilities in the normal course of business.  We have
sustained operating losses since our inception (October 21, 1983).  In
addition, we have used substantial amounts of working capital in our
operations.  Further, at September 30, 2008, the deficit accumulated during
the development stage amounted to approximately $332,547,374.





In view
of these matters, realization of a major portion of the assets in the
accompanying consolidated balance sheet is dependent upon our ability to meet
our financing requirements and the success of our future operations. 
During 2007, we received approximately $4,000,000 in private financing,
primarily from the sale of equity and debt securities.  Thus far in 2008,
we have received approximately $1,055,000 in private financing, also primarily
from the sale of equity and debt securities.  We plan to continue to
raise funds through the sale of our securities for the foreseeable
future.  In addition in 2007, we received contracts to inspect certain
bridges with nine states which generated gross revenue of approximately
$201,917.  Thus far in 2008, we have received contracts to inspect certain
bridges with four entities which generated gross revenue of approximately
$30,359.  We have begun marketing our current technologies while
continuing to develop new methods and applications.  We will need to raise
additional capital to finance future activities and no assurances can be made
that current or anticipated future sources of funds will enable us to finance
future operations.  In light of these circumstances, substantial doubt
exists about our ability to continue as a going concern.  The consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets or liabilities that might
be necessary should we be unable to continue as a going concern.





Results
of Operations for the Nine Months Ended September 30, 2008 as Compared to the
Nine Months Ended September 30, 2007 (Unaudited)





Revenues and Loss from
Operations





Our
revenue, research and development costs, general and administrative expenses,
and loss from operations for the nine months ended September 30, 2008 as
compared to the nine months ended September 30, 2007 are as
follows:





Nine
      Months
              Ended
              September
      30, 2008
            
            
            Nine
      Months
              Ended
              September
      30, 2007
            
            
            Percentage
              ChangeRevenue
            
            $
            30,359
            
            
            $
            146,745
            
            
            
            (79.31
            )%Research
      and Development costs
            
            
            423,428
            
            
            
            3,533,343
            
            
            
            (88.02
            )%General
      and Administrative expenses
            
            $
            26,619,102
            
            
            $
            82,608,673
            
            
            
            (67.78
            )%Loss
      from operations
            
            $
            (27,042,530
            )
            
            $
            (85,995,271
            )
            
            
            (68.55
            )%




Our
revenues were derived exclusively from bridge testing.




40
 Table of Contents


Of the $423,428 in
research and development costs for the nine months ended September 30, 2008,
$237,530 was incurred in salaries to our in-house engineering staff which
included an officer and director, $146,998 was paid to outside consultants and
for related expense reimbursements, and we valued the issuance of 150,000 shares
of our common stock that were issued to various consultants valued at
$34,500.  Of the $423,428 in research and development costs, $4,400 was
compensation expense recognized on the granting of options to our staff to
purchasea total of 400,000 shares of our common stock at a price per
share of $.011.





Of the
$3,533,343 in research and development costs for the nine months ended September
30, 2007, $131,221 was incurred in salaries to our in-house engineering staff
which included an officer and director, $257,022 was paid to outside consultants
and for related expense reimbursements, and we valued the issuance of 2,116,000
shares of our common stock that were issued to various consultants and a
director valued at $3,145,100.





General
and administrative expenses were $26,619,102 and $82,608,673, respectively, for
the nine months ended September 30, 2008 and 2007.  The major expenses
incurred during each of the quarters were:





Nine
      Months
              Ended
              September 30, 2008
            
            
            Nine
      Months
              Ended
              September 30, 2007Consulting
      services
            
            $
            4,999,837
            
            
            $
            16,506,521Officers’
      salaries
            
            
            351,002
            
            
            
            207,916Officer’s
      stock based compensation
            
            
            19,887,533
            
            
            
            45,000,000Office
      salaries
            
            
            108,100
            
            
            
            66,756Office
      expense
            
            
            63,167
            
            
            
            66,480Professional
      fees
            
            
            680,927
            
            
            
            856,463Rent
            
            
            24,648
            
            
            
            23,004Marketing
            
            
            182,474
            
            
            
            335,706Impairment
      loss
            
            
            -
            
            
            
            19,294,875Payroll
      taxes
            
            
            38,395
            
            
            
            44,717Travel
            
            
            82,173
            
            
            
            104,659Insurance
            
            
            51,997
            
            
            
            30,208Telephone
            
            
            16,696
            
            
            
            19,740




Of the
$4,999,837 in consulting expense for the nine months ended September 30, 2008,
$3,586,240 was related to the issuance of 11,099,167 shares of common
stock.  In addition, we charged $1,100,000 in consulting fees through an
increase in convertible debt in the same amount. Of the $16,506,521 in
consulting expense for the nine months ended September 30, 2007, $13,288,767 was
related to the issuance of 8,650,424 shares of common stock.  Of the
$856,463 in professional fees for the nine months ended September 30, 2007,
$655,300 was related to the issuance of 1,800,000 shares of common
stock.








41
 Table of Contents




Other Income and Expenses
and Net Loss





Our loss
on modification of convertible debt, modification of research and development
sponsorship agreement, loss on subscription receivables, interest expense,
other-than-temporary impairment of marketable securities, change in fair value
of derivative and warrant liabilities, loss on settlement of lawsuits, and net
loss for the nine months ended September 30, 2008 as compared to the nine months
ended September 30, 2007 are as follows:





Nine
      Months Ended
              September
      30, 2008
            
            
            Nine
      Months Ended
              September
      30, 2007
            
            
            Percentage
              ChangeInterest
      expense
            
            $
            (1,808,697
            )
            
            $
            (2,014,161
            )
            
            
            (10.20
            )%Loss
      on modification of Convertible debt
            
            $
            (964,730
            )
            
            $
            -
            
            
            
            -0-Net
      unrealized and realizedl oss of marketable securities
            
            $
            -
            
            
            $
            (10,866,553
            )
            
            
            -0-Change
      in fair value of derivative and warrant liabilities
            
            $
            10,431,555
            
            
            $
            14,505,323
            
            
            
            (28,08
            )%Interest
      income
            
            $
            15,879
            
            
            $
            35,270
            
            
            
            (54.98
            )%Provision
      for income taxes
            
            
            (800
            )
            
            
            (800
            )
            
            
            0
            %Net
      loss
            
            $
            (19,338,972
            )
            
            $
            (84,336,192
            )
            
            
            77.07
            %




Our
interest expense includes amortization of debt discounts totaling $1,497,618
during the nine months ended September 30, 2008 and $1,765,110 during the nine
months ended September 30, 2007.  The change in fair value of derivative
and warrant liabilities represents the change in derivative values related to
warrants and convertible debt with Palisades Capital, LLC and Golden Gate
Investors, Inc.





Liquidity
and Capital Resources





Introduction





During
the nine months ended September 30, 2008, as with the nine months ended
September 30, 2007, we did not generate positive cash flow.  As a result,
we funded our operations through the private sale of equity and debt securities,
the issuance of our securities in exchange for services, and loans.





Our cash,
investments in marketable securities held for trading, investments in marketable
securities available for sale, accounts receivable, prepaid services, prepaid
expenses and other current assets, total current assets, total assets, total
current liabilities, and total liabilities as of September 30, 2008, as compared
to September 30, 2007, were as follows:




42


September
      30, 2008
            
            
            September
      30, 2007Cash
            
            $
            441,076
            
            
            $
            987,284Marketing
      securities- trading
            
            $
            -
            
            
            $
            453,181Marketing
      securities- available for sale
            
            $
            -
            
            
            $
            120,000Investment
      in certificatesof deposit
            
            $
            -
            
            
            $
            1,107,681Accounts
      receivable
            
            $
            15,620
            
            
            $
            -Inventories
            
            $
            156,054
            
            
            $
            -Prepaid
      expenses and other
            
            $
            70,423
            
            
            $
            204,501Total
      current assets
            
            $
            683,173
            
            
            $
            2,872,647Total
      assets
            
            $
            1,128,852
            
            
            $
            2,928,147Total
      current liabilities
            
            $
            965,775
            
            
            $
            524,057Total
      liabilities
            
            $
            6,737,797
            
            
            $
            34,171,450





Cash
Requirements





For the
nine months ended September 30, 2008, our net cash used in operations was
$(2,381,825) compared to $(2,450,964) for the nine months ended September 30,
2007.





Negative
operating cash flows during the nine months ended September 30, 2008 were
primarily created by a net loss from operations of $(19,338,972), offset by the
issuance of stock for services of $4,729,541, amortization of discount on
convertible debentures of $1,497,617 and an increase in officer stock based
compensation of $19,885,333.  There was also an decrease in the fair value
of derivative and warrant liabilities of $(10,431,555), accrued interest on debt
of $272,077, net decrease in other assets of $19,961and net increase in other
liabilities of $19,443.





Negative
operating cash flows during the nine months ended September 30, 2007 were
primarily created by a net loss from operations of $(84,336,192), offset by
impairment losses of $19,294,877 incurred in connection with the acquisition of
a subsidiary, the issuance of stock for services of $19,519,168, amortization of
discount on convertible debentures of $1,765,110, a decrease in the fair value
of derivative and warrant liabilities of $(14,505,323), an increase in accounts
payable and accrued expenses of $(14,942), an increase in officer stock based
compensation of $45,000,000 and a net increase in other assets of
$(40,215).  There was also a decrease in the fair value of derivative
and warrant liabilities of $14,505,323. Because of our need for cash to fund our
continuing research and development, we do not have an opinion as to how
indicative these results will be of future results.





Sources and Uses of
Cash





Net cash
provided by (used in) investing activities for the nine months ended September
30, 2008 and 2007 were $1,282,833 and $(865,333), respectively.  For the
nine months ended September 30, 2008 and 2007, the net cash came primarily from
the sale of securities and maturities of other investments in the amount of
$1,865,000 and $537,174, respectively, offset by the amount for purchase of
securities of $(565,000) and $(1,952,038), respectively.  Net
cash


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from
investment activities during the nine months ended September 30, 2008 and 2007,
were further decreased by $17,167 and $50,469, respectively, for amounts we paid
in the purchase of property and equipment.





Net cash
provided by financing activities for the nine months ended September 30, 2008
and 2007, was $730,358 and $4,174,285, respectively.  For the nine months
ended September 30, 2008, the net cash used pertained to the purchase
of  207,000 shares of our common stock still held in treasury totaling
$3,266 and an increase in the amount of indebtedness of
$1,115,000.  In addition, during the nine month ended September 30,
2008, the Company received $18,624 through the issuance of 77,600 of its common
stock.  For the nine months ended September 30, 2007, the net cash
came primarily from the sale of common stock and warrants of $4,079,935 and
proceeds from convertible debentures and other notes payable of
$200,000.





We are
not generating sufficient cash flow from operations to fund growth.  We
cannot predict when we will begin to generate revenue from the sale of our
products, and until that time, we will need to raise additional capital through
the sale of our securities.  If we are unsuccessful in raising the required
capital, we may have to curtail operations.





Critical
Accounting Policies





The
discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America.  The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses.  In consultation with our Board of Directors, we
have identified the following accounting policies that we believe are key to an
understanding of our financial statements.  These are important accounting
policies that require management’s most difficult, subjective
judgments.





The first
critical accounting policy relates to revenue recognition.  Income from our
research is recognized at the time services are rendered and
billed.





The
second critical accounting policy relates to research and development
expense.  Costs incurred in the development of our products are expensed as
incurred.





The third
critical accounting policy relates to the valuation of non-monetary
consideration issued for services rendered. We value all services rendered in
exchange for our common stock at the quoted price of the shares issued at date
of issuance or at the fair value of the services rendered, which ever is more
readily determinable.  All other services provided in exchange for other
non-monetary consideration is valued at either the fair value of the services
received or the fair value of the consideration relinquished, whichever is more
readily determinable.





Our
accounting policy for equity instruments issued to consultants and vendors in
exchange for goods and services follows the provisions of EITF 96-18, Accounting for Equity Instruments
That are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services ” and EITF 00-18, Accounting Recognition for Certain
Transactions Involving


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Equity Instruments Granted to Other
Than Employees.”  The measurement date for the fair value of the
equity instruments issued is determined at the earlier of (i) the date at which
a commitment for performance by the consultant or vendor is reached or (ii) the
date at which the consultant or vendor’s performance is complete.  In the
case of equity instruments issued to consultants, the fair value of the equity
instrument is recognized over the term of the consulting
agreement.  In accordance to EITF 00-18, an asset acquired in exchange
for the issuance of fully vested, nonforfeitable equity instruments should not
be presented or classified as an offset to equity on the grantor’s balance sheet
once the equity instrument is granted for accounting
purposes.  Accordingly, we record the fair value of nonforfeitable
common stock issued for future consulting services as prepaid services in our
consolidated balance sheet.





The
fourth critical accounting policy is our accounting for conventional convertible
debt.  When the convertible feature of the conventional convertible debt
provides for a rate of conversion that is below market value, this feature is
characterized as a beneficial conversion feature (BCF”).  We record a BCF
as a debt discount pursuant to EITF Issue No. 98-5 (EITF 98-05),Accounting for Convertible
Securities with Beneficial Conversion Features or Contingency Adjustable
Conversion Ratio,” and EITF Issue No. 00-27, Application of EITF Issue No. 98-5
to Certain Convertible Instrument(s).”   In those
circumstances, the convertible debt will be recorded net of the discount related
to the BCF.  We amortize the discount to interest expense over the life of
the debt using the effective interest method.





The fifth
critical account policy relates to the accounting for non-conventional
convertible debt and the related stock purchase warrants.  In the case of
non-conventional convertible debt, we bifurcate our embedded derivative
instruments and record them under the provisions of SFAS No. 133,Accounting for Derivative
Instruments and Hedging Activities,” as amended, and
EITF Issue No. 00-19,Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock.”  These embedded derivatives
include the conversion feature, liquidated damages related to registration
rights and default provisions.  The accounting treatment of derivative
financial instruments requires that we record the derivatives and related
warrants at their fair values as of the inception date of the agreement and at
fair value as of each subsequent balance sheet date.  In addition, under
the provisions of EITF Issue No. 00-19, as a result of entering into the
non-conventional convertible debenture, we are required to value and classify
all other non-employee stock options and warrants as derivative liabilities at
that date and mark them to market at each reporting date thereafter.  Any
change in fair value will be recorded as non-operating, non-cash income or
expense at each reporting date.  If the fair value of the derivatives is
higher at the subsequent balance sheet date, we will record a non-operating,
non-cash charge.  If the fair value of the derivatives is lower at the
subsequent balance sheet date, we will record non-operating, non-cash
income.  We value our derivatives primarily using the Black-Scholes Option
Pricing Model.  The derivatives are classified as long-term
liabilities.





The sixth
critical accounting policy relates to the recording of marketable securities
held for trading and available-for-sale.  Marketable securities purchased
with the intent of selling them in the near term are classified as trading
securities.  Trading securities are initially recorded at cost and are
adjusted to their fair value, with the change in fair value during the period
included in earnings as unrealized gains or losses.  Realized gains or
losses on dispositions are based upon the net proceeds and the adjusted book
value of the securities sold, using the specific


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identification
method, and are recorded as realized gains or losses in the consolidated
statements of operations.  Marketable securities that are not classified as
trading securities are classified as available-for-sale securities. 
Available-for-sale securities are initially recorded at cost. 
Available-for-sale securities with quoted market prices are adjusted to their
fair value, subject to an impairment analysis (see below).  Any change in
fair value during the period is excluded from earnings and recorded, net of tax,
as a component of accumulated other comprehensive income (loss).  Any
decline in value of available-for-sale securities below cost that is considered
to be other than temporary is recorded as a reduction of the cost basis of the
security and is included in the statement of operations as a write down of the
market value (see below).





The
seventh critical accounting policy is our accounting for the fair market value
of non-marketable securities we have acquired.  Non-marketable securities
are originally recorded at cost.   In the case of non-marketable
securities we acquired with our common stock, we value the securities at a
significant discount to the stated per share cost based upon our historical
experience with similar transactions as to the amount ultimately realized from
the sale of the shares.  Such investments are reduced when we have
indications that a permanent decline in value has occurred.  At such time
as quoted market prices become available, the net cost basis of these securities
will be reclassified to the appropriate category of marketable securities. 
Until that time, the securities will be recorded at their net cost basis,
subject to an impairment analysis (see below).





In
accordance with the guidance of EITF 03-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments, we assess any
decline in value of available-for-sale securities and non-marketable securities
below cost as to whether such decline is other than temporary.  If a
decline is determined to be other than temporary, the decline is recorded as a
reduction of the cost basis of the security and is included in the statement of
operations as an impairment write down of the investment.





Item 3.   Quantitative and Qualitative Disclosures
about Market Risk





We are a
smaller reporting company as defined by Rule 12b-2 of the Securities Exchange
Act of 1934 and are not required to provide the information under this
item.





Item 4.   Controls and Procedures





Evaluation
of Disclosure Controls and Procedures





Our
President and Chief Financial Officer (the “Certifying Officers”) have evaluated
the effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of the end of
period covered by this report.  Based upon such evaluation, the
Certifying Officers concluded that our disclosure controls and procedures were
not effective to
ensure that the information required to be disclosed by us in the reports that
we file or submit under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission’s rules and forms, and is accumulated and
communicated to our management, including the Certifying Officers, as
appropriate to allow timely decisions regarding required disclosure, due to the
material weaknesses described below.


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In light
of the material weaknesses described below, the Certifying Officers performed
additional analysis and other post-closing procedures to ensure our consolidated
financial statements were prepared in accordance with generally accepted
accounting principles.  Accordingly, we believe that the consolidated
financial statements included in this report fairly present, in all material
respects, our financial condition, results of operations and cash flows for the
periods presented.





A
material weakness is a control deficiency (within the meaning of the Public
Company Accounting Oversight Board (“PCAOB”) Auditing Standard No. 2) or
combination of control deficiencies, that result in more than a remote
likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected.  The Certifying Officers have
identified the following three material weaknesses which have caused the
Certifying Officers to conclude that our disclosure controls and procedures were
not effective at the reasonable assurance level:





1.       We
do not yet have written documentation of our internal control policies and
procedures.  Written documentation of key internal controls over financial
reporting is a requirement of Section 404 of the Sarbanes-Oxley Act and will be
applicable to us for the year ending December 31, 2008.  The Certifying
Officers evaluated the impact of our failure to have written documentation of
our internal controls and procedures on our assessment of our disclosure
controls and procedures and have concluded that the control deficiency that
resulted represented a material weakness.





2.       We
do not have sufficient segregation of duties within accounting functions, which
is a basic internal control.  Due to our size and nature, segregation of
all conflicting duties may not always be possible and may not be economically
feasible.  However, to the extent possible, the initiation of transactions,
the custody of assets and the recording of transactions should be performed by
separate individuals.  The Certifying Officers evaluated the impact of our
failure to have segregation of duties on our assessment of our disclosure
controls and procedures and has concluded that the control deficiency that
resulted represented a material weakness.





3.       We
had a significant number of audit adjustments for the last three fiscal years.
 Audit adjustments are the result of a failure of the internal controls to
prevent or detect misstatements of accounting information.  The failure
could be due to inadequate design of the internal controls or to a
misapplication or override of controls.  The Certifying Officers evaluated
the impact of our significant number of audit adjustments last year and have
concluded that the control deficiency that resulted represented a material
weakness.





On
November 27, 2007, our Certifying Officers concluded that in valuing previous
periods’ non-cash security transactions, we utilized discounts to the respective
share’s trading prices as well as its derivative liabilities which they have
determined are without foundation.





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As a
result of this evaluation and conclusion, the Certifying Officers in conjunction
with our Board of Directors concluded that previously issued consolidated
financial statements included in our Annual Reports on Form 10-KSB for the
fiscal years ended December 31, 2005, 2006, and 2007, as well as all of our
quarterly reports on Form 10-QSB during the 2005, 2006 and 2007 fiscal years,
could no longer be relied upon.  In this regard, we amended and restated
our financial statements to eliminate all discounts and refiled our Annual
Report on Form 10-KSB for the fiscal year ended December 31, 2007.  The net
effect of the restatements was to increase the accumulated deficit at June 30,
2007 from $100,909,477 to $125,493,633.





The
Certifying Officers have discussed this matter with our current independent
registered public accounting firm.





To
remediate the material weaknesses in our disclosure controls and procedures
identified above, in addition to working with our independent auditors, we have
continued to refine our internal procedures to begin to implement segregation of
duties and to reduce the number of audit adjustments.





Changes
in Internal Control Over Financial Reporting





There
were no changes in our internal control over financial reporting during the
period covered by this report that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.





Item 4T.   Controls and Procedures





We are a
smaller reporting company as defined by Rule 12b-2 of the Securities Exchange
Act of 1934 and are not required to provide the information under this
item.























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PART II– OTHER INFORMATION





Item 1.  Legal Proceedings





Stephen
Beck





In July
2002, we settled a lawsuit related to a contract dispute with Mr. Stephen Beck.
 In March 2006, Mr. Beck filed a lawsuit against us alleging breach of
contract related to the lawsuit settlement and sought monetary damages, plus the
issuance of shares of our common stock plus interest.





In
December 2006, we entered into a settlement and release agreement, as well as
irrevocable escrow instructions, to settle the lawsuit Mr. Beck filed in March
2006.  As consideration under the settlement, we issued 5,000,000 shares of
our common stock to Mr. Beck, with the shares to be held by an escrow agent and
distributed to Mr. Beck monthly with a trading limit equal to 8% of the previous
month’s trading volume of our common stock, until Mr. Beck received a total of
$800,000.  As Mr. Beck received proceeds from the sale of his shares into
the market and 7.5% (net of any expenses incurred by us) of any cash raised by
us from the sale of equity, we would reduce our guarantee by that
amount.  We have paid a total of $285,182 to Mr. Beck in cash as part
of the settlement.   Mr. Beck also had anti-dilution rights on those shares
to maintain his percentage ownership through September 27, 2008.  We issued
another 5,000,000 shares to Mr. Beck to be held in escrow until the conditions
were met with respect to the anti-dilution shares.  As of the date of this
report, we have issued a total of 1,393,617 shares of common stock to Mr. Beck
pursuant to the anti-dilution provision in the settlement arrangement.  In
or about February 2008, Mr. Beck reached the $800,000 guarantee from the sale of
our common stock and the cash received from us for 7.5% of the capital we
raised.  Therefore, as of the date of this report, we have no further
liability to Mr. Beck.





On
September 12, 2007, we filed a complaint for declaratory relief against Mr. Beck
in the Superior Court of the State of California, County of Los Angeles, Central
Judicial District, seeking a judicial determination as to the respective rights
and duties of us and Mr. Beck with respect to certain terms and conditions of
the settlement agreement and escrow instructions.





On
February 7, 2008, we filed a first amended complaint in our action against Mr.
Beck for declaratory relief which now also seeks to have the settlement
agreement and escrow instructions rescinded.  On March 6, 2008, Mr. Beck
filed a cross-complaint against us and Robert M. Bernstein, our President and a
Director, for breach of contract, specific performance, declaratory relief,
conversion, intentional interference with contract (against Mr. Bernstein only)
and, in the alternative, equitable restitution.  Trial is scheduled
for February 2, 2009.





Gem
Advisors, Inc., GEM Global Emerging Markets, and Global Emerging Markets of
North America, Inc.





On June
15, 2005, we filed a Complaint in the Los Angeles Superior Court, State of
California, case number BC336689, against Gem Advisors, Inc., GEM Global
Emerging Markets, and Global Emerging Markets of North America, Inc., seeking a
declaration regarding certain


49
 Table of Contents


agreements
we entered into with the parties.  We did not seek monetary damages. 
On November 16, 2005, Gem Advisors, Inc. filed an Answer and Cross-Complaint,
seeking approximately $1.9 million in damages arising out of finders fees for
certain transactions.  On November 30, 2005, default judgments were entered
against the other defendants who failed to respond to our Complaint.  In
September 2006, this case was dismissed as to all parties because the parties
thought they could agree on the terms of a written settlement agreement. 
However, the parties failed to reach a settlement and no formal settlement
agreement was ever executed.





On
November 30, 2007, Gem Advisors, Inc. (“Gem”) filed a lawsuit
against us, Robert M. Bernstein, and Lawrence I. Washor (who
represented us in the lawsuit against Gem filed on June 15, 2005), for
breach of contract (settlement), breach of contract (for transfer to Gem of
585,000 shares we held in another company), breach of covenant of good faith and
fair dealing, and fraud and deceit – promise made without intention to perform
(the only cause of action asserted against Robert M. Bernstein and Lawrence I.
Washor).  Gem sought damages in excess of $250,000. On April 10, 2008, the
court sustained Lawrence I. Washor’s demurrer to the complaint, and dismissed
Lawrence I. Washor from the lawsuit.





On
October 9, 2008, we agreed to a settlement with Gem on the record of the
court.  The settlement provides that, in exchange for Gem’s agreement
to dismiss its lawsuit against us and our Chief Executive Officer, Robert M.
Bernstein, we would pay Gem the total sum of $250,000 as follows: (1) $15,000 by
November 30, 2008; (2) $5,000 no later than the last day of the month each month
thereafter; and (3) a percentage of any net funds received by us for any equity
or debt instrument sold, including any funds received from Robert M. Bernstein
from the sale of his stock, to reduce the $250,000 settlement amount, as
follows: (i) 5% up to the first $2,000,000 received, (ii) 4% for amounts
received between $2,000,001 to $4,000,000, and (iii) 3% of all amount received
over $4,000,000.




Item 1A.   Risk Factors





We are a
smaller reporting company as defined by Rule 12b-2 of the Securities Exchange
Act of 1934 and are not required to provide the information under this
item.





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





On July
14, 2008, we issued 10,000,000 shares of our common stock, restricted in
accordance with Rule 144, in consideration for the cancellation of $20,000 of
convertible debt. The issuances were exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933 (the “Act”), and the shareholders are
accredited investors who are familiar with our operations.





On August
14, 2008, we issued 20,000,000 shares of our common stock, restricted in
accordance with Rule 144, in consideration for the cancellation of $40,000 of
convertible debt. The issuances were exempt from registration pursuant to
Section 4(2) of the Act, and the shareholders are accredited investors who are
familiar with our operations.





On August
29, 2008, we issued warrants to purchase 6,000,000 shares of our common stock at
a price of $0.20 per share.  We issued the securities to one non-U.S.
person (as that term is defined


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 Table of Contents


in
Regulation S of the Act) in an offshore transaction relying on Regulation
S and/or Section 4(2) of the Act.




Item
3.Defaults Upon
Senior Securities.




There
have been no events which are required to be reported under this
item.





Item 4.   Submission of Matters to a Vote of Security
Holders.





On
September 9, 2008, a majority of our shareholders executed a majority written
consent in lieu of an annual meeting to avoid the expenses of holding a formal
annual meeting.  The majority shareholders voted to: (a) re-elect the
current directors on our Board of Directors (Robert M. Bernstein, William Berks,
and Joel R. Freedman); (b) ratify our current capitalization of: 600,000,000
shares of Class A common stock; 600,000 shares of Class B common stock; and
50,000,000 shares of preferred stock; (c) amend our Articles of Incorporation to
effect a one for 1,000 reverse stock split; (d) amend our Articles of
Incorporation to change our name to Matech Corp.; (f) authorize our 2008 Stock
Option Plan; and (g) ratify our appointment of Gruber & Co., LLC as our
independent public accountants.




Item 5.  Other Information.


None.


1Shares were purchased
in an open-market transaction.


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Item 6.  Exhibits.





3.1
            Certificate of Amendment of Articles of
      Incorporation, dated September 30, 200810.1
            Settlement Agreement and Release with RBC Dexia
      Investor Services Bank Luxembourg, Anima S.G.R.P.A. Rubrica Anima America,
      and Kreuzfeld Ltd., dated August 19, 200810.2
            Amendment to Settlement Agreement and Release
      with Kreuzfeld Ltd., dated August 19, 200810.3
            Settlement Agreement and Release with Patrick
      Fischli, dated August 28, 200810.4
            Settlement Agreement and Release with Rubrica
      Anima Fondattivo, dated August 28, 200810.5
            Settlement Agreement and Release with Rubrica
      Anima Fondo Trading, dated August 28, 200810.6
            Settlement Agreement and Release with Bank Julius
      Baer & Co. Hong Kong, dated August 28, 200810.7
            Warrant Agreement with RBC Dexia Investor
      Services Bank Luxembourg, dated August 29, 200810.8
            Warrant Agreement with Kreuzfeld Ltd., dated
      August 29, 200810.9
            Warrant Agreement with Patrick Fischli, dated
      August 29, 200810.10
            Warrant Agreement with Rubrica Anima Fondo
      Trading, dated August 29, 200810.11
            Warrant Agreement with Rubrica Anima Fondattivo,
      dated August 29, 200810.12
            Warrant Agreement with Bank Julius Baer &
      Co. Hong Kong, dated August 29, 200810.13
            Warrant Agreement with Anima S.G.R.P.A. Rubrica
      Anima America, dated August 29, 200810.14
            Warrant Agreement with Continental Advisors,
      dated August 29, 200810.15
            Amendment to Settlement Agreement with RBC Dexia
      Investor Services Bank Luxembourg, dated November 4,
    2008






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31.1
            Certification of Chief Executive Officer Pursuant
      to the Securities Exchange Act of 1934, Rules 13a-14(a) and 15d-14(a), as
      adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      200231.2
            Certification of Chief Financial Officer Pursuant
      to the Securities Exchange Act of 1934, Rules 13a-14(a) and 15d-14(a), as
      adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      200232
            Certifications Pursuant to 18 U.S.C., Section 1350,
      as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002





SIGNATURES





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




Dated:
      November 13, 2008
              /s/ Robert
      M. BernsteinBy:  Robert
      M. BernsteinIts:  President,
      Chief Executive Officer,and
      Chief Financial Officer (PrincipalExecutive
      Officer, Principal FinancialOfficer
      and Principal Accounting Officer)


























53