UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549





Form
10-Q





(Mark
One)





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





For
the quarterly period ended June 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





Material Technologies,
Inc.


(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 þ  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
            þ





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





As of
August 15, 2008, there were 185,736,018 shares of our Class A common stock
issued and outstanding.





MATERIAL
TECHNOLOGIES, INC.





TABLE OF CONTENTS








PagePART I – FINANCIAL INFORMATION
            1Item 1.  Financial Statements
      (unaudited)
            1Consolidated Balance Sheet – June 30,
      2008
            1-2Consolidated Statements of Operations
–
              For
      the three and six months ended June 30, 2008 and 2007
            3Consolidated Statements of Comprehensive Loss
      –
              For
      the six months ended June 30, 2008 and 2007
            4Consolidated Statements of Cash Flows
–
              For
      the six months ended June 30, 2008 and 2007
            5-7Consolidated Notes to Financial
    Statements
            8-30Item 2. Management’s Discussion and Analysis of
      Financial Condition and Results of Operations
            31Item 3. Quantitative and Qualitative Disclosures
      about Market Risk
            38Item 4.  Controls and
      Procedures
            38Item 4T.  Controls and
      Procedures
            40PART II – OTHER INFORMATION
            41Item 1. Legal Proceedings
            41Item 1A.  Risk Factors
            42Item 2. Unregistered Sales of Equity Securities
      and Use of Proceeds
            42Item 3. Defaults Upon Senior
      Securities
            43Item 4. Submission of Matters to a Vote of
      Security Holders
            43Item 5.  Other
    Information
            43Item 6. Exhibits
            43SIGNATURES
            44





PART I – FINANCIAL INFORMATION





Item 1.
            Financial
      Statements.




MATERIAL
      TECHNOLOGIES, INC.(A
      Development Stage Company)CONDENSED
      CONSOLIDATED BALANCE SHEETJune
      30,2008(Unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
            
            $
            530,045Inventories
            
            
            148,964Prepaid
      expenses and other current assets
            
            
            62,941Total current assets
            
            
            741,950Property
      and equipment, net
            
            
            89,632Intangible
      assets, net
            
            
            2,302Deposit
            
            
            2,348$
            836,232















Continued
.. . .
 F-1
  1
 Table of Contents
  MATERIAL
      TECHNOLOGIES, INC.(A
      Development Stage Company)CONDENSED
      CONSOLIDATED BALANCE SHEET - ContinuedJune
      30,2008(Unaudited)LIABILITIES
      AND STOCKHOLDERS'  DEFICITCurrent liabilities:Accounts payable and accrued expenses
              
              $
              470,017Current portion of research and development sponsorship
      payable
              
              
              25,000Notes
      payable
              
              
              67,573Convertible debentures and accrued interest payable, net of
      discount
              
              
              3,323,466Total current liabilities
              
              
              3,886,056Accrued legal settlement
              
              
              250,000Research and development sponsorship payable, net of current
      portion
              
              
              784,100Convertible debentures and accrued interest payable, net of
      discount
              
              
              29,024Notes payable, long-term
              
              
              222,110Derivative and warrant liabilities
              
              
              6,439,1587,724,392Total liabilities
              
              
              11,610,448Minority 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 June 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 June 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 June 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 June 30,2008
              
              
              -Class
      E  convertible preferred stock, $0.001 par value, no
      liquidationpreference;
      60,000 shares authorized; 53,700 shares issued andoutstanding as of June 30,2008
              
              
              54Class A Common Stock, $0.001 par value, 600,000,000 sharesauthorized; 168,499,167 shares issued and 149,330,402 shares
      outstandingat June 30,2008
              
              
              149,330Class B Common Stock, $0.001 par value, 600,000 shares
      authorized,issued and outstanding as of June 30,2008
              
              
              600Warrants subscribed
              
              
              10,000Additional paid-in-capital
              
              
              326,755,678Deficit accumulated during the development stage
              
              
              (337,594,305
              )Treasury stock (292,977 shares at cost at June 30,2008)
              
              
              (96,399
              )Total stockholders' deficit
              
              
              (10,775,041
              )$
              836,232






See
accompanying notes to the condensed consolidated financial
statements
 F-2


2
 Table of Contents





MATERIAL
      TECHNOLOGIES, INC.(A
      Development Stage Company)CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONSFrom
      October 21, 1983For
      the Three Months Ended
              
              
              For
      the Six Months Ended
              
              
              (Inception)June
      30,
              
              
              June
      30,
              
              
              through2007
              
              
              2008
              
              
              2007
              
              
              2008
              
              
              June
      30, 2008(Unaudited)
              
              
              (Unaudited)
              
              
              (Unaudited)
              
              
              (Unaudited)
              
              
              (Unaudited)(Restated)
              
              
              
              
              
              (Restated)Revenues:Research
      and development
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              5,392,085Revenue
      from bridge testing
              
              
              22,778
              
              
              
              
              
              
              
              66,745
              
              
              
              1,090
              
              
              
              319,714Other
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              274,125Total
      revenues
              
              
              22,778
              
              
              
              -
              
              
              
              66,745
              
              
              
              1,090
              
              
              
              5,985,924Costs
      and expenses:Research
      and development
              
              
              3,294,575
              
              
              
              150,847
              
              
              
              3,512,076
              
              
              
              309,840
              
              
              
              20,872,829General
      and administrative
              
              
              41,016,474
              
              
              
              5,517,443
              
              
              
              62,475,638
              
              
              
              25,845,768
              
              
              
              329,341,009Modification of research anddevelopment sponsorship agreement
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              5,963,120Loss
      on settlement of lawsuits
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,267,244Total
      costs and expenses
              
              
              44,311,049
              
              
              
              5,668,290
              
              
              
              65,987,714
              
              
              
              26,155,608
              
              
              
              357,444,202Loss
      from operations
              
              
              (44,288,271
              )
              
              
              (5,668,290
              )
              
              
              (65,920,969
              )
              
              
              (26,154,518
              )
              
              
              (351,458,278
              )Other
      income (expense):Gain
      on modification of convertible debt
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              586,245Loss
      on subcription receivables
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,368,555
              )Interest
      expense
              
              
              (612,416
              )
              
              
              (397,973
              )
              
              
              (1,590,651
              )
              
              
              (768,964
              )
              
              
              (12,509,157
              )Other-than-temporary
      impairment of marketablesecurities
      available for sale
              
              
              
              
              
              
              -
              
              
              
              
              
              
              
              
              
              
              
              (9,785,947
              )Net
      unrealized and realized loss of marketable securities
              
              
              (8,556,211
              )
              
              
              
              
              
              
              (8,556,219
              )
              
              
              (8
              )
              
              
              (9,398,226
              )Change
      in fair value of investments derivative liability
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (210,953
              )Change
      in fair value of derivative and warrant liabilities
              
              
              6,942,597
              
              
              
              (6,036,711
              )
              
              
              22,920,017
              
              
              
              2,522,864
              
              
              
              46,109,953Interest
      income
              
              
              12,594
              
              
              
              3,080
              
              
              
              15,966
              
              
              
              15,523
              
              
              
              482,405Other
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (25,992
              )Other
      income (expense), net
              
              
              (2,213,436
              )
              
              
              (6,431,604
              )
              
              
              12,789,113
              
              
              
              1,769,415
              
              
              
              13,879,773Loss
      before provision for income taxes
              
              
              (46,501,707
              )
              
              
              (12,099,894
              )
              
              
              (53,131,856
              )
              
              
              (24,385,103
              )
              
              
              (337,578,505
              )Provision
      for income taxes
              
              
              -
              
              
              
              -
              
              
              
              (800
              )
              
              
              (800
              )
              
              
              (15,800
              )Net
      loss
              
              $
              (46,501,707
              )
              
              $
              (12,099,894
              )
              
              $
              (53,132,656
              )
              
              $
              (24,385,903
              )
              
              $
              (337,594,305
              )Per
      share data:Basic
      and diluted net loss per share
              
              $
              (0.45
              )
              
              $
              (0.08
              )
              
              $
              (0.58
              )
              
              $
              (0.17
              )Weighted
      average Class A common sharesoutstanding
      - basic and diluted
              
              
              103,710,307
              
              
              
              156,616,668
              
              
              
              91,537,571
              
              
              
              147,589,164






See
accompanying notes to the condensed consolidated financial
statements
 F-3
 
 3
 Table of Contents
 
 MATERIAL
      TECHNOLOGIES, INC.(A
      Development Stage Company)CONSOLIDATED
      STATEMENTS OF COMPREHENSIVE LOSSFrom
      October 21, 1983For
      the Three Months Ended
              
              
              (Inception)June
      30,
              
              
              through2007
              
              
              2008
              
              
              June
      30, 2008(Unaudited)
              
              
              (Unaudited)
              
              
              (Unaudited)(Restated)Net
      loss
              
              $
              (46,501,707
              )
              
              $
              (12,099,894
              )
              
              $
              (337,594,305
              )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 loss
              
              $
              (46,501,707
              )
              
              $
              (12,099,894
              )
              
              $
              (337,594,305
              )
        See
accompanying notes to the condensed consolidated financial
statements
 F-4
 
 4
 Table of Contents
 
 MATERIAL
      TECHNOLOGIES, INC.(A
      Development Stage Company)CONDENSED
      CONSOLIDATED STATEMENTS OF CASH
    FLOWSFrom
      October 21, 1983For
      the Six Months Ended
                
                
                (Inception)June
      30,
                
                
                through2007
                
                
                2008
                
                
                June
      30, 2008(Unaudited)
                
                
                (Unaudited)
                
                
                (Unaudited)(Restated)Cash
      flows from operating activities:Net
      loss
                
                $
                (53,132,656
                )
                
                $
                (24,385,903
                )
                
                $
                (337,594,305
                )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Gain
      on modification of convertible debt
                
                
                -
                
                
                
                -
                
                
                
                (586,245
                )Impairment
      loss
                
                
                19,255,875
                
                
                
                
                
                
                
                21,391,528Loss
      on charge off of subscription receivables
                
                
                -
                
                
                
                
                
                
                
                1,368,555Issuance
      of common stock for services
                
                
                15,558,944
                
                
                
                3,625,200
                
                
                
                210,110,040Increase
      in debt for services and fees
                
                
                -
                
                
                
                1,100,000
                
                
                
                5,556,625Officer's
      stock based compensation
                
                
                30,000,000
                
                
                
                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
                
                
                
                
                
                
                
                
                
                
                (41,351,889
                )Net
      realized and unrealized loss on marketable securities
                
                
                8,556,200
                
                
                
                
                
                
                
                7,895,705Other-than-temporary
      impairment of marketable securities available for
      sale
                
                
                -
                
                
                
                
                
                
                
                9,785,946Legal
      fees incurred for note payable
                
                
                
                
                
                
                
                
                
                
                1,456,142Accrued
      interest expense added to principal
                
                
                156,901
                
                
                
                135,816
                
                
                
                1,630,821Amortization
      of discount on convertible debentures
                
                
                1,431,081
                
                
                
                632,615
                
                
                
                10,738,892Change
      in fair value of investments derivative liability
                
                
                (22,920,017
                )
                
                
                (2,522,865
                )
                
                
                700,458Accrued
      interest income added to principal
                
                
                (5,428
                )
                
                
                8,836
                
                
                
                (296,162
                )Depreciation
      and amortization
                
                
                1,951
                
                
                
                10,621
                
                
                
                238,405Other
      non-cash adjustments
                
                
                -
                
                
                
                
                
                
                
                (114,730
                )(Increase)
      decrease in trade receivables
                
                
                91,787
                
                
                
                108,661
                
                
                
                (50,328
                )(Increase)
      decrease in inventories
                
                
                -
                
                
                
                (86,748
                )
                
                
                (148,964
                )(Increase)
      decrease in prepaid expenses and other current
      assets
                
                
                (22,500
                )
                
                
                (17,257
                )
                
                
                225,316Increase
      in deposits
                
                
                -
                
                
                
                
                
                
                
                (2,348
                )(Decrease)
      increase in accounts payable and
    accrued expenses
                
                
                (141,766
                )
                
                
                (130,968
                )
                
                
                2,377,927Net
      cash used in operating activities
                
                
                (1,169,628
                )
                
                
                (1,636,659
                )
                
                
                (12,469,536
                )Cash
      flows from investing activities:Proceeds
      from the sale of marketable securities
                
                
                95,006
                
                
                
                300,000
                
                
                
                3,758,476Purchase
      of marketable securities
                
                
                (302,038
                )
                
                
                -
                
                
                
                (2,206,379
                )Investment
      in certificate of deposits and commerical paper
                
                
                (700,177
                )
                
                
                (565,000
                )
                
                
                (1,965,000
                )Maturities
      of certificate of deposits and commercial paper
                
                
                -
                
                
                
                1,565,000
                
                
                
                1,965,000Payment
      received on officer loans
                
                
                -
                
                
                
                3,803
                
                
                
                880,058Funds
      advanced to officers
                
                
                -
                
                
                
                -
                
                
                
                (549,379
                )Proceeds
      received in acquisition of consolidated subsidiaries
                
                
                
                
                
                
                
                
                
                
                600,000Purchase
      of property and equipment
                
                
                -
                
                
                
                (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 by investing activities
                
                
                (907,209
                )
                
                
                1,286,636
                
                
                
                2,064,738




Continued
.. . .
 F-5
 5
 Table of Contents
  MATERIAL
      TECHNOLOGIES, INC.(A
      Development Stage Company)CONSOLIDATED
      STATEMENTS OF CASH FLOWS - ContinuedFrom
      October 21, 1983For
      the Six Months Ended
                
                
                (Inception)June
      30,
                
                
                through2007
                
                
                2008
                
                
                June
      30, 2008(Unaudited)
                
                
                (Unaudited)
                
                
                (Unaudited)(Restated)Cash
      flow from financing activities:Proceeds
      from the sale of  common stock and warrants
                
                $
                2,850,000
                
                
                $
                18,624
                
                
                $
                9,464,577Proceeds
      from convertible debentures and othernotes
      payable
                
                
                200,000
                
                
                
                55,000
                
                
                
                2,102,766Proceeds
      from the sale of preferred stock
                
                
                100,000
                
                
                
                -
                
                
                
                473,005Costs
      incurred in offerings
                
                
                (773,779
                )
                
                
                -
                
                
                
                (1,130,932
                )Capital
      contributions
                
                
                -
                
                
                
                -
                
                
                
                301,068Purchase
      of treasury stock
                
                
                (17,381
                )
                
                
                (3,266
                )
                
                
                (170,641
                )Principal
      reduction on notes payable
                
                
                (26,671
                )
                
                
                
                
                
                
                (100,000
                )Payment
      on proposed reorganization
                
                
                -
                
                
                
                -
                
                
                
                (5,000
                )Net
      cash provided by (used in) financing activities
                
                
                2,332,169
                
                
                
                70,358
                
                
                
                10,934,843Net
      change in cash and cash equivalents
                
                
                255,332
                
                
                
                (279,665
                )
                
                
                530,045Cash
      and cash equivalents, beginning of period
                
                
                129,296
                
                
                
                809,710
                
                
                
                -Cash
      and cash equivalents, end of period
                
                $
                384,628
                
                
                $
                530,045
                
                
                $
                530,045Supplemental
      disclosure of cash flow information:Interest
      paid during the period
                
                $
                2,669
                
                
                $
                281Income
      taxes paid during the period
                
                $
                800
                
                
                $
                800
  Supplemental
      disclosures of non-cash investing and financing
activities:2008During
      the six months ended June 30, 2008, the Company issued 4,229,612 shares of
      its Class A common shares inthe
      conversion of $491,132 of convertible debt.During
      the six months ended June 30, 2008, the Company issued 13,207,500 shares
      of its Class A common stockfor
      consulting  services valued at $3,668,400.During
      the six months ended June 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 six months ended June 30, 2008. a former employee returned 450,000
      shares of the Company's Class Acommon
      stock to treasury which were subsequently cancelled.During
      the six months ended June 30, 2008. the Company's president returned
      30,000,000 shares of the Company'sClass
      A common stock to treasury which were subsequently
    cancelled.
 Continued
.. . .
 F-6
  6
 Table of Contents
  During
      the six months ended June 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
      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 six months ended June 30, 2008, the Company issued 77,600 shares of
      its Class A common stock FOR $18,624.During
      the six months ended June 30, 2008, the Company issued 1,039,746 shares of
      the Company's common stockwas
      issued through the conversion of 1,300 shares of the Company's Class E
      preferred shares.During
      the six months ended June 30, 2008, the Company contingent obligation to
      Mr. Beck under a settlement agreementwas
      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 six months ended June 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 six months ended June 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 six 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.2007During
      the six months ended June 30, 2007, the Company issued 2,838,598 shares of
      its Class A common stockfor
      consulting  services valued at $13,158,944.During
      the six months ended June 30, 2007, the Company received $1,000,000 in
      consideration of 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 the 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.During
      the six months ended June 30, 2007, the Company issued 50,000 shares its
      Class E Series convertiblepreferred
      stock in exchange for receiving all of the outstanding shares of Stress
      Analysis Technologies, Inc. ("SATI").The
      Company valued the acquisition at $19,355,875 of which $19,255,875 was
      allocated to the acquired license.Durng
      the six months ended June 30, 2007, the Company deemed the license to be
      impaired and charged of the$19,255,875
      to operation. In connection with this transaction, the Company issued an
      additional 5,000 preferredshares
      valued at $2,400,000 for fees in connection with the purchase. The
      $2,400,000 was charged to operations.During
      the six months ended June 30, 2007, the Company issued 10,800,000
      shares in escrow pursuant to an agreement it has withwith
      its convertible debenture holders. During 2007, 5,800,000 shares of Class
      A common stock was issued to certaindebenture
      holders in the conversion of $580,000 of indebtedness. In addition,
      for the redemption of 1,000,000 shares by certain
debentureholders,
      the balance due on the debentures was increased by
      $600,000.During
      the six months ended June 30, 2007, the Company received 50,000 shares of
      prior issued common stockwhich
      was subsequently cancelled.
 See
accompanying notes to the condensed consolidated financial
statements
 F-7
  7
 Table of Contents
 MATERIAL
TECHNOLOGIES, INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 For
the three months and six months ended June 30, 2008 and
2007
 NOTE 1 -
BASIS OF PRESENTATION
 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
Material Technologies, Inc.’s (the "Company" ) 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 June 30, 2008, has
an accumulated deficit of $337,594,305, 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.
    F-8
 8
 Table of Contents
 MATERIAL
TECHNOLOGIES, INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 For
the three months and six months ended June 30, 2008 and
2007
  Restatement of Financial
Statements
 
 In
valuing previous period’s non-cash security transactions, the Company utilized
discounts to the respective share’s trading prices which it has determined are
without foundation. In addition, the Company has also adjusted its derivative
liabilities to fair value.  Therefore, it has restated its June 30,
2007 financial statements eliminating all such discounts. The net effect of the
restatements was to increase net loss for the three months and six months ended
June 30, 2007 by $23,164,334 and $24,582,155 (See Note 14).
 
 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”. FSP 142-3 is effective for Format, Inc. in the first quarter
of 2009. The Company presently has no such intangible assets. If and at such
time as such assets are acquired, the Company will apply SFAS 160.
 
 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 our 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
  F-9
 9
 Table of Contents
 MATERIAL
TECHNOLOGIES, INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 For
the three months and six months ended June 30, 2008 and
2007
  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. We are currently assessing the impact of EITF 03-6-1, but do
not expect that such adoption will have a material effect on our results of
operations, financial position, or cash flows.
 
 NOTE 3–INVESTMENTS
 
 Commercial
Paper
 
 During
the six months ended June 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 six months, the Company reinvested $1,580,000.
The balance of the Company’s investment in commercial paper at June 30, 2008 was
$0.
 
 NOTE 4 -
INVENTORIES
 
 Inventories
at June 30, 2008 consist of the following:
 
 Finished
      goods
                $
                142,964
 
 Inventories
consist of sensors and other parts used in the Company’s bridge testing
operations.
 
 NOTE 5 – PROPERTY AND
EQUIPMENT
 
 Property
and equipment at June 30, 2008 consisted of the following:
 
 Office
      and computer equipment
                
                $
                27,645Manufacturing
      equipment
                
                
                230,522258,167Less
      accumulated depreciation
                
                
                (168,535
                )$
                89,632
 
 Depreciation
charged to operations for the three months ended June 30, 2008 and 2007
amount to $5,041 and $707, respectively. Depreciation charged to operations
for the six months ended June 30, 2008 and 2007 amount to $10,083 and
$1,413, respectively.
 
  F-10
 10
 Table of Contents
 MATERIAL
TECHNOLOGIES, INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 For
the three months and six months ended June 30, 2008 and
2007
  NOTE
6 – INTANGIBLE ASSETS
 
 Intangible
assets consist of the following at June 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
                
                
                
                (37,642
                )$
                2,302
 Amortization
charged to operations for the three months ended June 30, 2008 and 2007 was
$269, and $269, respectively.  Amortization charged to operations for
the six months ended June 30, 2008 and 2007 was $538, and $538,
respectively.
 
 Estimated
amortization expense for remaining life of the intangibles is as
follows:
 
 2008
                $   5382009
                $1,0762010
                $   688
 
 NOTE 7 – 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 one 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
  F-11
 11
 Table of Contents
 MATERIAL
TECHNOLOGIES, INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 For
the three months and six months ended June 30, 2008 and
2007
 
 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 June 30, 2008 and
2007 amounted $9,885 and $10,662, respectively.  Interest expense charged
to operations during the six months ended June 30, 2008 and 2007 amounted
$19,770 and $15,984, respectively.  The balance of the obligation
(including accrued interest) at June 30, 2008 was $809,100 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.
 
 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 the effective
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
 
  F-12
 12
 Table of Contents
 MATERIAL
TECHNOLOGIES, INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 For
the three months and six months ended June 30, 2008 and
2007
  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
 
 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:
  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:
  F-13
 13
 Table of Contents
 MATERIAL
TECHNOLOGIES, INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 For
the three months and six months ended June 30, 2008 and
2007
  Year
beginning
  January 1, 2009
                $
                10,000January 1, 2010
                $
                20,000January 1, 2011 and each year thereafter
                $
                30,000
  NOTE 8 – 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 10).  The balance
due on this loan as of June 30, 2008 was $57,573.  Interest charged to
operations during the three months ended June 30, 2008 and 2007 was $406 and
$406, respectively.  Interest charged to operations during the six months
ended June 30, 2008 and 2007 was $811 and $811, respectively.
 
 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 June 30, 2008 is $222,110.  Interest charged to operations
during the three months ended June 30, 2008 and 2007 was $4,343 and $4,012,
respectively.  Interest charged to operations during the six months ended
June 30, 2008 and 2007 was $8,602 and $5,152, respectively.
 
 NOTE 9 – 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
  F-14
 14
 Table of Contents
 MATERIAL
TECHNOLOGIES, INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 For
the three months and six months ended June 30, 2008 and
2007
  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.
 
 Under the
Debentures, each holder has the option to convert the principal amount of all
monies loaned under the Debentures, together with accrued interest, into common
stock of the Company at the lesser of (i) 50% of the average ten closing prices
for the Company’s common stock for the ten days immediately preceding the
conversion date or (ii) $0.10 (the lesser of the two being referred to as the
“Conversion Price.”)  In addition, the Debentures provide that in the
event the conversion price is less than $0.10 per share when the holder elects
to convert, the Company would have the right, and any time during the 75 days
following the date of the holder’s notice of conversion, to prepay all or a
portion of the Debentures that have been requested to be converted and the
Company would therefore not be required to issue the conversion
shares.
 
 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 the fair value of the conversion feature of $1,125,000 in
2004.
 
 The
Company’s CEO entered into a voting agreement and irrevocable proxy, which
provides that as of September 23, 2006, if an event of default (as defined in
the Debentures) continues for a
 period of
not less than 30 days, all Class B common stock which Mr. Bernstein owns of
record, or becomes the owner of record in the future will be voted in accordance
with the direction of a
 third
party named in the Debentures (an affiliate of Palisades) or his designated
successor.  This loss of Mr. Bernstein’s voting rights would affect a
change in the voting control of the Company.
 
 The
Debentures bear interest at an annual rate of 10%, are secured by substantially
all assets of the Company and were scheduled to mature on December 31, 2006,
when all principal and accrued interest was payable.  On October 27, 2006,
the Company entered into a series of agreements with Palisades, whereby the
Company extended the due date on over $2,100,000 (including accrued interest) in
debentures for two years from December 31, 2006 to December 31,
2008.
 
 During
the first quarter of 2008, the Company entered into a consulting agreement,
whereby in exchange for the agreed upon services, the debt was increased by
$1,000.000. In addition, during the first quarter of 2008, the Company issued
4,000,000 shares of its Class A common stock through the conversion of $400,000
of indebtedness.
 
 The
balance of the Debenture, including accrued interest, at June 30, 2008 was
$3,323,466 (net of unamortized discount of $375,647).  Interest charged to
operation in on the face amount of the debentures for the three months ended
June 30, 2008 and 2007 was $89,981 and $64,614,
respectively.  Interest charged to operation in on the face amount of
the debentures for the six months ended June 30, 2008 and 2007 was $161,698 and
$101,3024, respectively.  Amortization
  F-15
 15
 Table of Contents
 MATERIAL
TECHNOLOGIES, INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 For
the three months and six months ended June 30, 2008 and
2007
  expense
of the discount also charged to operations as interest expense for the three
months ended June 30, 2008 and 2007 amounted to $291,193 and $528,617,
respectively. Amortization expense of the discount also charged to operations as
interest expense for the six months ended June 30, 2008 and 2007 amounted to
$617,586 and $1,424,414, respectively.
 
 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.
 
 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 shown as a liability. In March 2008, the Company
issued 34,500,000 shares of its Class A common stock pursuant to the exercise of
34,500,000 warrants. The Company reduced its warrant liability by $1,151,900 as
of the date of exercise to equity.
 
 At June
30, 2008, the fair value of the remaining outstanding warrants and conversion
derivative liabilities were $7,500.
 
 GGI
 
 During
the six months ended June 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 three months ended June 30, 2008 and 2007
amounted to $0 and $1,185, respectively. Interest charged to operations relating
to this debt during the six months ended June 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 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 three months ended June 30, 2008 and 2007 amounted to
$0 and $3,333, respectively.  Amortization expense of the discount
also charged to operations as interest expense for the six months ended June 30,
2008 and 2007 amounted to $13,333 and $6,666, respectively.
  F-16
 16
 Table of Contents
 MATERIAL
TECHNOLOGIES, INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 For
the three months and six months ended June 30, 2008 and
2007
  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.
 
 Interest
charged to operations for the three and six months ended June 30, 2008 amounted
to $468. 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 six months ended June 30, 2008 totaled $1,696.
 
 NOTE
10 – COMMITMENTS AND CONTINGENCIES
 
 Royalties
 
 A summary
of royalty interests that the Company has granted and are outstanding as of June
30, 2008 follows:
   F-17
 17
 Table of Contents
 MATERIAL
TECHNOLOGIES, INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 For
the three months and six months ended June 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
                %
                
                
                -
                
                
                
                -
                
                
                
                -
 
 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
in to the market, the Company is reducing its guarantee by that
amount.  As of June  30, 2008, the Company’s guarantee to
Mr. Beck was $0.
 
 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 asserts that the contract was unenforceable
due to a number of factors.  Legal counsel has advised the Company
that it is premature to estimate the outcome or the range of damages that may
occur if the case is not settled in the Company’s favor.
 
 In the
ordinary course of business, the Company may be from time to time 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 our financial condition and/or results
of operations.  However, in the opinion of our management, matters
currently pending or threatened against us are not expected to have a material
adverse effect on the Company’s financial position or results of
operations.
 F-18
 18
 Table of Contents
 MATERIAL
TECHNOLOGIES, INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 For
the three months and six months ended June 30, 2008 and
2007
  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 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 11 – EMPLOYEE BENEFIT
PLAN
 
 On
December 14, 2007, the Company adopted a 401k retirement plan for its employees.
To be eligible 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 six months
ended June 30, 2008, the Company did not contribute to the plan.
 
 NOTE 12–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.
  F-19
 19
 Table of Contents
 MATERIAL
TECHNOLOGIES, INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 For
the three months and six months ended June 30, 2008 and
2007
  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.
 
 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 June 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 June 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 June 30, 2008, there were no Class D Preferred shares
outstanding.
 
  F-20
 20
 Table of Contents
 MATERIAL
TECHNOLOGIES, INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 For
the three months and six months ended June 30, 2008 and
2007
  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
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 six month period ended June 30, 2008, 1,300 shares of Class E convertible
preferred stock were converted into 1,039,746 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 six months ended June 30, 2008, the Company issued 53,432,949 and cancelled
30,450,000 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 June 30,
2008:
  F-21
 21
 Table of Contents
 MATERIAL
TECHNOLOGIES, INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 For
the three months and six months ended June 30, 2008 and
2007
  Issued
      shares
                
                
                168,499,167Less
      shares held in escrow:Shares issued to the Company and held in escrow
                
                
                (3,357,397
                )Shares held in escrow pursuant to agreement debenture
    holders
                
                
                (8,000,000
                )Contingent shares held related to the Beck settlement for
      antidilution purposes (see Note 10)
                
                
                (7,805,368
                )Other
                
                
                (6,000
                )19,168,765
                )Outstanding
      shares (including shares
      committed)
                
                
                149,330,402
 
 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 six months ended June 30, 2008, the Company issued 53,432,949 shares of its
Class A common stock, of which 4,229,612 shares were issued in the conversion of
$491,131 of convertible debt, 13,207,500 shares for consulting and other
services valued at $3,668,400, 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 six-month period, the Company
issued 1,039,746 shares of common stock on the conversion of 1,300 shares of
Class E preferred shares.
 
 During
the six-months ended June 30, 2008, the Company’s CEO returned 30,000,000
shares of common stock for cancellation. Also during the same six-month period,
another 450,000 common shares were returned for cancellation.
 F-22
 22
 Table of Contents
 MATERIAL
TECHNOLOGIES, INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 For
the three months and six months ended June 30, 2008 and
2007
  Stock
Options
 
 The
Company has the following stock option plans:  The 1998 Stock Plan (“the
1998 Plan”), the 2002 Stock Issuance/Stock Plan (“the 2002 Plan”), 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
September 1998, the Company adopted the 1998 Plan and reserved 2,667 shares of
its common stock for grant under the plan.  Eligible participants include
employees, advisors, consultants and officers who provide services to the
Company.  The option price is 100% of the fair market value of a share of
common stock at either the date of grant or such other day as the as the Board
may determine.  The plan expires upon the earlier of all reserved shares
being granted or September 10, 2008.
 
 In
February 2002, the Company adopted the 2002 Plan and reserved 66,667 shares of
its common stock for grant under the plan.  Eligible plan participants
include employees, advisors, consultants and officers who provide services to
the Company.  The option price is 100% of the fair market value of a share
of common stock at either the date of grant or such other day as the Board may
determine.  The plan expires upon the earlier of all reserved shares being
awarded or December 31, 2007.
 
 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.
 
 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 its CEO 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 the date
of grant. On April 23, 2008, the Company granted its CEO 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. The options expire ten years after the date of
grant. On May 4, 2008, the Company granted its CEO 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 the
date of grant.
  F-23
 23
 Table of Contents
 MATERIAL
TECHNOLOGIES, INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 For
the three months and six months ended June 30, 2008 and
2007
  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 and as of June 30, 2008,
the Company recognized a derivative liability of $6,400,000 that was charged to
operations.
 
 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 and as of June 30, 2008, the Company
recognized a derivative liability of $400,154 that was charged to
operations.
 
 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 9).  The Company has valued these warrants using
a market capitalization method in accordance with its established accounting
policy.  The value of these warrants on the date of grant was
$1,668,000 and was included as a component of the Company’s derivative liability
balance (see Note 9).  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 six months ended June 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.
 
 F-24
 24
 Table of Contents
 MATERIAL
TECHNOLOGIES, INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 For
the three months and six months ended June 30, 2008 and
2007
  The
following table summarizes the warrants and options outstanding at June 30,
2008:
 
 WeighedOptions/
                
                
                AverageWarrants
                
                
                ExerciseOutstanding
                
                
                PriceBalance
      – December 31, 2007
                
                
                5,118,334
                
                
                $
                0.460Granted
                
                
                416,190,546
                
                
                $
                0.006Exercised
                
                
                -
                
                
                
                -Forfeited
                
                
                -
                
                
                
                -Balance
      – June 30, 2008
                
                
                421,308,880
                
                
                $
                0 .012
  NOTE 13 – RELATED PARTY
TRANSACTIONS
  For
additional related party transactions, see Note 8.
  As of
June 30, 2008, the Company was owed $5,151 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 June 30, 2008 and
2007 amounted to $218 and $197, respectively  Interest credited to
operations relating to this loan during the six months ended June 30, 2008 and
2007 amounted to $430 and $887, 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 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
  F-25
 25
 Table of Contents
 MATERIAL
TECHNOLOGIES, INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 For
the three months and six months ended June 30, 2008 and
2007
  ceased
recognizing compensation when these shares were returned. During the three
months ended June 30, 2008 and 2007, the Company charged to operations
$4,833,333 and $15,000,000, respectively. During the six months ended June 30,
2008 and 2007, the Company charged to operations $19,833,333 and $30,000,000,
respectively.
  options
under its 2008 stock option plan to purchase 70,000,000 shares of the Company’s
Class A common stock at a price of $0.0077 per share. The options expire ten
years after the date of grant.
  NOTE 14 – RESTATEMENT OF
PREVIOUSLY ISSUED FINANCIAL STATEMENTS
  In
valuing previous period’s non-cash security transactions, the Company utilized
discounts to the respective share’s trading prices which it has determined are
without foundation. In addition, the Company has used similar discounts in
recording its derivative liabilities. Therefore, it has restated its June 30,
2008, financial statements eliminating all discounts. The net effect of the
restatements is as follows:
 
 For
      the Three Months EndedJune
      30, 2007As
      Originally Stated
                
                
                
                
                Adjustments
                
                
                As
      CorrectedRevenues:Research
      and development
                
                $
                -
                
                
                
                
                
                -
                
                
                $
                -Revenue
      from bridge testing
                
                
                22,778
                
                
                
                
                
                
                
                
                
                22,778Other
                
                
                -
                
                
                
                
                
                
                
                
                
                -Total
      revenues
                
                
                22,778
                
                
                
                
                
                -
                
                
                
                22,778Costs
      and expenses:Research
      and development
                
                
                2,390,415
                
                1
                )
                
                
                904,160
                
                
                
                3,294,575General
      and administrative
                
                
                21,161,094
                
                1
                )
                
                
                19,855,380
                
                
                
                41,016,474Total
      costs and expenses
                
                
                23,551,509
                
                
                
                
                
                20,759,540
                
                
                
                44,311,049Loss
      from operations
                
                
                (23,528,731
                )
                
                
                
                
                (20,759,540
                )
                
                
                (44,288,271
                )
 F-26
 26
 Table of Contents
 MATERIAL
TECHNOLOGIES, INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 For
the three months and six months ended June 30, 2008 and
2007
  Other
      income (expense):Interest
      expense
                
                
                (612,416
                )
                
                
                
                
                
                
                
                
                (612,416
                )
 Net
      unrealized and realized loss of marketable securities
                
                
                (11
                )
                2
                )
                
                
                (8,556,200
                )
                
                
                (8,556,211
                )Change
      in fair value of derivative liabilities
                
                
                791,192
                
                3
                )
                
                
                6,151,405
                
                
                
                6,942,597Interest
      income
                
                
                12,594
                
                
                
                
                
                
                
                
                
                12,594Other
      expense, net
                
                
                191,359
                
                
                
                
                
                (2,404,795
                )
                
                
                (2,213,436
                )Loss
      before provision for income taxes
                
                
                (23,337,372
                )
                
                
                
                
                (23,164,335
                )
                
                
                (46,501,707
                )Provision
      for income taxes
                
                
                -
                
                
                
                
                
                -
                
                
                
                -Net
      loss
                
                $
                (23,337,372
                )
                
                
                
                $
                (23,164,335
                )
                
                $
                (46,501,707
                )Per
      share data:Basic
      and diluted net loss per share
                
                $
                (0.23
                )
                
                
                
                $
                (0.22
                )
                
                $
                (0.45
                )Weighted
      average Class A common sharesoutstanding
      - basic and diluted
                
                
                103,710,307
                
                
                
                
                
                103,710,307
                
                
                
                103,710,3071)
      To eliminate all discounts previously used on valuing stock based
      compensation.2)
      To eliminate discounts previously used in valuing investment in Rocket
      City Automotive Group, Inc3)
      To eliminate discounts previously used in valuing derivative
      instruments.
 
 F-27
 27
 Table of Contents
 MATERIAL
TECHNOLOGIES, INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 For
the three months and six months ended June 30, 2008 and
2007
  For
      the Six Months EndedJune
      30, 2007As
      Originally Stated
                
                
                
                
                Adjustments
                
                
                As
      CorrectedRevenues:Research
      and development
                
                $
                -
                
                
                
                
                
                -
                
                
                $
                -Revenue
      from bridge testing
                
                
                66,745
                
                
                
                
                
                -
                
                
                
                66,745Other
                
                
                -
                
                
                
                
                
                -
                
                
                
                -Total
      revenues
                
                
                66,745
                
                
                
                
                
                -
                
                
                
                66,745Costs
      and expenses:Research
      and development
                
                
                3,402,346
                
                1
                )
                
                
                109,730
                
                
                
                3,512,076General
      and administrative
                
                
                25,178,091
                
                1
                )
                
                
                37,297,547
                
                
                
                62,475,638Total
      costs and expenses
                
                
                28,580,437
                
                
                
                
                
                37,407,277
                
                
                
                65,987,714Loss
      from operations
                
                
                (28,513,694
                )
                
                
                
                
                (37,407,277
                )
                
                
                (65,920,969
                )Other
      income (expense):Gain
      on modification of convertible debt
                
                
                -
                
                
                
                
                
                
                
                
                
                -Modification
      of research and development sponsorship agreement
                
                
                -
                
                
                
                
                
                
                
                
                
                -Loss
      on subscription receivable
                
                
                
                
                
                
                
                
                
                
                
                
                -Interest
      expense
                
                
                (1,590,651
                )
                
                
                
                
                
                
                
                
                (1,590,651
                )Other-than-temporary
      impairment of marketable
                
                
                
                
                
                
                
                
                
                
                
                
                -securities
      available for sale
                
                
                -
                
                
                
                
                
                
                
                
                
                -Net
      unrealized and realized loss of marketable securities
                
                
                (19
                )
                2
                )
                
                
                (8,556,200
                )
                
                
                (8,556,219
                )Change
      in fair value of derivative liabilities
                
                
                1,538,696
                
                3
                )
                
                
                21,381,321
                
                
                
                22,920,017Interest
      income
                
                
                15,966
                
                
                
                
                
                
                
                
                
                15,966
  F-28
 28
 Table of Contents
 MATERIAL
TECHNOLOGIES, INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 For
the three months and six months ended June 30, 2008 and
2007
 Other
      expense, net
                
                
                (36,008
                )
                
                
                
                
                12,825,121
                
                
                
                12,789,113Loss
      before provision for income taxes
                
                
                (28,549,702
                )
                
                
                
                
                (24,582,156
                )
                
                
                (53,131,856
                )Provision
      for income taxes
                
                
                (800
                )
                
                
                
                
                -
                
                
                
                -Net
      loss
                
                $
                (28,200,501
                )
                
                
                
                $
                (24,582,156
                )
                
                $
                (53,131,856
                )Per
      share data:Basic
      and diluted net loss per share
                
                $
                (0.31
                )
                
                
                
                $
                (0.27
                )
                
                $
                (0.58
                )Weighted
      average Class A common sharesoutstanding
      - basic and diluted
                
                
                91,537,571
                
                
                
                
                
                91,537,571
                
                
                
                91,537,5711)
      To eliminate all discounts previously used on valuing stock based
      compensation.2)
      To eliminate discounts previously used in valuing investment in Rocket
      City Automotive Group, Inc3)
      To eliminate discounts previously used in valuing derivative
      instruments.
 
 NOTE 15 – SUBSEQUENT
EVENTS
 
 In July
2008, the Company issued 8,577,907 shares of its common stock through a
conversion of shares of its Class E preferred stock.
 
 In July
2008, a consultant returned to the Company 208,333 shares of its common stock
for cancellation.
 
 In July
2008, the Company issued 10,000,000 shares of its common stock in cancellation
of $20,000 of convertible debt.
  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. Prinicipal is due
on the maturity date with accrued interest due
  F-29
 29
 Table of Contents
  quarterly;
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 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 trading days
immediately preceding the conversion date or (ii) $0.10.  The Company
is required to reserve the number of 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.
  In August
2008, the Company issued 20,000,000 shares of its common stock in cancellation
of $40,000 of convertible debt.


F-30
 30
 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 the settlement of liabilities in the
normal course of business.  We have sustained operating
losses


31
 Table of Contents


since our
inception (October 21, 1983).  In addition, we have used substantial
amounts of working capital in our operations.  Further, at June 30, 2008,
the deficit accumulated during the development stage amounted to approximately
$337,594,305.





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 $1,073,600 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
$55,000.  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 Six Months Ended June 30, 2008 as Compared to the Six
Months Ended June 30, 2007





Revenues and Loss from
Operations





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




Six
      months
              Ended
              June
      30, 2008
            
            
            Six
      months
              Ended
              June
      30, 2007
            
            
            Percentage
              ChangeRevenue
            
            $
            1,090
            
            
            $
            66,745
            
            
            
            (98.36
            )%Research
      andDevelopment costs
            
            $
            309,840
            
            
            $
            3,512,076
            
            
            
            (91.17
            )%General
      andAdministrative expenses
            
            $
            25,845,768
            
            
            $
            62,475,638
            
            
            
            (58.63
            )%Loss
      from operations
            
            $
            (26,155,608
            )
            
            $
            (65,920,969
            )
            
            
            (60.32
            )%





Our
revenues were derived exclusively from bridge testing.




Of the $309,840 in
research and development costs for the six months ended June 30, 2008, $159,355
was incurred in salaries to our in-house engineering staff which included an
officer and director, $115,985 was paid to outside consultants and for related
expense reimbursements, and 32
 Table of Contents










Of the
$3,512,076 in research and development costs for the six months ended June 30,
2007, $66,625 was incurred in salaries to our in-house engineering staff which
included an officer and director, $300,351 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 at
$3,145,100.





General
and administrative expenses were $25,845,768 and $62,475,638, respectively, for
the six months ended June 30, 2008 and 2007.  The major expenses incurred
during each of the quarters were:




Six
      months
              Ended
              June
      30, 2008
            
            
            Six
      months
              Ended
              June
      30, 2007Consulting
      services
            
            $
            4,790,293
            
            
            $
            12,177,839Officer’s
      salary
            
            
            251,000
            
            
            
            125,000Officer’s
      stock basedcompensation
            
            
            19,887,533
            
            
            
            30,000,000Secretarial
      salaries
            
            
            65,497
            
            
            
            44,576Office
      expense
            
            
            36,865
            
            
            
            36,453Professional
      fees
            
            
            444,936
            
            
            
            535,782Rent
            
            
            16,197
            
            
            
            15,258Marketing
      & Promo
            
            
            111,214
            
            
            
            138,786Impairment
      loss
            
            
            --
            
            
            
            19,255,875Payroll
      taxes
            
            
            35,008
            
            
            
            17,461Travel
            
            
            67,830
            
            
            
            69,614Insurance
            
            
            33,777
            
            
            
            16,155Telephone
            
            
            10,617
            
            
            
            11,977





Of the
$4,790,293 in consulting expense for the six months ended June 30, 2008,
$3,581,900 relates to the issuance of 11,057,500 shares of common stock. 
In addition, we charged $1,100,000 in consulting fees through an increase in
convertible debt by the same amount. Of the $12,177,839 in consulting expense
for the six months ended June 30, 2007, $11,967,345 was related to the issuance
of 5,714,552 shares of common stock.  Of the $535,782 in professional
fees for the six months ended June 30, 2007, $435,000 relates to the
issuance of 300,000 shares of common stock.





33
 Table of Contents


Other Income and Expenses
and Net Loss





Our gain
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 six months ended June 30, 2008 as compared to the six months ended
June 30, 2007 are as follows:




Six
      months
              Ended
              June
      30, 2008
            
            
            Six
      months
              Ended
              June
      30, 2007
            
            
            Percentage
              ChangeInterest
      expense
            
            $
            (768,964
            )
            
            $
            (1,590,651
            )
            
            
            (51.66
            )  %Net
      unrealized and realizedloss of marketable
      securities
            
            $
            (8
            )
            
            $
            (8,556,219
            )
            
            
            (100.00
            )%Change
      in fair value ofderivative and warrant
      liabilities
            
            $
            2,522,864
            
            
            $
            22,920,017
            
            
            
            (88.99
            )
      %Interest
      income
            
            $
            15,523
            
            
            $
            15,966
            
            
            
            (2.77
            )%Provision
      for income taxes
            
            
            (800
            )
            
            
            (800
            )
            
            
            0
            %Net
      loss
            
            $
            (24,385,103
            )
            
            $
            (53,132,656
            )
            
            
            54.10
            %





Our
interest expense includes amortization of debt discounts totaling $630,919
during the six months ended June 30, 2008 and $1,431,080 during the six months
ended June 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.





Liquidity
and Capital Resources





Introduction





During
the six months ended June 30, 2008, as with the six months ended June 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 June 30, 2008, as compared to
June 30, 2007, were as follows:




34
 Table of Contents




June
      30, 2008
            
            
            June
      30, 2007Cash
            
            $
            530,045
            
            
            $
            384,628Marketing
      securities - trading
            
            $
            --
            
            
            $
            342,169Investment
      in certificateof deposits
            
            $
            --
            
            
            $
            704,800Accounts
      receivable
            
            $
            --
            
            
            $
            24,920Inventories
            
            $
            148,964
            
            
            $
            --Prepaid
      expenses andother
            
            $
            62,941
            
            
            $
            32,323Total
      current assets
            
            $
            741,950
            
            
            $
            1,488,840Total
      assets
            
            $
            836,232
            
            
            $
            2,139,025Total
      current liabilities
            
            $
            3,886,056
            
            
            $
            445,467Total
      liabilities
            
            $
            11,610,448
            
            
            $
            3,941,680





Cash
Requirements





For the
six months ended June 30, 2008, our net cash used in operations was $1,636,659
compared to $1,169,628 for the six months ended June 30,
2007.





Negative
operating cash flows during the six months ended June 30, 2008 were primarily
created by a net loss from operations of $24,385,903, offset by the issuance of
stock for services of $3,625,200, amortization of discount on convertible
debentures of $632,615 and an increase in officer stock based compensation of
$19,885,333.  There was also a decrease in the fair value of
derivative and warrant liabilities of $2,522,865 and accrued interest on debt of
$135,816, net decrease in assets of $104,005 and net decrease in liabilities of
$130,968.





Negative
operating cash flows during the six months ended June 30, 2007 were primarily
created by a net loss from operations of $53,132,656, offset by impairment
losses of $19,255,878 incurred in connection with the acquisition of
 subsidiaries, the issuance of stock for services of $15,558,944 ,
amortization of discount on convertible debentures of $1,431,081, an increase in
accounts payable and accrued expenses of $141,766,an increase in officer stock
based compensation of $30,000,000 and a net decrease in assets of $71,238. 
There was also a decrease in the fair value of derivative and warrant
liabilities of $22,920,017 and accrued interest on debt of $156,901. 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 six months ended June 30,
2008 and 2007 were $1,286,636 and $(907,209), respectively.  For the six
months ended June 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 $95,006, respectively, offset by the amount for purchase of
securities of $(565,000) and $(700,177), respectively.  Net cash from
investment activities during the quarter ended June 30, 2008 was further
decreased by the $17,167 on the purchase of property and equipment and increased
by an officer loan repayment of $3,803.




Net cash
provided by financing activities for the six months ended June 30, 2008 and
2007, was $70,358 and $2,332,169, respectively.  For the six months ended
June 30, 2008, the net cash used pertained to the purchase of 200,000 shares of
our common stock still held in treasury totaling $3,266 and an increase in the
amount of indebtedness of $55,000. In addition, during the six month ended June
30, 2008, the Company received $18,624 through the issuance of 77,600 of its
common stock.   For the six months ended June 30, 2007, the net
cash came primarily from the sale of common stock and warrants of $2,950,000 and
proceeds from convertible debentures and other notes payable of
$200,000.


35
 Table of Contents


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 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.


36
 Table of Contents


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 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).


37
 Table of Contents


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.





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.







38
 Table of Contents


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.





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.


39
 Table of Contents


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.















40
 Table of Contents


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


41
 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. filed a lawsuit
against us, Robert M. Bernstein, and Lawrence I. Washor (who
represented us in the lawsuit against Gem Advisors, Inc. filed on June
15, 2005), for breach of contract (settlement), breach of contract (for transfer
to Gem Advisors, Inc. 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 Advisors, Inc. is seeking
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.  Trial is scheduled for October 8, 2008.





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 April
11, 2008, we issued a total of 1,039,746  shares of common stock
pursuant to a conversion of Series E Convertible Preferred Stock.  We
relied on the exemption from registration relating to offerings that do not
involve any public offering pursuant to Section 4(2) under the Securities Act of
1933 (the “Act”) and/or Rule 506 of Regulation D of the Act.  We
believe that the investor had adequate access to information about us through
the investor’s relationship with us.
  On July
11, 2008, we issued a total of 7,538,161  shares of common stock
pursuant to a conversion of Series E Convertible Preferred Stock.  We
relied on the exemption from registration relating to offerings that do not
involve any public offering pursuant to Section 4(2) under the Securities Act of
1933 (the “Act”) and/or Rule 506 of Regulation D of the Act.  We
believe that the investor had adequate access to information about us through
the investor’s relationship with us.


On July
31, 2008, we issued a $1,000,000 10% convertible debenture to Kreuzfeld Ltd.
(the “Debenture”).  Interest on the Debenture is payable quarterly and
may be paid in either cash or in shares of our common stock, valued at 50% of
the average closing price of our common stock on the  ten trading days
immediately prior to such share issuance, at our option.  The
Debenture is secured by all of our assets pursuant to a Security Agreement,
dated July 31, 2008.  All or any portion of the amounts due under the
Debenture, which matures on December 31, 2011, may be converted at any time, at
the option of Kreuzfeld Ltd., into shares of our common stock at a conversion
price equal to the lesser of (i) 50% of the average closing price of our common
stock for the ten trading days immediately preceding the conversion date, or
(ii) $0.10.  On August 6, 2008, we entered into a Registration Rights
Agreement with Kreuzfeld Ltd. pursuant to which we agreed to file with the
Securities and Exchange Commission a registration statement to register the
Debenture and the shares into which the Debenture is
convertible.  Neither the Debenture nor the shares into which the
Debenture is convertible have been registered under the Act and may not be
offered or sold in the United States absent registration or an applicable exemption
from registration.  The issuance of the Debenture was made to one
non-U.S. person (as that term is defined in Regulation S of the Act) in an
offshore transaction relying on Regulation S and/or Section 4(2) of the
Act.


42
 Table of Contents




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 April
22, 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 in order to
increase our authorized shares of Class A common stock from 600,000,000 to
1,500,000,000; (d) amend our Articles of Incorporation to effect a one for 1,000
reverse stock split; (e) 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.





Item 6.
            Exhibits.





10.1
            License Agreement with Fatigue Solutions Corp.,
      dated May 21, 200810.2
            Incentive Stock Option Agreement, dated May 23,
      200810.3
            Business Agreement with The India-America
      Technology Agency, dated May 25, 200810.4
            Indemnification Agreement with Marybeth Miceli
      Newton, dated June 5, 200810.5
            Teaming Agreement with e-RADLIK, Inc., dated June
      6, 200810.6
            Convertible Debenture issued to Kreuzfeld, Ltd.,
      dated July 31, 200810.7
            Security Agreement with Kreuzfeld, Ltd., dated
      July 31, 200810.8
            Financing Escrow Agreement with Continental
      Advisors, SA and Corporate Legal Services, LLP, dated July 31,
      200810.9
            Registration Rights Agreement with Kreuzfeld,
      Ltd., dated August 6, 2008




43
 Table of Contents




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:  
      August 18, 2008
              /s/ Robert
      M. BernsteinBy:  Robert
      M. BernsteinIts:  President,
      Chief Executive Officer,
                and
      Chief Financial Officer (Principal
                Executive
      Officer, Principal Financial
                Officer
      and Principal Accounting Officer)












44