UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549





Form
10-Q/A





(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: 33-23617





Matech
Corp


FormerlyMaterial
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 R   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
            R





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





As of
August 15, 2008, there were 194,459,421 shares of our Class A common stock
issued and outstanding.





MATERIAL
TECHNOLOGIES, INC.





TABLE OF CONTENTS






PART I – FINANCIAL INFORMATION
                        1Item 1.  Financial Statements
      (unaudited)
                        1Consolidated Balance Sheet – June 30, 2008
                        1Consolidated Statements of Operations –
                          For the three and six months ended June 30, 2008 and
      2007
                        3Consolidated Statements of Cash Flows –
                          For the six months ended June 30, 2008 and
    2007
                        4Consolidated Notes to Financial
    Statements
                        7Item 2. Management’s Discussion and Analysis of
      Financial Condition and Results of Operations
                        34Item 3. Quantitative and Qualitative Disclosures about
      Market Risk
                        41Item 4.  Controls and
Procedures
                        41Item 4T.  Controls and
    Procedures
                        43PART II – OTHER INFORMATION
                        44Item 1. Legal Proceedings
                        44Item 1A.  Risk Factors
                        45Item 2. Unregistered Sales of Equity Securities and Use
      of Proceeds
                        45Item 3. Defaults Upon Senior
    Securities
                        46Item 4. Submission of Matters to a Vote of Security
      Holders
                        46Item 5.  Other Information
                        46Item 6. Exhibits
                        46SIGNATURES
                        47







i
 Table of Contents


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
.. . .


1
 Table of Contents


MATERIAL
      TECHNOLOGIES, INC.(A
      Development Stage Company)CONDENSED
      CONSOLIDATED BALANCE SHEET - ContinuedJune
      30,2008(Unaudited)(Restated)LIABILITIES
      AND STOCKHOLDERS'  DEFICITCurrent
      liabilities:Accounts
      payable and accrued expenses
                                                                      
                                                                      $
                                                                      470,017Current
      portion of research and development sponsorship payable
                                                                      
                                                                      
                                                                      25,000Notes
      payable
                                                                      
                                                                      
                                                                      67,573Total
      current liabilities
                                                                      
                                                                      
                                                                      562,590Accrued
      legal settlement
                                                                      
                                                                      
                                                                      250,000Research
      and development sponsorship payable, net of current
portion
                                                                      
                                                                      
                                                                      784,100Convertible
      debentures and accrued interest payable, net of discount
                                                                      
                                                                      
                                                                      270,973Notes
      payable, long-term
                                                                      
                                                                      
                                                                      222,110Derivative
      and warrant liabilities
                                                                      
                                                                      
                                                                      75,760,42577,287,608Total
      liabilities
                                                                      
                                                                      
                                                                      77,850,198Minority
      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 shares issued and 149,330 shares outstandingat
      June 30,2008
                                                                      
                                                                      
                                                                      149Class
      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
                                                                      
                                                                      
                                                                      326,904,859Deficit
      accumulated during the development stage
                                                                      
                                                                      
                                                                      (403,834,055
                                                                      )Treasury
      stock ( 293 shares at cost at June 30, 2008)
                                                                      
                                                                      
                                                                      (96,399
                                                                      )Total
      stockholders' deficit
                                                                      
                                                                      
                                                                      (77,014,791
                                                                      )$
                                                                      836,232




See
accompanying notes to the condensed consolidated financial
statements.


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)
                                                                                                          
                                                                                                          
                                                                                                          (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 and development 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):Loss
      on modification of convertible debt
                                                                                                          
                                                                                                          
                                                                                                          -
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          (964,730
                                                                                                          )
                                                                                                          
                                                                                                          
                                                                                                          -
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          (964,730
                                                                                                          )
                                                                                                          
                                                                                                          
                                                                                                          (378,485
                                                                                                          )Loss
      on subcription receivables
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          (1,368,555
                                                                                                          )Interest
      expense
                                                                                                          
                                                                                                          
                                                                                                          (612,416
                                                                                                          )
                                                                                                          
                                                                                                          
                                                                                                          (606,028
                                                                                                          )
                                                                                                          
                                                                                                          
                                                                                                          (1,590,651
                                                                                                          )
                                                                                                          
                                                                                                          
                                                                                                          (977,019
                                                                                                          )
                                                                                                          
                                                                                                          
                                                                                                          (12,717,212
                                                                                                          )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
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          (71,103,676
                                                                                                          )
                                                                                                          
                                                                                                          
                                                                                                          22,920,017
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          (62,544,101
                                                                                                          )
                                                                                                          
                                                                                                          
                                                                                                          (18,957,012
                                                                                                          )Interest
      income
                                                                                                          
                                                                                                          
                                                                                                          12,594
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          3,080
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          15,966
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          15,523
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          482,405Other
                                                                                                          
                                                                                                          
                                                                                                          -
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          -
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          -
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          -
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          (25,992
                                                                                                          )Other
      income (expense), net
                                                                                                          
                                                                                                          
                                                                                                          (2,213,436
                                                                                                          )
                                                                                                          
                                                                                                          
                                                                                                          (72,671,354
                                                                                                          )
                                                                                                          
                                                                                                          
                                                                                                          12,789,113
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          (64,470,335
                                                                                                          )
                                                                                                          
                                                                                                          
                                                                                                          (52,359,977
                                                                                                          )Loss
      before provision for income taxes
                                                                                                          
                                                                                                          
                                                                                                          (46,501,707
                                                                                                          )
                                                                                                          
                                                                                                          
                                                                                                          (78,339,644
                                                                                                          )
                                                                                                          
                                                                                                          
                                                                                                          (53,131,856
                                                                                                          )
                                                                                                          
                                                                                                          
                                                                                                          (90,624,853
                                                                                                          )
                                                                                                          
                                                                                                          
                                                                                                          (403,818,255
                                                                                                          )Provision
      for income taxes
                                                                                                          
                                                                                                          
                                                                                                          -
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          -
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          (800
                                                                                                          )
                                                                                                          
                                                                                                          
                                                                                                          (800
                                                                                                          )
                                                                                                          
                                                                                                          
                                                                                                          (15,800
                                                                                                          )Net
      loss
                                                                                                          
                                                                                                          $
                                                                                                          (46,501,707
                                                                                                          )
                                                                                                          
                                                                                                          $
                                                                                                          (78,339,644
                                                                                                          )
                                                                                                          
                                                                                                          $
                                                                                                          (53,132,656
                                                                                                          )
                                                                                                          
                                                                                                          $
                                                                                                          (90,625,653
                                                                                                          )
                                                                                                          
                                                                                                          $
                                                                                                          (403,834,055
                                                                                                          )Per
      share data:Basic
      and diluted net loss per share
                                                                                                          
                                                                                                          $
                                                                                                          (448.38
                                                                                                          )
                                                                                                          
                                                                                                          $
                                                                                                          (500.20
                                                                                                          )
                                                                                                          
                                                                                                          $
                                                                                                          (580.45
                                                                                                          )
                                                                                                          
                                                                                                          $
                                                                                                          (614.04
                                                                                                          )Weighted
      average Class A common shares outstanding - basic and
      diluted
                                                                                                          
                                                                                                          
                                                                                                          103,710
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          156,617
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          91,538
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          147,589








See
accompanying notes to the condensed consolidated financial
statements.




3
 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)
                                                                                      
                                                                                      
                                                                                      (Restated)Cash
      flows from operating activities:Net
      loss
                                                                                      
                                                                                      $
                                                                                      (53,132,656
                                                                                      )
                                                                                      
                                                                                      $
                                                                                      (90,625,653
                                                                                      )
                                                                                      
                                                                                      $
                                                                                      (403,834,055
                                                                                      )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Loss
      on modification of convertible debt
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      964,730
                                                                                      
                                                                                      
                                                                                      
                                                                                      378,485Impairment
      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 of research 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
                                                                                      
                                                                                      
                                                                                      
                                                                                      824,072
                                                                                      
                                                                                      
                                                                                      
                                                                                      10,930,350Change
      in fair value of investments derivative liability
                                                                                      
                                                                                      
                                                                                      (22,920,017
                                                                                      )
                                                                                      
                                                                                      
                                                                                      62,544,101
                                                                                      
                                                                                      
                                                                                      
                                                                                      65,767,423Accrued
      interest income added to principal
                                                                                      
                                                                                      
                                                                                      (5,428
                                                                                      )
                                                                                      
                                                                                      
                                                                                      25,433
                                                                                      
                                                                                      
                                                                                      
                                                                                      (279,565
                                                                                      )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 (used in) investing activities
                                                                                      
                                                                                      
                                                                                      (907,209
                                                                                      )
                                                                                      
                                                                                      
                                                                                      1,286,636
                                                                                      
                                                                                      
                                                                                      
                                                                                      2,064,738




Continued
.. . .




4
 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)
                                                                                            
                                                                                            
                                                                                            (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 other notes 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 4,230 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 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 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 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 shares of the Company'sClass
      A common stock to treasury which were subsequently
    cancelled.During
      the six months ended June 30, 2008, the Company issued 34,500 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 78 shares of its
      Class A common stock for $18,624.During
      the six months ended June 30, 2008, the Company issued 1,040 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.
  Continued
.. . .
  5
 Table of Contents
   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 2,839 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 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 shares
      of the Company'scommon
      stock at a price of $1.20 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
      shares in escrow pursuant to an agreement it has withwith
      its convertible debenture holders. During 2007, 5,800 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 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 shares of
      prior issued common stockwhich
      was subsequently cancelled.


See
accompanying notes to the condensed consolidated financial
statements.
 6
 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’s) Form 10-KSB for the year ended
December 31, 2007.
  Reverse
Stock Split
  Effective
on October 3, 2008, the Company declared a 1-for-1,000 reverse split of the
Company’s Class A common stock. All share amounts and per share amounts have
been adjusted throughout these financial statements for the reverse stock
split.
  Restatement
of Financial Statements
 
 The
Company entered into an agreement with the Palisades convertible note holders to
modify the terms of the convertible notes with an effective date of June 16,
2008 (See Note 9). In addition, effective on October 3, 2008, the Company
declared a 1-for-1,000 reverse split of the Company’s Class A common stock. All
share amounts and per share amounts have been adjusted throughout the financial
statements for the reverse stock split.  Based upon these two
reansactions. the Company has restated its financial statements for the three
and six months ended June 30, 2008 as follows:
 
 Statements
of operations:
  For
      the Three Months EndedJune
      30, 2008As
      Originally Stated
                              
                              
                              Adjustments
                              
                              
                              As
      CorrectedRevenues:Research
      and development
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              -Revenue
      from bridge testing
                              
                              
                              -
                              
                              
                              
                              
                              
                              
                              
                              -Other
                              
                              
                              -
                              
                              
                              
                              
                              
                              
                              
                              -
 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




Total
      revenues
                            
                            
                            -
                            
                            
                            
                            
                            
                            
                            -
                            
                            
                            
                            -Costs
      and expenses:Research
      and development
                            
                            
                            150,847
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            150,847General
      and administrative
                            
                            
                            5,517,443
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            5,517,443Total
      costs and expenses
                            
                            
                            5,668,290
                            
                            
                            
                            
                            
                            
                            -
                            
                            
                            
                            5,668,290Loss
      from operations
                            
                            
                            (5,668,290
                            )
                            
                            
                            
                            
                            
                            -
                            
                            
                            
                            (5,668,290
                            )Other
      income (expense):Interest
      expense
                            
                            
                            (397,973
                            )
                            
                            
                            1
                            )
                            
                            
                            (208,055
                            )
                            
                            
                            (606,028
                            )Loss
      on modification of convertible debt
                            
                            
                            -
                            
                            
                            
                            2
                            )
                            
                            
                            (964,730
                            )
                            
                            
                            (964,730
                            )Change
      in fair value of derivative liabilities
                            
                            
                            (6,036,711
                            )
                            
                            
                            3
                            )
                            
                            
                            (65,066,965
                            )
                            
                            
                            (71,103,676
                            )Interest
      income
                            
                            
                            3,080
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            3,080Other
      expense, net
                            
                            
                            (6,431,604
                            )
                            
                            
                            
                            
                            
                            
                            (66,239,750
                            )
                            
                            
                            (72,671,354
                            )Loss
      before provision for income taxes
                            
                            
                            (12,099,894
                            )
                            
                            
                            
                            
                            
                            
                            (66,239,750
                            )
                            
                            
                            (78,339,644
                            )Provision
      for income taxes
                            
                            
                            -
                            
                            
                            
                            
                            
                            
                            
                            -
                            
                            
                            
                            -Net
      loss
                            
                            $
                            (12,099,894
                            )
                            
                            
                            
                            
                            
                            $
                            (66,239,750
                            )
                            
                            $
                            (78,339,644
                            )Per
      share data:Basic
      and diluted net loss per share
                            
                            $
                            (77.26
                            )
                            
                            
                            
                            
                            
                            $
                            (422.94
                            )
                            
                            $
                            (500.20
                            )Weighted average
      Class A common shares outstanding - basic and
      diluted
                            
                            
                            156,617
                            
                            
                            
                            
                            
                            
                            
                            156,617
                            
                            
                            
                            156,617
  1)  To
      record additional interest of $16,597 on the increased balance of debt
      and
      amortization of increased discount totalling
      $191,458.2) 
      To record loss on modification of convertible debt.3)  To
      expense increase in derivative liability due to the reduction in conversion price of
      convertible debt and granting of warrants to purchase 35M shares of common
      stock.
  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
 
 For
      the Six Months EndedJune
      30, 2008As
      Originally Stated
                        
                        
                        
                        
                        
                        Adjustments
                        
                        
                        As
      CorrectedRevenues:Research
      and development
                        
                        $
                        -
                        
                        
                        
                        
                        
                        
                        -
                        
                        
                        $
                        -Revenue
      from bridge testing
                        
                        
                        1,090
                        
                        
                        
                        
                        
                        
                        -
                        
                        
                        
                        1,090Other
                        
                        
                        -
                        
                        
                        
                        
                        
                        
                        -
                        
                        
                        
                        -Total
      revenues
                        
                        
                        1,090
                        
                        
                        
                        
                        
                        
                        -
                        
                        
                        
                        1,090Costs
      and expenses:Research
      and development
                        
                        
                        309,840
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        309,840General
      and administrative
                        
                        
                        25,845,768
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        25,845,768Total
      costs and expenses
                        
                        
                        26,155,608
                        
                        
                        
                        
                        
                        
                        -
                        
                        
                        
                        26,155,608Loss
      from operations
                        
                        
                        (26,154,518
                        )
                        
                        
                        
                        
                        
                        -
                        
                        
                        
                        (26,154,518
                        )Other
      income (expense):Interest
      expense
                        
                        
                        (768,964
                        )
                        
                        
                        1
                        )
                        
                        
                        (208,055
                        )
                        
                        
                        (977,019
                        )Loss
      on modification of convertible debt
                        
                        
                        -
                        
                        
                        
                        2
                        )
                        
                        
                        (964,730
                        )
                        
                        
                        (964,730
                        )Change
      in fair value of derivative liabilitiesInterest
      income
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        -Other
      expense, net
                        
                        
                        -
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        -Net
      unrealized and realized loss of marketable securities
                        
                        
                        (8
                        )
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (8
                        )Change
      in fair value of derivative liabilities
                        
                        
                        2,522,864
                        
                        
                        
                        3
                        )
                        
                        
                        (65,066,965
                        )
                        
                        
                        (62,544,101
                        )Interest
      income
                        
                        
                        15,523
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        15,5231,769,415
                        
                        
                        
                        
                        
                        
                        
                        (66,239,750
                        )
                        
                        
                        (64,470,335
                        )Loss
      before provision for income taxes
                        
                        
                        (24,385,103
                        )
                        
                        
                        
                        
                        
                        
                        (66,239,750
                        )
                        
                        
                        (90,624,853
                        )Provision
      for income taxes
                        
                        
                        (800
                        )
                        
                        
                        
                        
                        
                        
                        -
                        
                        
                        
                        (800
                        )Net
      loss
                        
                        $
                        (28,200,501
                        )
                        
                        
                        
                        
                        
                        $
                        (66,239,750
                        )
                        
                        $
                        (90,625,653
                        )Per
      share data:Basic
      and diluted net loss per share
                        
                        $
                        (0.31
                        )
                        
                        
                        
                        
                        
                        $
                        (723.63
                        )
                        
                        $
                        (990.04
                        )Weighted
      average Class A common shares outstanding - basic and
      diluted
                        
                        
                        91,538
                        
                        
                        
                        
                        
                        
                        
                        91,538
                        
                        
                        
                        91,538


1)  To
      record additional interest of $16,597 on the increased balance of debt and
      amortization
      of increased discount totaling
      $191,458.2) 
      To record loss on modification of convertible debt.3)  To
      expense increase in derivative liability due to the reduction in
      conversion price of convertible debt and
      granting of warrants to purchase 35M shares of common
      stock.
   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
  Balance
sheet:
  June
      30, 2008As
      Originally Stated
                                              
                                              
                                              
                                              
                                              
                                              Adjustments
                                              
                                              
                                              As
      CorrectedCurrent
      liabilities:Accounts
      payable and accrued expenses
                                              
                                              $
                                              470,017
                                              
                                              
                                              
                                              
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              470,017Current
      portion of research and development
      sponsorship     payable
                                              
                                              
                                              25,000
                                              
                                              
                                              
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              25,000Notes
      payable
                                              
                                              
                                              67,573
                                              
                                              
                                              
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              67,573Convertible
      debentures and accrued interest payable, net of
    discount
                                              
                                              
                                              3,323,466
                                              
                                              
                                              
                                              1
                                              )
                                              
                                              
                                              (3,289,571
                                              )
                                              
                                              
                                              -2
                                              )
                                              
                                              
                                              (33,895
                                              )Total
      current liabilities
                                              
                                              
                                              3,886,056
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              (3,323,466
                                              )
                                              
                                              
                                              562,590-Accrued
      legal settlement
                                              
                                              
                                              250,000
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              250,000Research
      and development sponsorship payable, net of current
      portion
                                              
                                              
                                              784,100
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              784,100Convertible
      debentures and accrued interest payable, net of
    discount
                                              
                                              
                                              29,024
                                              
                                              
                                              
                                              3
                                              )
                                              
                                              
                                              4,254,301
                                              
                                              
                                              
                                              270,9733
                                              )
                                              
                                              
                                              (4,254,301
                                              )4
                                              )
                                              
                                              
                                              241,949Notes
      payable, long-term
                                              
                                              
                                              222,110
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              222,110Derivative
      and warrant liabilities
                                              
                                              
                                              6,439,158
                                              
                                              
                                              
                                              1
                                              )
                                              
                                              
                                              4,254,301
                                              
                                              
                                              
                                              75,760,4255
                                              )
                                              
                                              
                                              65,066,9667,724,392
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              69,563,216
                                              
                                              
                                              
                                              77,287,608
  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
  Total
      liabilities
                                                                        
                                                                        
                                                                        11,610,448
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        66,239,750
                                                                        
                                                                        
                                                                        
                                                                        77,850,198Minority
      interest in consolidated subsidiary
                                                                        
                                                                        
                                                                        825
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        825Commitments
      and contingenciesStockholders'
      deficit:Preferred
      Stock
                                                                        
                                                                        
                                                                        55
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        55Class
      A Common Stock,
                                                                        
                                                                        
                                                                        149,330
                                                                        
                                                                        
                                                                        
                                                                        6
                                                                        )
                                                                        
                                                                        
                                                                        (149,181
                                                                        )
                                                                        
                                                                        
                                                                        149Class
      B Common Stock,
                                                                        
                                                                        
                                                                        600
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        600Warrants
      subscribed
                                                                        
                                                                        
                                                                        10,000
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        10,000Additional
      paid-in-capital
                                                                        
                                                                        
                                                                        326,755,678
                                                                        
                                                                        
                                                                        
                                                                        6
                                                                        )
                                                                        
                                                                        
                                                                        149,181
                                                                        
                                                                        
                                                                        
                                                                        326,904,859Deficit
      accumulated during the development stage
                                                                        
                                                                        
                                                                        (337,594,305
                                                                        )
                                                                        
                                                                        
                                                                        1
                                                                        
                                                                        
                                                                        
                                                                        (964,730
                                                                        )
                                                                        
                                                                        
                                                                        (403,834,055
                                                                        )2
                                                                        )
                                                                        
                                                                        
                                                                        33,8954
                                                                        )
                                                                        
                                                                        
                                                                        (241,949
                                                                        )5
                                                                        )
                                                                        
                                                                        
                                                                        (65,066,966
                                                                        )Treasury
      stock
                                                                        
                                                                        
                                                                        (96,399
                                                                        )
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        (96,399
                                                                        )-Total
      stockholders' deficit
                                                                        
                                                                        
                                                                        (10,775,041
                                                                        )
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        (66,239,750
                                                                        )
                                                                        
                                                                        
                                                                        (77,014,791
                                                                        )-$
                                                                        836,232
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        $
                                                                        -
                                                                        
                                                                        
                                                                        $
                                                                        836,232
  1) To record gain
      on extinquishmment of
      balance of convertible debt prior to the modification of
      the debt and to record derivative warrant liability on the issuance
      of  35M
  warrants.2)
      To adjust accrued interest on note balance at June 16,
      2008.3) To record
      balance of new convertible debt and related discount based upon the terms of the June
      16, 2008 agreement.4)
      To record accrued interest on the modified balance of convertible debt and
      amortization modified discount.5)
      To adjust derivative warrant liability at June 30, 2008 to fair
      value.6)
      To adjust common stock for October 2008 1000:1 reverse stock
      split.
  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
  Going
Concern
  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 restated
financial statements, the Company is in the development stage and, at June 30,
2008, has an accumulated deficit of $403,834,055, 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.
 
 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
  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
  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 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:
 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
  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.
 
 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 $267, 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
 
 
 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
  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 1 share of its
common stock, and a 5% royalty on sales of the product.  The Company valued
the license agreement at $6,250.  The license terminates upon the
expiration of the underlying patents, unless sooner terminated as provided in
the agreement.  The Company is amortizing the license over 17
years.
 
 In
addition to the license agreement, the Company also agreed under a modified
workout agreement relating to a prior sponsorship agreement to pay the
University, retroactive to January 1, 2005, the balance of $760,831, which
accrues interest at a monthly rate of 0.5% simple interest.  The Company is
obligated to pay $25,000 annually due on the anniversary date of the Workout
Agreement.  Further, the Company is also obligated to pay within ten days
following the filing of the Company’s Forms 10-QSB or 10-KSB an amount equal to
10% of the Company’s operating income (as defined) as reflected in the quarterly
and annual filings.  Under the revised terms of the Workout Agreement, the
Company’s CEO’s annual cash salary is capped at $250,000.  The Company
agreed to pay the University an amount equal to any cash salary paid to Mr.
Bernstein in excess of the $250,000, which will be credited against the balance
of the amounts due under the agreement.
 
 Interest
expense charged to operations during the three months ended 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.
  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
  In
partial consideration for the license, the Company must pay to NCAT a royalty
equal to 3.5% of net sales of licensed products sold by the Company, its
affiliates and from sublicensees.  In the case of sub-licensees, the
Company must pay NCAT 25% of any income, revenue, or other financial
consideration received on any sublicense including but not limited to, advance
payments, license issue fees, license maintenance fees, and option fees. 
Minimum royalties are due as follows:
  Year
beginning
 
 August
      2, 2009
                      
                      $
                      30,000August
      2, 2010
                      
                      $
                      30,000August
      2, 2011 and each year thereafter
                      
                      $
                      50,000
 
 The
license remains in full force for the life of the last-to-expire patent.
 The license can be terminated by the Company by giving 90-day written
notice and thereupon stop the manufacturing, use, or sale of any
product developed under the license.  In addition, the license
terminates if the Company defaults under the royalty provisions of the license
or files for bankruptcy protection.
 
 ISIS
Innovation Limited (“ISIS”)
 
 In
the 2007 acquisition of SATI, the Company acquired a license to develop and
market the patented process known as “X-Ray diffraction method”. Under the terms
of the exclusive license with ISIS Innovation Limited, the licensor was granted
back the right to utilize the process on a perpetual, royalty-free basis. The
licensee is responsible for all costs associated with maintaining and protecting
the patent. In the case of sub-licensees, the Company must pay ISIS 25% of any
income, revenue, or other financial consideration received on any sublicense
including but not limited to, advance payments, license issue fees, license
maintenance fees, and option fees, In addition, a 2.5% royalty on net sales is
due with minimum royalties as follows:
  Year
beginning
 January
      29, 2010
                      
                      $
                      21,000January
      29, 2011
                      
                      $
                      32,000January
      29, 2012
                      
                      $
                      42,000
   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
  Iowa
State University Research Foundation
(“ISURF”)
  In the 2007 acquisition of
NATI, the Company acquired a license to develop and market the patented process
known as “Nondestructive evaluation and stimulate industrial innovation”. Under
the terms of the non-exclusive license with ISURF, the Company is required to
develop products for sale in the commercial market and to provide ISURF with a
development plan and bi-annual development report until the first commercial
product sale. The Company has the right to sublicense the patented process to
third companies, but is required to pay a royalty fee of 25% of amounts earned
by the Company under the sublicenses. For each product sold under the license,
the Company is required to pay ISURF a royalty equal to 3% of the selling price
with the following minimum royalty payments:
 
 Year
beginning
 
 January
      1, 2009
                      
                      $
                      10,000January
      1, 2010
                      
                      $
                      20,000January
      1, 2011 and each year thereafter
                      
                      $
                      30,000
 
 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.
 
  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
  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 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.
 
 Effective
June 16, 2008, the Company and Investor Group (“Palisades’) entered into
Settlement Agreement and General Release whereby Palisades agreed to extend the
maturity date of the convertible debentures to December 31, 2009. Under the
modified terms of the underlying Notes,  the Company is required to
make minimum monthly interest payments totaling $10,000, the first payment being
made in August 2008.  Under the settlement and related escrow
agreement, the Company is required to deposit a number of shares equal to 9.99%
of its issued and outstanding Class A Common Stock into a brokerage account in
the name of Agent at a firm to be determined from time to time by
Agent.  The Company also agreed to modify the terms of the notes to
include the following restrictions:
 
 ·
              If
      an Event of Default occurs under the Notes, and, if such Event of Default
      is curable, such Event of Default continues for a period of 30 days
      without being cured, then the 10% interest rate set forth in the Notes
      will be increased to a Default Interest Rate of 18% per annum, and the
      total balance of principal and accrued interest of the debentures shall
      bear interest at the Default Interest Rate from the date of the occurrence
      of such Event of Default
 
 ·
              In
      addition, the entry of any judgment against the Company in excess of
      $150,000, regardless of where, how, to whom or under what agreement such
      liability arises, shall be an Event of Default under the Debentures,
      unless (i) the Company pays such judgment within 60 days, or (ii) the
      Company duly files an appeal of such judgment and execution of such
      judgment is stayed.  Finally, the entry of any order or judgment
      in favor of any judgment creditor or other creditor attaching the assets
      of the Company shall be an Event of Default under these
      debentures.  The conversion price of the debentures shall not be
      at any time more than $0.10 per share, regardless of any combination of
      shares of the Common Stock of the Company by reverse split or
      otherwise.
  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
  ·
                If an Event of
      Default occurs which is not curedwithin its
      applicable cure period, if it is curable,
      the conversion price of these debentures after such cure period has
      expired shall be reduced to half of the pre-Event of Default conversion
      price.  For clarification, if the conversion price before an
      Event of Default were the lesser of 50% of market price or $0.10, then the
      new conversion price would be the lesser of 25% of market price or
      $0.05.
 ·
              The
      Company shall not issue any shares of its Class A Common Stock without a
      legend stating that such shares may not be sold, transferred, pledged,
      assigned or alienated for a period of at least one year following the date
      of the issuance of such certificate, other than shares issued to or with
      the written consent of the Holder.  Notwithstanding the
      foregoing, this provision shall not apply to (i) any shares issued to
      purchasers in a financing where the Company receives net proceeds of at
      least Five Hundred Thousand Dollars ($500,000) and the shares are sold for
      not less than fifty percent (50%) of the closing price of the Company’s
      common stock reported as of the closing date of such financing, and (ii)
      any shares issued in connection with an acquisition of assets by the
      Company where (a) the Company provides to the Holder a fairness opinion as
      to the value of the acquired assets, and (b) the Company receives assets
      that are worth at least fifty percent (50%) of the closing price per share
      of the Company’s common stock as of the closing date of the
      acquisition.
 
 ·
              The
      Company shall not enter into any agreement pursuant to which any party
      other than the Holder has pre-emptive rights, the right to receive shares
      of any class of securities of the Company for no additional consideration,
      the right to receive a set, pre-determined percentage of the outstanding
      shares of the Company for any period of time, or any other similar right
      that has the effect of maintaining a set percentage of the issued and/or
      outstanding shares of any class or classes of the capital stock of the
      Company.
 
 ·
              The
      Company shall not enter into any agreement giving another party
      anti-dilution protection unless (1) all shares received pursuant to such
      provision are subject to a two-year lock-up from the date of issuance, and
      (2) all such shares received are subject to a “dribble-out,” following the
      two-year lock-up, restricting their sale to not more than 1/20th
      of 5% of the previous month’s total trading volume in any single trading
      day.
 
 ·
              The
      Company will not file any Registration Statement on Form S-8 nor issue any
      shares registered on Form S-8, exclusive of shares currently registered on
      Form S-8.  However, when the total capital in the Company’s cash
      account drops below $500,000, the Company may issue up to $30,000 worth of
      securities registered on Form S-8, valued at the market price of the
      common stock on the date of issuance, per month,
      non-cumulative.  Any issuance of S-8 shares will be supported by
      an opinion of the Company’s counsel that such issuance complies in all
      respects with federal
securities
  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
  laws.  This
      opinion will be provided to the legal representative of the Holder upon
      request.  Further, the Company will ensure that every entity or
      individual that receives S-8 shares will be subject to a “dribble-out”
      restricting their sale to not more than 1/20th
      of 2% of the previous month’s total trading volume in any single trading
      day, non-cumulative.  The above described dribble-out is not an
      aggregate sale restriction for all entities and individuals receiving S-8
      shares;
 
 ·
              The
      Company has informed the Holder that it is considering completing a
      one-for-one-thousand reverse split of its common stock, as described in an
      Information Statement filed by the Company on or about April 25,
      2008.  The Company acknowledges that the conversion price of the
      Debenture shall not be effected by any such reverse split, and that after
      giving effect to such reverse split, the conversion price shall remain the
      lesser of (i) 50% of the averaged ten closing prices for the Company’s
      Common Stock for the ten trading days immediately preceding the Conversion
      Date or (ii) $0.10.  The Holder consents to this
      action.  The parties acknowledge that the Company is not
      obligated to complete this reverse-split, or any reverse
      split.
 
 ·
              The
      shareholder lockup provisions will not apply to up to any shares held by
      Mr. Robert Bernstein, and sold by him personally in a bona-fide sale to an
      unrelated, unaffiliated third party; provided, that (i) the number of
      shares sold shall not exceed Two Million Five Hundred Thousand Dollars
      ($2,500,000) worth of stock, calculated based on the number of shares sold
      multiplied by the closing price of the stock on the date such shares are
      sold (if a market trade) or transferred on the books of the transfer agent
      (if a private transfer).  Once Two Million Five Hundred Thousand
      Dollars ($2,500,000) worth of stock has been sold as calculated above, the
      lockup on whatever remains of the shares owned by Mr. Bernstein (if
      any) goes back into effect.  In this regard, if Mr. Bernstein
      sells any of his shares without legend, then he may only sell up to 1/20th
      of 5% of the previous month’s total trading volume in any single trading
      day, and he may not sell more than 1% of the issued and outstanding shares
      of Matech during any 90 day period.  Further, if Mr. Bernstein sells
      any of his shares, he must have such shares transferred on the books of
      the transfer agent within five business days of the sale.  Mr.
      Bernstein shall comply with all reporting requirements under Section 16 of
      the Securities Exchange Act of 1934, as
  amended.
 
 As
further consideration for the Note Holders to extend the maturity date of the
debentures and to enter into the Settlement Agreement, the Company agreed to pay
an extension fee and a settlement fee totaling $554,910, which was added to the
outstanding balance of the debentures as of June 16, 2008 and grant the holders
warrants to purchase 35,000,000 shares of the Company’s Class A common stock at
an exercise price of the lesser of (i) $0.001 per share, or (ii) 50% of market
price   The warrants expire on October 16, 2016. Payment of the
warrant price may be in cash or cashless, at the option of the warrant
holder.
  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
  The
Company accounted for the modification of the convertible debt pursuant to EITF
96-19 “Debtor's Accounting for a Modification or Exchange of Debt
Instruments” and recognized a loss on the modification of $964,730 that was
charged to operations.
 
 Further,Per EITF 00-19, paragraph 4, these convertible debentures do not meet the
definition of a “conventional convertible debt instrument” since the debt is not
convertible into a fixed number of shares.  The debt can be converted into
common stock at a conversions price that is a percentage of the market price;
therefore, the number of shares that could be required to be delivered upon
“net-share settlement” is essentially indeterminate.  Therefore, the
convertible debenture is considered “non-conventional,” which means that the
conversion feature must be bifurcated from the debt and shown as a separate
derivative liability. The Company recognized a derivative liability of
$4,254,301 on June 16, 2008, with an offset to debt discount in the same
amount.
 
 In
addition, since the convertible debenture is convertible into an indeterminate
number of shares of common stock, it is assumed that the Company could never
have enough authorized and unissued shares to settle the conversion of the
warrants into common stock.  Therefore, the warrants issued in connection
with this transaction are also shown as a derivative liability.
 
 In
connection with the settlement agreement, the Company entered into a consulting
agreement with an affiliate of the debenture holders for a term commencing on
May 1, 2008 and terminating no earlier than May 1, 2010. For the duration of the
agreement, the Consultant agrees to assist the Company with implementing the
Company’s business plan, assist it in identifying, analyzing, structuring and
negotiating acquisitions and related activities. Under the terms of the
consulting agreement, the Company agreed to pay a fee of $20,000 per month and
reimburse the Consultant for reasonable expenses it incurred relating to the
Company’s business. As further consideration, the Company granted warrants to
the consultant to purchase 5,000,000 shares of the Company’s Class A common
stock at an exercise price of the lesser of (i) $0.10 per share, or (ii) 50% of
market price   The warrants expire on October 16, 2013. Payment
of the warrant price may be in cash or cashless, at the option of the warrant
holder. the Warrant Shares are stated after giving effect to a one for
one-thousand reverse stock split completed in October 2008.
 
 The
balance of the Debenture, including accrued interest, at June 30, 2008 was
$241,950 (net of unamortized discount of $4,028,669).  Interest charged to
operation in on the face amount of the debentures for the three months ended
June 30, 2008 and 2007 was $106,578 and $64,614,
respectively.  Interest charged to operation on the face amount of the
debentures for the six  months ended June 30, 2008 and 2007 was
$226,909 and $101,302,
  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
  respectively.  Amortization
expense of the discount also charged to operations as interest expense for the
three months ended June 30, 2008 and 2007 amounted to $482,651 and $528,617,
respectively. Amortization expense of the discount charged to operations as
interest expense for the six months ended June 30, 2008 and 2007 amounted to
$809,044 and $1,424,414, respectively.
 
 At
June 30, 2008, the fair value of the derivative liabilities relating to the
above-indicated convertible debt and warrants amounted to $68,753,699 and
$567,567, respectively.
 
 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.
 
 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.
  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
  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:
 
 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
  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
  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.
 
 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 contribution to the
plan.
 
  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
  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.
 
 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
  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
  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.
 
 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.
 
  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
  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 53,433 and cancelled
30,450 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:
  Issued
      shares
                                  
                                  
                                  168,499Less
      shares held in escrow:Shares
      issued to the Company and held in escrow
                                  
                                  
                                  (3,357
                                  )Shares
      held in escrow pursuant to agreement debenture holders
                                  
                                  
                                  (8,000
                                  )Contingent
      shares held related to the Beck settlementfor antidilution
      purposes (see Note 10)
                                  
                                  
                                  (7,806
                                  )Other
                                  
                                  
                                  (6
                                  )(19,169
                                  )Outstanding
      shares (including shares committed)
                                  
                                  
                                  149,330
  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.
 
  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
  2008
  During
the six months ended June 30, 2008, the Company issued 53,434 shares of its
Class A common stock, of which 4,230 shares were issued in the conversion of
$491,131 of convertible debt, 13,207 shares for consulting and other services
valued at $3,668,400, 378 shares issued pursuant to an anti-dilutive provision
of a settlement agreement, valued at par, and 34,500 shares issued on the
exercise of 34,500,000 warrants. Upon the issuing of the 34.500 shares, theCompany credited its related derivative warrant liability of $1,151,900
to equity. In addition, during the six-month period, the Company issued 1,040
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 President returned 30,000
shares of common stock for cancellation. Also during the same six-month period,
another 450 common shares were returned for cancellation.
 
 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.
 
 
 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
  In
December 2006, the Company adopted the 2006/2007 Plan and reserved 3,000,000
shares of its common stock for grant.  Eligible plan participants
include independent consultants, and the Company may issue the shares of the
stock or option may be granted at any price.  The plan expires upon
the earlier of all reserved shares being granted or December 1,
2016.
  On April 22, 2008, the
Board of Directors adopted the 2008 Incentive and Nonstatutory Stock Option Plan
for its employees, directors, and consultants. The Company initially
reserved 100,000,000 shares of its Class A common shares to be issued under the
plan. The plan was later amended to increase the number of shares reserved to
400,000,000. On April 22, 2008, the Company granted Mr. Bernstein options under
the plan to purchase 30,000,000 shares of the Company’s Class A common stock at
a price of $.04 per share. The options expire ten years after grant. On April
23, 2008, the Company granted Mr. Bernstein options under the plan to purchase
300,000,000 shares of the Company’s Class A common stock at a price of $.00462
per share. The options expire ten years after grant. On May 4, 2008, the Company
granted Mr. Bernstein options under the plan to purchase 70,000,000 shares of
the Company’s Class A common stock at a price of $.0077 per share. The options
expire ten years after grant.
 
 These
option agreements allow for cashless exercises when the fair market value of the
Company’s common stock exceeds the respective exercise price. The Company deemed
these options to be derivatives based upon their terms 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
  29
 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
  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.
 
 Under
the terms of its June 16, 2008 settlement agreement with Palisades, the Company
granted warrants to the debenture holders to purchase a total of 35,000,000
shares of the Company’s common stock at a price per share of the lesser of (i)
$0.001 per share, or (ii) 50% of market price. The Warrants expire on October
16, 2016. The Company also granted warrants to purchase 5,000,000 shares if its
common stock to an affiliate of the debenture holders as part consideration for
consultant services. The 5,000,000 warrants are exercisable at a price per share
of the lesser of (i) $0.10 per share, or (ii) 50% of market
price   The Warrants expire on October 16, 2013. The terms of the
respective warrant agreements allow the warrant holder certain piggyback
registration rights.
 
 The
following table summarizes the warrants and options outstanding at June 30,
2008:
 
 WeighedOptions/
                                      
                                      
                                      AverageWarrants
                                      
                                      
                                      ExerciseOutstanding
                                      
                                      
                                      PriceBalance
      – December 31, 2007
                                      
                                      
                                      35,131,667
                                      
                                      
                                      $
                                      0.003Granted
                                      
                                      
                                      456,190,546
                                      
                                      
                                      $
                                      0.007Exercised
                                      
                                      
                                      (34,500,000
                                      )
                                      
                                      $
                                      (0.001
                                      )Forfeited
                                      
                                      
                                      (13,333
                                      )
                                      
                                      $
                                      (0.001
                                      )Balance
      – June 30, 2008
                                      
                                      
                                      456,808,880
                                      
                                      
                                      $
                                      0.007
 
 
 30
 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
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  Interestcredited
 
 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 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.
 
 NOTE 14 –
FAIR VALUE
  The
Company adopted Statement of Financial Accounting Standard No. 157, Fair Value
Measurements (“SFAS 157”), to measure the fair value of certain of its financial
assets required to be measured on a recurring basis. The adoption of SFAS 157
did not impact the Company’s consolidated financial position or results of
operations.  SFAS 157 establishes a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure fair value. The
hierarchy gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (Level 1 measurements) and the
lowest priority to unobservable inputs (Level 3 measurements).  SFAS
157 defines fair value as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants on the measurement date. A fair value measurement assumes that the
transaction to sell the asset or transfer the liability occurs in the principal
market for the asset or liability. The three levels of the fair value hierarchy
under SFAS 157 are described below:
  Level
1. Valuations based on quoted prices in active markets for identical assets
or liabilities that an entity has the ability to access.
  31
 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
Company’s Level 1 assets include cash accounts payable and accrued expenses. Due
to the short term maturity of these liabilities, the Company valued them at net
book value.
 Level
2. Valuations based on quoted prices for similar assets or liabilities,
quoted prices for identical assets or liabilities in markets that are not
active, or other inputs that are observable or can be corroborated by observable
data for substantially the full term of the assets or
liabilities.
  The
Company’s Level 2 assets consist of a derivative
  Level
3. Valuations based on inputs that are supported by little or no market activity
and that are significant to the fair value of the assets or
liabilities.
  The
Company had no level 3 assets as of June 30, 2008.
  The
table below presents
a reconciliation for all assets and liabilities measured at fair value on a
recurring basis.
  June
      30, 2008Fair
      Value Measurements*Level
      1
                                                                                                
                                                                                                
                                                                                                Level
      2
                                                                                                
                                                                                                
                                                                                                Level
      3
                                                                                                
                                                                                                
                                                                                                Fair
      ValueAssetsCash
                                                                                                
                                                                                                $
                                                                                                530,045
                                                                                                
                                                                                                
                                                                                                $
                                                                                                -
                                                                                                
                                                                                                
                                                                                                $
                                                                                                -
                                                                                                
                                                                                                
                                                                                                $
                                                                                                530,045LiabilitiesAccounts
      payable and accrued expenses
                                                                                                
                                                                                                $
                                                                                                470,017
                                                                                                
                                                                                                
                                                                                                $
                                                                                                -
                                                                                                
                                                                                                
                                                                                                $
                                                                                                -
                                                                                                
                                                                                                
                                                                                                $
                                                                                                470,017Derivative
      and warrant liability
                                                                                                
                                                                                                $
                                                                                                -
                                                                                                
                                                                                                
                                                                                                $
                                                                                                75,760,425
                                                                                                
                                                                                                
                                                                                                $
                                                                                                -
                                                                                                
                                                                                                
                                                                                                $
                                                                                                75,760,425
  Derivative
      andWarrant
      LiabilityBalance
      – January 1, 2008
                                                            
                                                            $
                                                            10,113,923Total
      realized and unrealized lossesIncluded
      in operations
                                                            
                                                            
                                                            62,544,101Liability
      accrued on issuance ofconvertible
      long-term debt
                                                            
                                                            
                                                            4,254,301Liability
      credited to equity onexercise
      of 34,500 warrants
                                                            
                                                            
                                                            (1,151,900
                                                            )Balance
      – June 30, 2008
                                                            
                                                            $
                                                            75,760,425
   32
 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 15 –
SUBSEQUENT EVENTS
 
 In
July 2008, the Company issued 7,538 shares of its common stock through a
conversion of 4,450 shares of its Class E preferred stock.
 
 In
July 2008, a consultant returned to the Company 208 shares of its common
stock for cancellation.
 
 In
July 2008, the Company issued 10,000 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 accrue on the
outstanding loan balance at an annual rate of 10% per annum. Prinicipal is due
on the maturity date with accrued interest due quarter; however,  the
Company has the right to defer interest payments until the maturity date so long
as it does not have positive earnings  before interest, taxes,
depreciation and amortization (“EBITDA”).  The maturity date of the
note is December 31, 2011.  The balance owed on the note, including
accrued interest, is convertible at the election of the holder into do many free
trading shares of the Company’s common stock based upon a conversion price of
the lesser of (i) 50% of the averaged ten closing prices for the Company’s
common stock for the ten (10) trading days immediately preceding the conversion
date or (ii) $0.10.  The Company is required to reserve the number
of  free trading shares of Common Stock required pursuant to and upon
the terms set forth in the Subscription Agreement (approximately 100,000,000
shares), to permit the conversion of this Debenture. The Company has pledged
significantly all of its assets as collateral on this loan.
 
 In
August 2008, the Company issued 20,000 shares of its common stock in
cancellation of $40,000 of convertible debt.
  October
3, 2008, the Company declared a 1-for-1,000 reverse split of the Company’s Class
A common stock.






33
 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 since our
inception (October 21, 1983).  In addition, we have used substantial
amounts of


34
 Table of Contents


working
capital in our operations.  Further, at June 30, 2008, the deficit
accumulated during the development stage amounted to approximately
$403,834,055.





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 nine states which will 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





As
discussed further in Notes 1 and 9 to the accompanying financial statements,
effective June 18, 2008, the Company entered into an agreement with the
Palisades convertible  note holders to modify the terms of the
convertible debt. The Company has restated its 2008 financial statements to
include the effect of this modification agreement. Further in October 2008, the
Company authorized a 1000:1 reverse stock split. Reference to all stock
issuances in 2008 has been restated to consider this reverse stock
split.





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
      and development
      costs
                                                
                                                $
                                                309,840
                                                
                                                
                                                $
                                                3,512,076
                                                
                                                
                                                
                                                (91.17
                                                )%General
      and administrative
      expenses
                                                
                                                $
                                                25,845,768
                                                
                                                
                                                $
                                                62,475,638
                                                
                                                
                                                
                                                (58.63
                                                )%Loss
      from operations
                                                
                                                $
                                                (26,154,518
                                                )
                                                
                                                $
                                                (65,920,969
                                                )
                                                
                                                
                                                (60.32
                                                )%




35
 Table of Contents




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 we valued the issuance of 150 shares of
our common stock that were issued to one consultant at $34,500. Of the
$159,355 is R&D salaries, $4,400 was compensation expense recognized on the
granting of options to our staff to purchase a total of 400 shares of our common
stock.





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 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 based compensation
                                                    
                                                    
                                                    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  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 5,715 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 shares of common stock.


36
 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
                                              
                                              $
                                              (977,019
                                              )
                                              
                                              $
                                              (1,590,651
                                              )
                                              
                                              
                                              (38.58
                                              )%Loss
      on modification of convertible
      debt
                                              
                                              
                                              (964,730
                                              )
                                              
                                              
                                              --
                                              
                                              
                                              
                                              100.00
                                              %Net
      unrealized and realized loss
      of marketable securities
                                              
                                              $
                                              (8
                                              )
                                              
                                              $
                                              (8,556,219
                                              )
                                              
                                              
                                              (100.00
                                              )%Change
      in fair value of derivative
      and warrantliabilities
                                              
                                              $
                                              (62,544,101
                                              )
                                              
                                              $
                                              22,920,017
                                              
                                              
                                              
                                              (372.88
                                              )%Interest
      income
                                              
                                              $
                                              15,523
                                              
                                              
                                              $
                                              15,966
                                              
                                              
                                              
                                              (2.77
                                              )%Provision
      for income taxes
                                              
                                              
                                              (800
                                              )
                                              
                                              
                                              (800
                                              )
                                              
                                              
                                              0
                                              %Net
      loss
                                              
                                              $
                                              (90,625,653
                                              )
                                              
                                              $
                                              (53,132,656
                                              )
                                              
                                              
                                              (70,56
                                              )%




Our
interest expense includes amortization of debt discounts totaling $824,073
during the six months ended June 30, 2008 and $1,431,081 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:


37
 Table of Contents




June
      30, 2008
                                                    
                                                    
                                                    June
      30, 2007Cash
                                                    
                                                    $
                                                    530,045
                                                    
                                                    
                                                    $
                                                    384,628Marketing
      securities-
      trading
                                                    
                                                    $
                                                    --
                                                    
                                                    
                                                    $
                                                    342,169Investment
      in certificate of
      deposits
                                                    
                                                    $
                                                    --
                                                    
                                                    
                                                    $
                                                    704,800Accounts
      receivable
                                                    
                                                    $
                                                    --
                                                    
                                                    
                                                    $
                                                    24,920Inventories
                                                    
                                                    $
                                                    148,964
                                                    
                                                    
                                                    $
                                                    --Prepaid
      expenses and other
                                                    
                                                    $
                                                    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 $90,625,653, offset by the loss on the
modification of the Palisades convertible debt of $964,730, issuance of stock
for services of $3,625,200, amortization of discount on convertible
debentures of $824,073 increase in officer stock based compensation of
$19,885,333 and increase in derivative liabilities of $62,544,100.  There
was also a decrease in 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


38
 Table of Contents


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.





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


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





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





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





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




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





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





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





Item 3.       Quantitative and
Qualitative Disclosures about Market Risk





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





Item 4.       Controls and
Procedures





Evaluation
of Disclosure Controls and Procedures





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







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





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





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





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





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





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





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


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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
$292,944,478.





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





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





Changes
in Internal Control Over Financial Reporting





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





Item 4T.       Controls and
Procedures





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






















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PART II – OTHER INFORMATION





Item 1.       Legal
Proceedings





Stephen
Beck





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





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





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





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





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





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


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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 1,040  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 shares of common stock to two entities
pursuant to their 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 each 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


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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.





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 *
                Business
      Agreement with The India-America Technology Agency, dated May 25,
      200810.3 *
                Indemnification
      Agreement with Marybeth Miceli Newton, dated June 5,
  200810.4 *
                Teaming
      Agreement with e-RADLIK, Inc., dated June 6, 200810.5 *
                Convertible
      Debenture issued to Kreuzfeld, Ltd., dated July 31,
200810.6 *
                Security
      Agreement with Kreuzfeld, Ltd., dated July 31, 200810.7 *
                Financing
      Escrow Agreement with Continental Advisors, SA and Corporate Legal
      Services, LLP, dated July 31, 2008
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  10.8 *
                  Registration
      Rights Agreement with Kreuzfeld, Ltd., dated August 6,
  200831.1
                  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




* Previously
filed.


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 3, 2009
                          /s/ Robert
      M. BernsteinBy:
                          Robert M.
      BernsteinIts:
                          President,
      Chief Executive Officer,and
      Chief Financial Officer (PrincipalExecutive
      Officer, Principal FinancialOfficer
      and Principal Accounting Officer)

























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