UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-K




(Mark
One)




x ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE


SECURITIES
EXCHANGE ACT OF 1934





For
the Fiscal Year Ended December 31, 2006




OR




 ̈ TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
EXCHANGE ACT OF 1934




For the
transition period from to




Commission
file number: 000-29204




GLOBAL MATRECHS,
INC.




(Exact
name of registrant as specified in its charter)






Delaware
                    
                    58-2153309(State
      or other jurisdiction of
                    
                    (I.R.S.
      employerincorporation
      or organization)
                    
                    identification
      No.)90
      Grove Street, Suite 201
                    
                    .Ridgefield, CT
                    
                    06877(Address
      of principal executive offices)
                    
                    (Zip
      code)





Registrant's
telephone number, including area code: (203) 431-6665




Securities
registered pursuant to Section 12(b) of the Act: None




Securities
registered pursuant to Section 12(g) of the Act:




Common Stock, Par value
$.0001 Per Share


(Title of
class)




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Exchange Act  Yes ̈ Nox




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.  Yes ̈ Nox




Indicate
by check mark whether 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 registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes ̈
Nox







Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K  ̈




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 (Check one):




Large Accelerated Filer  ̈
              
              Accelerated Filer                    ̈Non-Accelerated Filer   x (Do not check if a smaller reporting company)
              
              Smaller reporting company    ̈




Indicate by
check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Act).


Yes   ̈       No  x




The
aggregate market value of the common stock held by non-affiliates of the
registrant was approximately $1,580,627 on June 30, 2006, based on the last
reported sales price of the registrant’s common stock on the Over-the-Counter
Bulletin Board on such date. All executive officers, directors and 10% or more
beneficial owners of the registrant’s common stock have been deemed, solely for
the purpose of the foregoing calculation, “affiliates” of the
registrant.




As of
December 15, 2008, there were 377,607,819 shares of the registrant’s common
stock, $.001 par value, issued and outstanding.








GLOBAL
MATRECHS, INC. AND SUBSIDIARIES


FORM
10-K


For
the Year Ended


December
31, 2006




TABLE
OF CONTENTS




PART
      I
                Page
      No.ITEM
      1.
                Business
                4ITEM
      1A.
                Risk
      Factors
                12ITEM
      1B.
                Unresolved
      Staff Comments
                19ITEM
      2.
                Properties
                19ITEM
      3.
                Legal
      Proceedings
                19ITEM
      4.
                Submission
      of Matters to a Vote of Security Holders
                20PART
      IIITEM
      5.
                Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                21ITEM
      6.
                Selected
      Financial Data
                24ITEM
      7.
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operation
                25ITEM
      7A.
                Quantitative
      and Qualitative Disclosures About Market Risk
                34ITEM
      8.
                Financial
      Statements and Supplementary Data
                35ITEM
      9.
                Changes
      In and Disagreements With Accountants on Accounting and Financial
      Disclosure
                35ITEM
      9A.
                Controls
      and Procedures
                36ITEM
      9B.
                Other
      Information
                36PART
      IIIITEM
      10.
                Directors,
      Executive Officers and Corporate Governance
                37ITEM
      11.
                Executive
      Compensation
                39ITEM
      12.
                Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                44ITEM
      13.
                Certain
      Relationships and Related Transactions, and Director
      Independence
                45ITEM
      14.
                Principal
      Accounting Fees and Services
                47PART
      IVITEM
      15.
                Exhibits,
      Financial Statement Schedules
                48Signatures
                
                52




3


PART
I





ITEM
1.  BUSINESS





Cautionary
Note About Forward-Looking Statements




Certain
matters discussed herein may constitute forward-looking statements and as such
may involve risks and uncertainties.  In this Annual Report on Form
10-K, the words “anticipates,” “believes,” “expects,” “intends,” “future” and
similar expressions identify certain forward-looking
statements.  These forward-looking statements relate to, among other
things, expectations of the business environment in which we operate,
projections of future performance, perceived opportunities in the market and
statements regarding our mission and vision.  Our actual results,
performance, or achievements may differ significantly from the results,
performance or achievements expressed or implied in such forward-looking
statements.  For discussion of the factors that might cause such a
difference, see Item 7. “Management’s Discussion and Analysis of Financial
Condition and Results of Operation”.  We undertake no obligation to
update or revise such forward-looking statements.  We urge readers to
review carefully the risk factors described in this Annual Report found in Item
1A. “Risk Factors” and the other documents that we file with the Securities and
Exchange Commission (“SEC”). These documents can be read at
www.sec.gov.





History




Global
Matrechs, Inc. (“Global Matrechs,” “we,” “us,” “our” or the “Company”), was
organized in 1994 to provide complex web-based software applications and
integration services to businesses seeking to take advantage of the Internet.
Over time we have been the successor to many businesses and have undergone
material changes to our business and our financial structure.  Our
current business focus is marketing and selling the technologies we licensed
from Eurotech, which is described in detail below, to manufacturers and other
parties.




On March
27, 2003, we entered into a License and Exchange Agreement with Eurotech and
Polymate, Ltd. and Greenfield Capital Partners, LLC (the “Exchange Agreement”).
On May 22, 2003 we entered into a License Agreement with Eurotech (the “License
Agreement”). Pursuant to the Exchange Agreement and the License Agreement,
Eurotech has licensed to us its rights to EKOR (now called NuCapTM), HNIPU,
Electro Magnetic Radiography/Acoustic Core (EMR/AC), Rad-X, Firesil, LEM and
Rapidly Biodegradable Hydrophobic Material (RBHM) technologies, which are more
fully described herein. The License Agreement provides that the licenses granted
to us thereunder may be terminated by Eurotech (i) if we have not affected a
commercial sale of any licensed technology or improved licensed technology by
April 1, 2006, and (ii) in other circumstances.  During 2006, the
Company received multiple commercial orders from the Hanford nuclear waste
facility in Richland, Washington via the contractor Battelle, and the Department
of Energy site in Oakridge, Tennessee for NuCapTM and for HNIPU through our sales
partner EFM from Denbar paints in Israel along with small orders in the United
States.




In
consideration for these agreements, we (i) issued to Eurotech 11,250 shares of
Series F Convertible Preferred Stock and 1,069 shares of Series G Convertible
Preferred Stock, and (ii) agreed to pay Eurotech a royalty of seven percent (7%)
on net sales generated by the licensed technologies and a royalty of four
percent (4%) on net sales generated by products and services that are
improvements on the licensed technologies.




Also in
connection with this transaction, we issued 1,500 shares of Series F Convertible
Preferred Stock to Polymate, as partial consideration for its agreement to
modify its rights to receive royalties from Eurotech, and 750 shares of Series F
Convertible Preferred Stock to Greenfield as compensation for advisory services
relating to the transaction. The holders of shares of Series F Preferred Stock
later cancelled their outstanding shares of Series F Preferred Stock in exchange
for the right to receive shares of Series H Convertible Preferred Stock, which
were issued to them on September 30, 2003. Greenfield has since sold its
interest in our Preferred Series H shares to Southshore Capital Fund, Ltd. and
Polymate has converted all of its preferred shares to common
shares.




Prior to
May 31, 2004, we derived revenue from professional web development
services, software licensing, application development, insurance and securities
sales commissions, hosting fees and transactions fees.  On May 31,
2004, we completed the sale of our remaining Internet business to Tulix Systems,
Inc., Gia Bokuchava, Nino Doijashvili and Timothy R. Robinson, who were officers
and directors of our company, and now are the officers, directors and founding
shareholders of Tulix.  We have kept a 15% interest in the surviving
entity.  We recorded a loss on the sale of this business of $125,030
in the fourth quarter of 2003 and recorded an additional loss of $124,385 in the
second quarter of 2004 for adjustments to the closing as provided for in the
closing documents. With the consummation of this sale, we have completely exited
from all Internet-related enterprises and our business consists exclusively of
the marketing of technologies licensed from Eurotech, Ltd. under the License
Agreement. On May 18, 2007 we completed a Redemption Agreement with Tulix
selling back our 15% interest in Tulix to the management of Tulix for
$50,000.




4


On
December 31, 2004, we completed the acquisition of True to Form, Limited (“True
to Form”), a maker of specialized lighting products for a range of markets. On
December 29, 2005, we completed the sale of True to Form back to its original
owner. Our primary source of operating revenue had been, prior to this sale, the
specialty lighting group. However, during the first three quarters of 2005, True
to Form was unprofitable. As a result of the sale of True to Form, we narrowed
the focus of our business to marketing the technologies we currently license
from Eurotech.




Private
Placements with Southridge Partners, LP





On
January 31, 2005, we entered into a Second Securities Purchase Agreement (the
“Second Securities Purchase Agreement”) with Southridge Partners, LP
(“Southridge”), one of our existing investors, whereby we agreed to sell a
convertible promissory note in the principal amount of $250,000 and warrant to
purchase up to 10,000,000 shares of our common stock to Southridge in exchange
for its $250,000 investment. The note was convertible, at the option of
Southridge, into shares of our common stock at a conversion price of $0.02 per
share. The interest rate of this note was two percent (2%) per annum. Under the
terms of the Second Securities Purchase Agreement, Southridge was entitled to
require us to repurchase some or all of its notes if the market price of our
common stock fell below $0.03 per share for ten (10) consecutive trading days,
at a repurchase price equal to 140% of the principal amount of the note. In the
event we defaulted under the terms of the note, the entire outstanding principal
(and any outstanding interest accrued thereon) was to become immediately due and
payable, and the interest rate will automatically increase to 18% per annum.
This note was paid off on January 2, 2007.





Under the
terms of the Second Securities Purchase Agreement, Southridge had the option any
time prior to July 1, 2005, to purchase an additional note in the principal
amount of up to $1,500,000 on substantially the same terms as the note issued on
January 31, 2005. Southridge exercised this option on March 2, April 11, and May
2, 2005, purchasing notes in the aggregate principal amount of $425,000 and
warrants to purchase up to 17,000,000 shares of our common stock at an exercise
price of $0.025 per share. Each of these transactions was exempt from
registration pursuant to the provisions of Section 4(2) of the Securities Act of
1933, as amended (the “Securities Act”). On July 8, 2005, we, together with
Southridge, terminated the option to purchase additional notes.





We have
secured the payment of the notes with a subordinated security interest in our
accounts, general intangibles, inventories and other collateral. In addition, in
the event we propose to register securities under the Securities Act, we are
required to notify Southridge in advance of such registration and, at its
request (subject to limited exceptions), include the shares of our common stock
underlying its notes and warrants in the registration statement filed in
connection with such registration (and assume any expenses associated
therewith). The warrants have an expiration date of January 31, 2010, and
contain a cashless exercise provision whereby Southridge may pay the exercise
price associated with any exercise by having us withhold a number of shares
otherwise issuable upon such exercise having a fair market value equal to the
applicable aggregate exercise price. In the event such provision is used with
respect to an exercise, we would receive no proceeds upon such
exercise.





Exchange
Agreement with Woodward, LLC





On
January 31, 2005, we entered into an Exchange Agreement with Woodward, LLC,
pursuant to which we acquired promissory notes, and have accordingly assumed all
rights pertaining thereto, issued by Eurotech, Ltd. The notes are currently in
default and have an aggregate outstanding principal amount of $290,000. The
notes carry a default annual interest rate of 18% and are past due. In exchange
for these notes, we issued to Woodward a promissory note with an annual interest
rate of two percent (2%) in the principal amount of $250,000, which is
convertible at the election of Woodward into shares of our common stock at a
conversion price equal to 80% of the average of the seven (7) lowest closing bid
prices for the ten (10) trading days immediately preceding the date the Company
receives written notice from Woodward of its election to effect such a
conversion. Under the terms of the Exchange Agreement, in the event we propose
to register securities under the Securities Act, we are required to notify
Woodward in advance of such registration and, at its request (subject to limited
exceptions), include the shares of our common stock underlying the note on the
registration statement filed in connection with such registration, and assume
any expenses associated therewith. This note was transferred to Aberdeen Avenue,
LLC (“Aberdeen”) on May 24, 2006.





Private
Placements with MacNab, LLC





On June
14, July 13, August 1, September 14, and October 3, 2005, we entered into
Securities Purchase Agreements with MacNab, LLC, each in substantially the same
form, pursuant to which we sold non-negotiable 2% secured convertible promissory
notes in the aggregate principal amount of $595,000, and warrants to purchase up
to 23,800,000 shares of our common stock, for an aggregate purchase price of
$595,000. The notes and warrants are on substantially the same terms as the
notes and warrants issued to Southridge, as described above.  On May
24, 2006, these notes were assigned to Aberdeen Avenue, LLC with the maturity
dates extended to December 31, 2008.




5


Debt
Issuance to Southridge





On
January 31, 2005, March 2, 2005, April 11, 2005, May 12, 2005, December 7, 2005,
June 20, 2006, September 13, 2006, October 19, 2006, December 1, 2006 and
December 21, 2006, we issued promissory notes in the aggregate principal amount
of $1,295,000 to Southridge with a maturity date of June 30, 2008 and a current
interest rate of 2%. In addition on January 10, 2007, and January 25, 2007, we
issued promissory notes in the aggregate principal amount of $90,000 to
Southridge, which matures on December 31, 2008.   In the event of
a default, the annual interest rate on all of these notes will increase to 18%
and Southridge may, at its option, demand immediate payment of all amounts due
under these notes.  The January 31, 2005, March 2, 2005 and May 12,
2005 notes in the aggregate amount of $550,000 were amended on May 24, 2006
whereby December 31, 2008 was established as the new maturity date for each of
these notes.  While no notice of default has been received from
Southridge regarding the remaining notes, the Company and Southridge are
negotiating the terms of the amendments to these remaining notes.





Promissory
Notes Sold to Aberdeen




On July
13, 2006, we executed a promissory note agreement with Aberdeen, one of our
existing investors, pursuant to which we received gross proceeds of $150,000.
The principal value of the note is $180,000 which is payable in full on or
before November 30, 2006. If we fail to pay the principal amount in full on or
before the maturity date, then the principal amount increases to $200,000. The
note does not otherwise incur interest. The note contains usual and customary
events of default.  We are currently seeking to renegotiate the terms
of this note.





On
September 13, 2006, we executed an additional promissory note agreement with
Aberdeen pursuant to which we received gross proceeds of $50,000. The principal
value of the note is $60,000 which is payable in full on or before November 30,
2006. If we fail to pay the principal amount in full on or before the maturity
date, then the principal amount increases to $75,000. The note does not
otherwise incur interest. The note contains usual and customary events of
default. We are currently seeking to renegotiate the terms of this
note.





Amendment
of Convertible Promissory Notes




On May
24, 2006, we entered into an agreement to amend the terms of the promissory
notes issued to MacNab, LLC and Southridge. Under the terms of the amendment, we
have, among other things, modified the conversion price from a fixed rate of
$.60 per share to a variable rate based on 80% of the market price of our common
stock and eliminated a provision which permitted the holder to force us to
repurchase its note at a 40% premium over the outstanding principal in the event
shares of our common stock trade below $.60 for 10 consecutive trading days.
MacNab, LLC waived all penalties due from us, which amounted to more than
$500,000. While we believe that this amendment was in the best interests of the
Company, stockholders will be subject to significant dilution of their shares of
common stock in the event our stock price declines.





On July
12, 2006, we (i) issued 450,000 shares of common stock to Consulting for
Strategic Growth 1, Inc. for services to be rendered during July, August and
September 2006, (ii) granted non-qualified stock options to the members of the
Board of Directors, with an exercise price of $0.05 as follows; 250,000 to Mr.
K.I.F Gothner, 100,000 to Mr. Tom Folsom and 1,000,000 to Mr. Michael Sheppard,
(iii) issued to Peter Gulko non-qualified stock options for the purchase of
186,063 shares of common stock at an exercise price of $0.05, and (iv) granted
to each member of the Board non-qualified stock options for the purchase of
250,000 shares of common stock on each of September 30, 2006 and December 29,
2006 at an exercise price per share equal to the then-current market price of
our common stock.





On October 20, 2006 we issued a
non-qualified option for 350,000 shares of common stock to Future Now Capital
Markets Group, Inc. as consideration for services rendered.  This
option is exercisable on a cashless basis at a price of $0.0129 a share and will
expire October 19, 2011.





On
November 14, 2006, we issued a non-qualified option for an additional 150,000
shares of common stock to Future Now Capital Markets Group, Inc. as
consideration for services rendered.  This option is exercisable on a
cashless basis at a price of $0.0070 a share and will expire November 13,
2011.





On
December 27, 2006 we issued a non-qualified option for 1,582,750 shares of
common stock to a consultant and Future Now Capital Markets Group, Inc. for
consideration of services rendered at a price of $0.0065 a share and will expire
December 28, 2011.





On April
2, 2007, our Board of Directors resolved that we (i) complete negotiating the
application for D & O insurance, (ii) complete the settlement agreement with
Carey Naddell in lieu of cash, legal fees and penalty, for 20,000,000 shares of
the Company’s common stock with registration rights, (iii) engage an advisor for
$12,500 and warrants worth $12,500, (iv) sell its minority interest in Tulix for
$50,000, (v) issue Future Now Capital Markets Group, Inc. 1,250,000 shares for
services rendered along with $15,000, (vi) has the authority to borrow up to
$350,000, and (vii) options be granted to Peter Gulko, a consultant for services
rendered for 1,578,912 shares of common stock and to the Board of Directors for
1,100,000 shares of common stock.




6


Increase
in Authorized Shares Available for Issuance and Stock Split





On
April 28, 2006 we received shareholder approval to increase the number of shares
of common stock authorized for issuance under our certificate of incorporation
from 300,000,000 to 900,000,000. Also on April 28, 2006, we amended our
certificate of incorporation to effect that increase. We also received
authorization from our shareholders to effect a reverse split of our common
stock (which would have the effect of decreasing the number of shares
outstanding and, thereby, increase the number of shares available for issuance)
at a series of ratios, at the discretion of our board of directors. On May 26,
2006, pursuant to the approval of our shareholders, we effected a reverse split
of our common stock at a ratio of 1:20 and filed an Amendment to the Certificate
of Incorporation with the Delaware Secretary of State, thereby decreasing the
number of issued and outstanding shares. Both the increase in the number of
shares authorized for issuance under our charter and the reverse stock split are
likely to result in dilution to our existing shareholders.  The
accompanying financial statements and footnotes have been retroactively adjusted
to reflect the reverse stock split.





On
September 14, 2006, the Company and Brittany Capital Management Limited
(“Brittany”) agreed to terminate the parties’ Private Equity Credit Agreement
and Registration Rights Agreement, dated January 10, 2006, and enter into a new
Private Equity Credit Agreement and Registration Rights Agreement with terms
substantially similar to the January agreements whereas we may draw up to an
aggregate $15 million, from time to time at our discretion, in exchange for
shares of our common stock. Each draw under the Private Equity Credit Agreement
is structured as a put option, wherein we require Brittany to purchase a number
of shares of our common stock after a discount to the market price is applied
over the course of a commitment period extending to October 2009. The reasons
for terminating the January agreements included the parties’ decision to
decrease the number of shares, which were required to be registered pursuant to
the January Registration Rights Agreement and to change certain mechanics
relating to the exercise of put options. Copies of the September 14, 2006
Private Equity Agreement and Registration Rights Agreement were attached as
exhibits to our Current Report on Form 8-K filed with the SEC on September 15,
2006.




We are
required to draw down a minimum of one hundred thousand dollars. Under the
Brittany Private Equity Credit Agreement if we draw a lesser amount, we must pay
Brittany an amount equal to eight percent of the difference between that amount
and the minimum. As of the filing date of this Annual Report on Form 10-K, we
have drawn down $599,019.




Number of shares issuable under the
Private Equity Credit Agreement.





We cannot
predict the actual number of shares of common stock that may be issued under the
Private Equity Credit Agreement, in part because the purchase price of the
shares will fluctuate based on prevailing market conditions and we have not
determined the total amount of cash advances we intend to draw. Based on the
closing price of our common stock of $0.0009 on September 26, 2008, we
would have to issue to Brittany approximately 16.7 billion shares of our common
stock in order to draw down the $15 million available to us under the Private
Equity Credit Agreement.





Dilution.





The
issuance and sale of shares under the Private Equity Credit Agreement has had
and will continue to have a significant dilutive impact on our stockholders for
several reasons, including the following:





The
lower our stock price is, the more shares we would have to issue for a given
draw down amount.





The
shares we may issue under the Private Equity Credit Agreement are at a discount
to the market price.





The
issuance of shares under the agreement will increase the number of shares we
have outstanding, and their subsequent


resale
will increase the number of freely tradable shares in the market.





Brittany
is an “underwriter” under the Securities Act, as amended, in connection with the
sale of common stock issuable pursuant to our Private Equity Credit Agreement.
Under this agreement, after our delivery of a notice of our intent to put
shares, Brittany will pay us, in two equal installments, the amount of the
draw-down we request in exchange for a number of shares equal to 92% of the
average of three closing bid prices during the applicable valuation period
preceding the date on which the installment is completed. The 8% discount on the
purchase of common stock to be received by Brittany is an underwriting discount.
We are required to pay Southridge Investment Group, LLC, formerly Greenfield
Capital Partners, LLC, a registered broker dealer, a fee in cash, equal to 1% of
the amounts, if any, we may draw down for services related to the establishment
of our Private Equity Credit Agreement.




7


Products
and Services




NuCapTM




Description.NuCap, formerly
called EKOR, was developed jointly by scientists at the I.V. Kurchatov
Institute, or Kurchatov, and members of the Euro-Asian Physical Society, or
EAPS, both based in Moscow, Russia. EKOR was the brand name for a family of
materials designed for the purposes of long-term isolation of radioactive or
otherwise hazardous materials. As a silicon-based elastomer, NuCap’s adhesive
properties allow it to stick to a wide variety of wet or dry surfaces and
materials. When applied, NuCap materials surround and immobilize radioactive or
hazardous debris ranging from fine dust to large pieces of equipment and, in
combination with their fire-resistant and water- proof properties prevent such
debris from migrating by water or as air-borne particles. NuCap materials also
possess other highly desirable performance characteristics such as chemical
resistance, fire resistance, heat resistance, and resistance to environmental
aging and degradation from radiation. In addition to its unique combination of
performance characteristics, NuCap comes in multiple product forms and can be
applied using specified methods for waste-coating and encapsulation. We believe
that this allows NuCap to be used as a solution for a broad spectrum of nuclear
and hazardous waste management problems.




The NuCap
product family’s performance characteristics and flexibility of form make it a
tool for a broad spectrum of applications. There are currently five basic forms
of NuCap:




1.           Sealer
Plus, which can be sprayed to coat containers or cover contaminated
surfaces;




2.           Foam,
which is pumped in a range of densities to fill crevices, ducts or
pipes;




3.
            Grout,
      applied in a pour and mix method, which can be used to make shapes for
      shielding or to macroencapsulate items to form an unleachable monolith for
      transportation or disposal;





4.
            Matrix,
      applied in a pour and mix method, which can be used to microencapsulate
      radioactive or hazardous wastes to form an elastomeric monolith for
      transportation or disposal; and





5.
            StoneStore,
      applied in a pour and mix method, which can be used to microencapsulate
      highly radioactive waste and will form a ceramic monolith for permanent
      disposal. StoneStore is still in the research and development
      stage.




Marketing.We are
aggressively marketing NuCap for use in nuclear waste encapsulation and nuclear
debris fixation for nuclear cleanup projects, nuclear facility decontamination
and decommissionings, and nuclear waste transportation and disposal. As part of
this strategy, we have completed a sales representation agreement with NuCon-RF
to represent the Company on an exclusive basis in the former Soviet Union (“RF”)
and non-exclusive basis in the European Community and a manufacturing agreement
with Dow Corning. While we have sold small orders of NuCapTM into Europe and the
United States we continue to see strong opportunities for NuCap and our other
technologies, however, we can offer no assurance that our efforts will be
successful.




HNIPU




Description.HNIPU is a
hybrid polyurethane that does not involve the toxic isocyanates utilized in the
production of conventional polyurethane and that has lower permeability and
greater chemical resistance qualities as compared to conventional polyurethane.
We believe that these advanced characteristics, in addition to the potential
reduced risk from the elimination of isocyanates in its production, make HNIPU
superior to conventional polyurethanes in connection with their use in a number
of industrial application contexts such as manufacturing automotive components,
paints, foams, plastics and truck bed liners; aerospace sealants, industrial
adhesives, coatings, flooring, glues; industrial equipment and machinery; and
consumer goods such as appliances, footwear, furniture and plastic products.
Because of HNIPU’s lower permeability and improved chemical resistance, we think
that industrial paints and coatings are a potential target market for
HNIPU.




Marketing. On November 17,
2003, we entered into an agreement with Environmental Friendly Materials, GMBH
(“EFM”), a German company, for the manufacture and sale of HNIPU for the
European marketplace. EFM has been given non-exclusive license to manufacture
and distribute HNIPU and intends to manufacture it at various locations across
Europe. We have applied for approval to sell HNIPU in the United States from the
EPA and in May 2005 we were approved and have been put on their approved list of
products.  In February 2006, we received our first commercial order on
HNIPU from a paint manufacturer in Israel.  On August 30, 2006 we
completed an updated Agreement with EFM that will expand its territory to
include Southeast Asia.




Because
HNIPU represents a new class of polymer compounds closely related to
polyurethanes, we expect that a variety of products will emerge from the
development of variations and improvements to the existing HNIPU binders that
have worldwide industrial applications. For this reason, we continue to seek to
license HNIPU to large industrial polymer and chemical manufacturers who can
sell the various HNIPU binders to international industrial manufacturers. This
particular focus will be to transfer the existing binder product technologies
under licensing agreements from our laboratory in Israel to the
manufacturer.




8


EMR/AC




Description.Eurotech
licensed certain rights to Acoustic Core and Electromagnetic Radiography for
specific markets, consisting of (i) illicit material detection, (ii) above
surface or subsurface nuclear or other hazardous material remediation, (iii)
marine dredging sites (inland and ocean) and (iv) oil exploration, from Trylon
Metrics, Inc. pursuant to an agreement dated July 2001, as amended in October
2001. Eurotech licenses the illicit materials detection application to another
company and licenses the remaining three applications to us.




These
technologies use a non-contact inspection methodology that creates signals that
are then interpreted by a digital analyzer that allows identification of
elemental or compound materials from their empirically determined properties.
Acoustic Core is used in applications that are predominately wet (i.e.,
riverbeds, wetlands, etc.) and EMR is used in dry environments. Completed
research and development studies have verified that Acoustic Core and EMR can
identify materials by their acoustic or electromagnetic signatures, but the
feature of these technologies that we believe is unique is their ability to map
in three dimensions the existence of target materials at extremely low
concentrations at depths of up to 300 feet. The capabilities of these
technologies complement the NuCap product line by, for example, allowing tanks
of waste to be monitored for leaks and the leaks, when discovered, targeted for
repair. Acoustic Core and EMR may have applications in markets that involve
subsurface evaluation, from contamination discovery and monitoring to resource
discovery.




Marketing.In conjunction
with the marketing of NuCap, we intend to market EMR/AC to a variety of
facilities requiring detection of nuclear waste contaminants and other
environmentally hazardous substances in subsurface soil and ground water
resulting from leaking storage tanks or toxic chemical spills. We are currently
seeking a manufacturing partner for EMR/AC, and we are waiting until we find
such a partner to pursue our marketing strategy for EMR/AC.




RAD-X




Description.Rad-X is a
technology intended for use as an interior fire-resistant fixative for equipment
or facilities with contaminated surfaces. Rad-X differs from NuCap Sealer Plus
in that it is not weather-resistant and does not have the chemical, radiation
and aging resistance needed for long-term protection. Rad-X provides a low-cost
fixative for surfaces that are scheduled for disassembly or dismantlement and
need strong adhesion (glue-down of contaminated particles that could become
airborne) and fire-resistance properties. Rad-X was first marketed in
2001.




Marketing. We are currently
seeking a manufacturing partner for Rad-X, and we are waiting until we find such
a partner to pursue our marketing strategy for Rad-X.




Rapidly
Biodegradable Hydrophobic Material (“RBHM”)




Description.RBHM is a
hydrophobic (water resistant), strong, cheap, and completely biodegradable
cellulose-based composite material. RBHM is intended to improve the properties
of both paper and plastic packaging materials. The material can be used as a
commodity in trade, industry, and agriculture for a wide range of applications.
To date, most attempts to produce biodegradable products for consumers have
focused on developing plastics that could biodegrade. RBHM takes a different
approach - making cellulose-based material with the same physical properties as
plastic, except the material biodegrades completely in the same time as regular
paper bags. RBHM consists of cellulose (paper) and biodegradable organic
additives. Biodegradation of RBHM occurs in wet soil through normal enzymatic
action of various microorganisms - fungi and bacteria. We believe that the main
advantages of RBHM are:




·             Strength.
RBHM’s strength characteristics, especially combined with low elongation and
acquired water resistance of the material, make RBHM unique and desirable for
packaging applications.




·             Water
Resistance. RBHM keeps water resistance for one week. Most of the existing
biodegradable packaging products are not hydrophobic at all and will fail if
wetted during use.




·             Biodegradable
Nature. Enzymes begin breaking down RBHM in the presence of moisture in natural
environments such as soil. Then microorganisms decompose the material with
rapidly occurring metabolic reactions. RBHM is completely converted into carbon
dioxide, water, and biomass in two to three months in wet soil.




·             Reproducible
Natural Raw Materials. RBHM uses cellulose, a widely available and renewable raw
material.




·             Relatively
Low Cost. The main obstacle to widespread use of biodegradable polymers has been
cost. Traditionally, biodegradable polymers are significantly more expensive
than commodity polymers. The high costs involved in the production of
biodegradable polymers means that they cannot compete favorably with
conventional polymers. This high cost has deterred the widespread adoption of
biodegradable plastics in major consumer applications. At an additional cost of
less than 10%, and sometimes less depending on the type of material treated,
materials treated with RBHM provide plastic-like performance and are
biodegradable.




9


We
believe that there are many potential applications for a technology like RBHM.
Because RBHM can be applied on sheets, films and fibers, it is suitable for a
range of single-use products, including, among others, grocery and waste bags,
the top and back sheets of disposable diapers, and disposable eating
utensils.




Marketing. We are currently
seeking a manufacturing partner for RBHM, and we are waiting until we find such
a partner to pursue our marketing strategy for RBHM, which will be through our
website and dealer network.




Liquid
Ebonite Material (“LEM”)




Description. LEM is a
synthetic liquid rubber with enhanced mechanical, permeability and
anti-corrosive qualities as compared to conventional sheet rubber coverings. In
laboratory testing, coverings made with LEM, as compared to conventional sheet
rubber coverings, have displayed greater resistance to harsh chemicals such as
acids, alkalis and benzene, and have been successfully applied to intricate and
complex surfaces such as sieve meshing. Based on the physical and chemical
properties of LEM, and on the basis of such tests, we believe that LEM coverings
are capable of providing superior protection to small-diameter piping and to the
intricate parts of pumps, fans, and centrifuge rotors. LEM can be applied to
form surface coverings using standard coating techniques, including spraying and
dipping.




Marketing. We are currently
seeking a manufacturing partner for LEM, and we are waiting until we find such a
partner to pursue our marketing strategy for LEM, which will be through our
website.




Firesil




Description. Firesil is an
environmentally compatible organomineral coating for fire-stop material with
good adhesion properties to hydrophilic and hydrophobic surfaces. It exhibits
strong fire resistance, thermostability, and water resistance
characteristics.




Marketing. We intend to
market Firesil directly to corporations that are prospective candidates for
sub-licensing the technology. Eurotech had Firesil tested by an accredited lab
to ASTM protocol and it passed these tests. We are currently seeking a
manufacturing partner for Firesil and will wait until we find such a partner to
pursue a marketing strategy for Firesil.





We
have received some small commercial orders for our technology, but to date have
derived no significant revenue from the above technologies that we license from
Eurotech. The development and commercialization of NuCapTM, HNIPU and the other
technologies we license will depend largely on the success of our marketing
efforts and our ability to identify manufacturing partners, and we cannot be
certain that we will be able to conduct our activities in a way that builds
interest in these products, or that any interest we do build will result in
revenue to us. Furthermore, even if these licensed technologies do become a
source of revenue for us, there is no guarantee such revenue will be sufficient
to offset our administrative costs. Although the exclusive focus of our business
is on the marketing of these licensed technologies, there can be no assurance
that these efforts will succeed.




Effect
of Change in General Economy





We have
experienced a loss of business due to current economic conditions.  We
have seen evidence of existing and potential customers purchasing our
competitor’s products, which we believe to be lower-performing, and may be
available at a lower-cost.





Competition




Our
licensed technologies are targeted at highly competitive markets. Due to the
nature and size of some of the markets and some of the projects for which our
licensed technologies may be applicable, there are sometimes other competitors
who may have significantly greater name recognition and greater financial and
other resources than we do. Many of these competitors also have technologies
that are very competitive with our licensed technologies. For example, NuCap is
a composite material based on a silicone polymer that is different from other
silicones produced by manufacturers such as GE Silicones, but the products
produced by any of these manufacturers may compete with NuCap. As another
example, some of the major producers of polyurethanes used in coatings and
finishes, sealants and adhesives, which products may compete with the HNIPU
technology, include Akzo Nobel, Dow Chemical and Kansai.




10


Intellectual
Property Rights




General




Many
entities, including some developing technologies similar to ours, now have and
may in the future obtain patents and other intellectual property rights that
cover or affect products or services directly or indirectly related to the
technologies that we license from Eurotech. In general, if a court determines
that one or more of the licensed technologies infringes on intellectual property
held by others, we would be required to cease infringing on intellectual
property held by others, we would be required to cease developing or marketing
those products or to obtain licenses to develop and market those products from
the holders of the intellectual property, or to redesign those products in such
a way as to avoid infringing the patent claims. If a competitor holds
intellectual property rights, the entity might be predisposed to exercise its
right to prohibit our use of its intellectual property in our products and
services, thus impacting our competitive position.




There can
be no assurance that we are aware of all patents and other intellectual property
rights that the licensed technologies may potentially infringe. In addition,
patent applications in the United States are confidential until the Patent and
Trademark Office issues a patent and, accordingly, we cannot evaluate the extent
to which the licensed technologies may infringe claims contained in pending
patent applications. Further, it is often not possible to determine definitively
whether a claim of infringement is valid, absent protracted litigation, which we
may not have the resources to pursue.




We cannot
estimate the extent to which we may be required in the future to obtain licenses
with respect to patents held by others and the availability and cost of any such
licenses. Those costs, and their impact on our financial position, could be
material. Damages in patent infringement cases can also include a tripling of
actual damages in certain cases. To the extent that we are required to pay
royalties to third parties to whom we are not currently making payments, these
increased costs of doing business could negatively affect our liquidity and
operating results.




In
addition, there may be entities developing and marketing technologies that
infringe on patents and intellectual property rights held by us. Patent
infringement claims are protracted and costly. We may not have the resources to
adequately protect our intellectual property. Any expenditure to pursue
intellectual property rights by us could negatively affect us.




NuCapTM
Intellectual Property Rights




EAPS has
patented EKOR in the U.S., Russia, and other industrialized countries. On March
23, 1999, the U.S. Patent and Trademark Office issued to EAPS Patent No.
5,886,060 on the process for manufacturing one of the EKOR compound variants.
Pursuant to a sub-license agreement, Eurotech became the exclusive global
licensee of all right, title and interest (inclusive of all patent and other
intellectual property rights now or in the future) in EKOR. We are a licensee of
Eurotech and have renamed the product NuCap. We do not know if additional
proprietary technology that we have developed relating to NuCap will prove
patentable. We have applied for trademark protection for the mark “NuCap” with
the U.S. Patent and Trademark Office and received the mark NuCap during the last
quarter 2005.




HNIPU
Intellectual Property Rights




U.S.
Patent Number 6120905 for HNIPU network polymers and composites formed there
from was issued on September 19, 2000. Patents for this technology have also
been issued in Europe (EP 1088021, PCT WO 9965969) and Australia (4441099).
These patents have been assigned to Eurotech. The method of synthesis of
cyclocarbonates and nonisocyanate or hybrid nonisocyanate network polyurethanes
is patent applied for in the United States, which application has been assigned
to Eurotech. We are a licensee of Eurotech. As a regular part of our business
activities, we intend to submit patent applications to protect our developed
intellectual property, improvements and extensions, although we do not know
whether any technologies that we develop will be patentable.




EMR/AC
Intellectual Property Rights




U.S.
Patent Number 4,922,467 for Acoustic Detection Apparatus (Acoustic Core) was
issued to David Caulfield on May 1, 1990 and subsequently assigned to Ocean Data
Equipment Corporation. This patent was significantly improved, for which U.S.
Patent Number 6,545,945 was issued on April 8, 2003. Electromagnetic Radiography
technology has been protected under trade secret laws. The worldwide exclusive
licensing rights to these technologies for the detection of nuclear and
hazardous materials at nuclear remediation and marine dredging sites, and for
oil exploration, were obtained by Eurotech and, except to the extent related to
the illicit materials detection application of these technologies, were
subsequently licensed to us.




LEM
Intellectual Property Rights




Eurotech
has acquired the intellectual property rights associated with U.S. Patent Number
6303683 (issued October 16, 2001) for Liquid Ebonite mixtures and coatings, and
concretes formed there from and an application filed under the Patent
Cooperation Treaty (PCT/US99/16883) on July 26, 1999 by Dr. Igor Figovsky, the
inventor of these technologies. We are a licensee of Eurotech.




11


Firesil
Intellectual Property Rights




Eurotech
acquired the formula for Firesil from Dr. Figovsky, its inventor, in 2000.
Eurotech terminated previously initiated patent applications and has elected to
protect this formula as a trade secret. Eurotech owns the federally registered
trademark “Firesil”. We are a licensee of Eurotech.




Government
Regulation




The use
of NuCapTM is subject to U.S. environmental safety laws and regulations
pertaining to the safe use and containment of hazardous and nuclear waste. Based
on the results of tests conducted by Eurotech, we believe that the NuCap
compounds meet current applicable regulations for safe use, containment and
storage of hazardous and nuclear materials. It is, however, possible that more
stringent or different standards may be adopted or applied in the future that
might influence the intended use for NuCap and it is also possible that the
standards, if adopted or applied, may materially increase the cost to us of
using NuCap compounds or prevent their use altogether. We are not aware of any
other U.S. or foreign laws or regulations that significantly hinder the
marketing, sale, or use of NuCap based materials.




The
manufacture of HNIPU and operation of EMR/AC equipment is not expected to be
impacted adversely by government regulations. HNIPU’s MSDS identifies the
limited risks associated with the manufacture, handling and application of the
non-isocyanate polyurethane. OSHA outlines operational regulations as related to
acoustic frequencies and power levels as might be applied to EMR/AC operations.
We have currently applied to the EPA for approval of HNIPU to be sold in the
United States.




The
manufacture and use of HNIPU is subject to U.S. environmental safety laws and
regulations pertaining to the safe use of chemicals and polymeric materials.
While HNIPU does not use highly toxic compounds like isocyanates, it is still
subject to governmental regulations, but based on preliminary assessments by
Eurotech we believe that HNIPU compounds will meet current and future
regulations. If we are successful in licensing various HNIPU binders to chemical
and polymer manufacturers, we expect that the licensees will bear the costs of
applying for governmental approvals required for manufacturing and industrial
usage. We are not aware of any other U.S. or foreign laws or regulations that
significantly hinder the marketing, sale, or use of HNIPU based
materials.




Environmental
Considerations and Regulations




The
Company has implemented environmental programs and policies designed to avoid
potential liability under applicable environmental laws. The Company has not
incurred any significant environmental compliance cost, and compliance with
environmental regulations has not had a material effect on the Company's
operations or financial condition. This is primarily due to the Company's
general policies of closely monitoring its compliance with all environmental
laws. In the future, the Company does not expect environmental compliance to
have a material effect on its operations and financial condition. The Company's
policy for determining the timing and amount of any environmental cost is to
reflect an expense as and when the cost becomes probable and reasonably capable
of estimation.





Employees




We
currently employ 1 individual full-time and 2 part time sales and marketing
consultants and 1 part time consultant who serves as our Chief Financial
Officer.




ITEM
1A. RISK FACTORS





Set forth below are certain risks and
uncertainties relating to our business.




You should carefully consider the
following information about risks described below, together with the other
information contained in this Annual Report on Form 10-K and in our other
filings with the SEC, before you decide to buy or maintain an investment in our
common stock. We believe the risks described below are the risks that are
material to us as of the filing date of this Annual Report on Form
10-K.  If any of the following risks actually occur, our business
financial condition, operating results and future growth prospects would likely
be materially and adversely affected. In these circumstances, the market price
of our common stock could decline, and you may lose all or part of the money you
paid to buy our common stock.




12


RISKS
RELATED TO OUR BUSINESS





We
do not believe we have, and we are unsure whether we will be able to generate,
sufficient funds to sustain our operations through the next twelve
months.





Our
management believes that currently available funds will not be sufficient to
sustain our operations at current levels through the next twelve
months.  The Company has incurred losses from continuing operations
during the years ended December 31, 2006, 2005 and 2004 of approximately, $1.7
million, $5.3 million and $3.0 million resulting in an accumulated deficit
balance of approximately $38.1 million as of December 31, 2006. At December 31,
2006, we had only $1,397 in cash and a working capital deficiency of $3.7
million.  Our ability to continue to operate at current levels depends
upon, among other things, our ability to generate sufficient revenue from the
sale of our products and services and the receipt of continued funding from our
existing short-term and long-term financing sources.




In the
long-term, our ability to continue as a going concern is dependent on generating
sufficient revenue from product sales and the sale of our services. Our ability
to generate significant revenue from any of these or other sources is
uncertain.  Historically, our operations have not generated sufficient
revenue to cover our costs.  In the event that our operations do not
generate sufficient cash, we could be required to reduce our level of operations
while attempting to raise additional working capital.  We can give no
assurance that additional financing will be available to us on acceptable terms
or at all.  The failure to obtain any necessary additional financing
would have a material adverse effect on us. If adequate funds are not available
or are not available on acceptable terms, our ability to fund our operations and
any intended expansion, to take advantage of business opportunities, to develop
or enhance products or services or to otherwise respond to competitive pressures
would be significantly limited, and we might need to significantly restrict or
discontinue our operations.




We
have a history of operating losses, and there is no assurance we will achieve
profitability in the future.  If we cannot obtain additional capital
required to fund our operations and finance our growth, our business will
suffer.





As
described above, we have a history of operating losses. During the fiscal years
ended December 31, 2006, and, 2005, we recorded net losses of $1.7 million and
$6.1 million, respectively. As of December 31, 2006, we had an accumulated
deficit of approximately $38.1 million.  If we continue to experience
operating losses, an investment in our common stock is at risk of being lost. We
cannot predict when, or if, we will ever achieve profitability.  The
continued development of our current technologies or acquisitions of new
technologies will require additional capital.  If we are unable to
generate additional capital through our operations, we will be required to
resort to financing activities.  We may be unable to obtain additional
funds in a timely manner or on acceptable terms, if at all, which would render
us unable to fund our operations or expand our business.




If we are
unable to obtain capital when needed, we may have to restructure our business or
delay or abandon our development and expansion plans. Although we have been
successful in the past in obtaining financing for working capital and capital
expenditures, we will have ongoing capital needs as we expand our business. Our
inability to obtain adequate financing will result in the need to curtail
business operations. Our financial statements do not include any adjustments
that might result from the outcome of this uncertainty. If we raise additional
funds through the sale of equity or convertible securities:




·             the
ownership percentage of our common stock will be reduced;




·             the
value of our stock may be diluted;




·             we
may issue securities that have rights, preferences and privileges senior to our
common stock; and




·             the
terms of any additional indebtedness may include restrictive financial and
operating covenants that would limit our ability to compete and expand, thereby
increasing the price of our stock.




We
have a going concern qualification in the report by our independent registered
public accounting firm for our financial statements for the year ended December
31, 2006, which may make it difficult to raise capital and may require us to
scale back or cease operations.




The
report of our independent registered public accounting firm on our financial
statements as of December 31, 2006 and for the year then ended contains an
explanatory paragraph stating that there is substantial doubt as to our ability
to continue as a going-concern, which indicates an absence of obvious or
reasonably assured sources of future funding that will be required by us to
maintain ongoing operations. Our ability to obtain additional funding will
determine our ability to continue as a going concern. Accordingly, there is
substantial doubt about our ability to continue as a going concern. Our
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.  This uncertainty may affect our ability
to raise additional capital and may also negatively impact our relationships
with current and potential suppliers and customers.




13


The
management of our finances and the quality and timeliness of our financial
reporting may be adversely affected if we are unable to increase the size and
capabilities of our internal administrative and finance function as our business
grows.




We have
engaged an outside consulting firm (other than our independent registered public
accounting firm) to provide financial management and accounting services on a
temporary basis. If we are unable to retain sufficient financial management and
accounting services on a cost-effective basis, our ability to effectively manage
our finances and the quality and timeliness of our financial reporting could be
adversely affected.




We
are currently dependent upon external financing, including our Private Equity
Credit Agreement with Brittany Capital Management, to fund our operations and
may not be able to access sufficient funds when needed. As a result, our
business may suffer.





Currently,
we are dependent upon external financing to fund our operations. Our financing
needs are expected to be provided, in large part, by our Private Equity Credit
Agreement dated September 14, 2006 with Brittany Capital Management. We have
registered the resale of 7,800,000 shares of common stock we may issue under
this agreement pursuant to our registration statement on Form SB-2, as amended
(file No. 333-137833).





The
number of shares we have to issue for a given draw down under the Private Equity
Credit Agreement has an inverse relationship to our market price. Therefore, the
lower our market price, the less we will be able to raise by issuing the
7,800,000 registered shares to Brittany. In the event we have additional
financing needs after we have exhausted these shares, we will need to find
alternative methods of financing our operations or registering additional shares
to be issued under the Private Equity Credit Agreement.





In
addition, our access to funds under the Private Equity Credit Agreement may be
limited by the following factors:





·             Maximum Put Amount. The
maximum amount of each put is equal to the lesser of (a) $500,000, or (b) 500%
percent of the weighted average volume for the 20 trading days immediately
preceding the put date.




·             9.99% Cap. Our Private Equity
Credit Agreement provides that in no event shall the number of shares issuable
to Brittany cause it to own in excess of 9.99% of the then outstanding shares of
our common stock. Because of this maximum advance restriction, we may not be
able to access sufficient funds when needed.




·             Authorized Shares of Common
Stock. At the market price of our common stock as of September 30, 2008
($0.0009 per share), it would require 16.7 billion shares to draw down the full
$15,000,000 available under the agreement, and we had only 533.8 million shares
of common stock available for issuance as of September 30, 2008. It may be
necessary for our shareholders to approve an increase to the common stock
available for issuance under our Certificate of Incorporation, whether by
increasing the number of shares we are authorized to issue, effecting a reverse
split of our common stock (thereby decreasing the number of shares outstanding),
or both.





If we are
unable to access sufficient funds when needed, our business may
suffer.




We
face intense competition, which could result in lower revenues and higher
research and development expenditures and could adversely affect our results of
operations.




If we do
not develop or acquire new and enhanced products, or if we are not able to
invest adequately in our research and development activities, our business,
financial condition and results of operations could be negatively impacted. Many
of our competitors have significantly more cash and resources than we have. Our
competitors may introduce products that are competitively priced, have increased
performance or functionality, or incorporate technological advances that we have
not yet developed or implemented. To remain competitive, we must continue to
develop, market and sell new and enhanced systems and products at competitive
prices, which will require significant research and development
expenditures.




If
we cannot effectively manage our growth, our business may suffer.




Recently,
we have expanded our operations to pursue existing and potential new market
opportunities. This growth has placed, and is expected to continue to place, a
strain on our personnel, management, financial and other resources. To manage
our growth effectively, we must, among other things:




·             successfully
attract, train, motivate and manage a larger number of employees for sales and
customer support activities;




14


·             control
working capital requirements; and




·             improve
the efficiency of our operating, administrative, financial and accounting
systems, procedures and controls.




If we
fail to manage our growth properly, we may incur unnecessary expenses and the
efficiency of our operations may decline.




If
we are unable to expand into new markets, we may be unable to achieve our growth
strategy and our ultimate business objectives.




A
significant element of our future growth strategy involves the expansion of our
business into new geographic and product markets. Expansion of our operations
depends, among other things, on the success of our marketing strategy in new
markets, successfully establishing and operating new locations, hiring and
retaining qualified management and other personnel and obtaining adequate
financing for working capital purposes.  If our efforts in expansion
are unsuccessful, we may be unable to achieve our growth strategy and our
ultimate business objectives, and as a result, may lose our competitive
position.





We
may be unable to hire and retain the skilled personnel we need to expand our
operations.




To meet
our growth objectives, we must attract and retain highly skilled technical,
operational, managerial and sales and marketing personnel. If we fail to attract
and retain the necessary personnel, we may be unable to achieve our business
objectives and may lose our competitive position, which could lead to a
significant decline in net sales. We face significant competition for these
skilled professionals from other companies, research and academic institutions,
government entities and other organizations.




Our
success depends on the services of our executive officers and key employees, and
the loss of such employees could have a serious negative impact on our business
and operations.





We depend
upon the continued services of our senior management for our continued success.
We can provide no assurances that we will be able to retain our senior
management or other key personnel.  We have no employment agreements
with or key-man insurance coverage on any members of our senior
management.   The loss of any member of senior management could
have a serious negative impact upon our business and operating
results.




Our
business may suffer if we cannot protect our proprietary
technology.




Our
ability to compete depends significantly upon our trade secrets and our other
proprietary technology. We have filed patents in connection with HNIPU and have
a trade secret on NuCapTM. We are also a licensee with respect to certain of
Eurotech’s patents.  These steps that we have taken to protect our
technology may be inadequate to prevent others from using what we regard as our
technology to compete with us. Existing trade secrets, copyright and trademark
laws offer only limited protection. In addition, the laws of some foreign
countries do not protect our proprietary technology to the same extent as the
laws of the United States, which could increase the likelihood of
misappropriation. Furthermore, other companies could independently develop
similar or superior technology without violating our intellectual property
rights. Any misappropriation of our technology or the development of competing
technology, or our licenses from Eurotech, could seriously harm our competitive
position, which could lead to a substantial reduction in net sales.





If we
resort to legal proceedings to enforce our intellectual property rights, the
proceedings could be burdensome, disruptive and expensive, distract the
attention of management, and there can be no assurance that we would
prevail.




Claims
by others that we infringe their intellectual property rights could harm our
business and financial condition.





Our
industries are characterized by the existence of a large number of patents and
frequent claims and related litigation regarding patent and other intellectual
property rights. We cannot be certain that our products do not and will not
infringe issued patents, patents that may be issued in the future, or other
intellectual property rights of others.




We do not
conduct exhaustive patent searches to determine whether the technology used in
our products infringes patents held by third parties. In addition, product
development is inherently uncertain in a rapidly evolving technological
environment in which there may be numerous patent applications pending, many of
which are confidential when filed, with regard to similar
technologies.




15


We may
face claims by third parties that our products or technology infringe their
patents or other intellectual property rights. Any claim of infringement could
cause us to incur substantial costs defending against the claim, even if the
claim is invalid, and could distract the attention of our management. If any of
our products are found to violate third-party proprietary rights, we may be
required to pay substantial damages. In addition, we may be required to
re-engineer our products or obtain licenses from third parties to continue to
offer our products. Any efforts to re-engineer our products or obtain licenses
on commercially reasonable terms may not be successful, which would prevent us
from selling our products, and, in any case, could substantially increase our
costs and have a material adverse effect on our business, financial condition
and results of operations.





RISKS
RELATING TO CORPORATE GOVERNANCE




We
are not subject to the same corporate governance standards as listed companies.
This may affect market confidence and company performance. As a result, our
business could be harmed and the price of our stock could decrease.




Registered
stock exchanges have adopted enhanced corporate governance requirements that
apply to issuers that list their securities on those markets. These standards
deal with the rights and responsibilities of a company’s management, its board,
shareholders and various stakeholders. How well companies are run may affect
market confidence as well as company performance. Our common stock is quoted on
the Pink OTC Markets, Inc, which does not have comparable requirements. As a
result, our business and the price of our stock may be adversely
affected.




New
corporate governance requirements have made it more difficult to attract
qualified directors. As a result, our business may be harmed and the price of
our stock may be adversely affected.




New
corporate governance requirements have increased the role and responsibilities
of directors and executive officers of public companies. These new requirements
will make it more difficult and more expensive for us to obtain director and
officer liability insurance. We may be required to accept reduced coverage or
incur significantly higher costs to obtain coverage. As a result, it may be more
difficult for us to attract and retain qualified individuals to serve as members
of our board of directors.




If
we fail to maintain effective internal controls over financial reporting, the
price of our common stock may be adversely affected.




We are
required to establish and maintain appropriate internal controls over financial
reporting. Our internal controls over financial reporting may have weaknesses
and conditions that need to be addressed, the disclosure of which may have an
adverse impact on the price of our common stock. Failure to establish those
controls, or any failure of those controls once established, could adversely
impact our public disclosures regarding our business, financial condition or
results of operations. In addition, management’s assessment of internal controls
over financial reporting may identify weaknesses and conditions that need to be
addressed in our internal controls over financial reporting or other matters
that may raise concerns for investors. Any actual or perceived weaknesses and
conditions that need to be addressed, disclosure of management’s assessment of
our internal controls over financial reporting or disclosure of our independent
registered public accounting firm’s attestation to or report on management’s
assessment of our internal controls over financial reporting may have an adverse
impact on the price of our common stock.




Standards
for compliance with Section 404 of the Sarbanes-Oxley Act of 2002 are uncertain,
and if we fail to comply in a timely manner, our business could be harmed and
our stock price could decline.




Rules
adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002
require annual assessment of our internal control over financial reporting, and
attestation of this assessment by our independent registered public accountant.
Unless the SEC delays the date on which this requirement becomes effective, we
will first have to include management’s report of our internal control over
financial reporting in our annual report for fiscal year ending December 31,
2008 and our auditor’s attestation of this assessment in our annual report for
fiscal year ending December 31, 2009. The standards that must be met for
management to assess the effectiveness of the internal control over financial
reporting are new and complex, and require significant documentation, testing
and possible remediation to meet the detailed standards. We may encounter
problems or delays in completing activities necessary to make an assessment of
its internal control over financial reporting. In addition, we may encounter
problems or delays in completing the implementation of any requested
improvements and receiving an attestation of its assessment by our independent
registered public accountants. If management cannot assess our internal control
over financial reporting as effective, or our independent auditors are unable to
issue an unqualified attestation report on such assessment, investor confidence
and share value may be negatively impacted.





RISKS
RELATED TO OUR COMMON STOCK





The
market price of our common stock may be volatile.




Our stock
price has been volatile. From January 1, 2004 to September 30, 2008, the
trading price of our common stock ranged from $3.00 to $0.0005 per share. Many
factors may cause the market price of our common stock to fluctuate,
including:




· variations
in our quarterly results of operations;




16


· the
introduction of new products by us or our competitors;




· acquisitions
or strategic alliances involving us or our competitors;




· future
sales of shares of common stock in the public market; and




· market
conditions in our industries and the economy as a whole.




In
addition, the stock market has recently experienced extreme price and volume
fluctuations. These fluctuations are often unrelated to the operating
performance of particular companies. These broad market fluctuations may
adversely affect the market price of our common stock. When the market price of
a company’s stock drops significantly, stockholders at times institute
securities class action litigation against that company. Any litigation against
us could cause us to incur substantial costs, divert the time and attention of
our management and other resources or otherwise harm our business.




We
have never paid dividends on our capital stock, and we do not anticipate paying
dividends in the foreseeable future.




We have
not paid dividends on any of our classes of capital stock to date, and we
currently intend to retain our future earnings, if any, to fund the development
and growth of our business. As a result, capital appreciation, if any, of our
common stock will be the sole source of gain for the foreseeable future. In
addition, before we may pay any dividends with respect to our common stock, we
must pay the holders of our preferred stock an equivalent dividend. If we
determine that we are in the position to declare a dividend, the amount of the
dividend we ultimately declare may be substantially reduced as the result of our
obligations under the terms of our preferred stock.





Our
charter, bylaws and Delaware law may deter takeovers.




Our
certificate of incorporation, bylaws and Delaware law contain provisions that
could have an anti-takeover effect and discourage, delay or prevent a change in
control or an acquisition that many stockholders may find attractive. These
provisions may also discourage proxy contests and make it more difficult for our
stockholders to take some corporate actions, including the election of
directors. These provisions relate to:




· the
ability of our board of directors to issue preferred stock, and determine its
terms, without a stockholder vote;




· the
classification of our board of directors, which effectively prevents
stockholders from electing a majority of the directors at any one annual meeting
of stockholders;




· the
limitation that directors may be removed only for cause by the affirmative vote
of the holders of at least 75% of our shares of capital stock entitled to vote;
and





· advance
notice requirements for stockholder proposals and director
nominations.





These
provisions also could limit the price that investors might be willing to pay in
the future for shares of our common stock.





We
have been unable to file our SEC filings on time




We were unable to file this Annual
Report on Form 10-K for the fiscal year ended December 31, 2006, our Annual
Report for our fiscal year ended December 31, 2007, and the Quarterly Reports
for our each of our fiscal periods ending March 31, 2007, June 30, 2007,
September 30, 2007, March 31, 2008, June 30, 2008 and September 30, 2008 on a
timely basis. The late filings of these documents may adversely affect our
ability to raise capital and may have eroded investor
confidence.  Because we have failed to comply with our reporting
obligations with the SEC, our shareholders have not had adequate information
about us, and any trading markets currently existing for our securities may have
decreased or continue to decrease, and our shareholders may be finding, or will
find it difficult to sell their shares. We will continue to make every effort to
bring all our SEC filings up-to-date.





Existing
stockholders will experience significant dilution from our sale of shares under
the Private Equity Credit Agreement, the conversion of notes and preferred
stock, and the exercise of warrants.




To date,
we have funded our operations through equity investments and issuances of debt.
Stockholders will experience substantial dilution as a result of our agreements
with our investors. The number of shares issuable under some of these
arrangements is indeterminate. The issuance and sale of common stock to our
investors will reduce the ownership interest of our existing stockholders in our
company, and may depress the value of our common stock. In addition, the
subsequent resale by the investors of those shares may further reduce our share
price.




17


If
an active and liquid market for our common stock does not develop, or is not
sustained, it may be difficult for investors to resell their shares. As a
result, they may not be able to sell their shares when they want.




Our
common stock is not traded on a registered securities exchange and we do not
meet the initial listing criteria for any registered securities exchange. It is
quoted on the less-recognized Pink OTC Markets, Inc. This factor may impair an
investor’s ability to sell his shares when he wants and/or could depress our
stock price. As a result, an investor may find it difficult to dispose of, or to
obtain accurate quotations of the price of, our securities because smaller
quantities of shares could be bought and sold, transactions could be delayed and
security analyst and news coverage of our company may be reduced. These factors
could result in lower prices and larger spreads in the bids and ask prices for
our shares. Due to the current price of our common stock, many brokerage firms
may not be willing to effect transactions in our securities, particularly
because of an SEC rule imposing additional sales requirements on broker-dealers
who sell low-priced securities (generally those below $5.00 per share). These
factors severely limit the liquidity of our common stock and likely have a
material adverse effect on our market price and on our ability to raise
additional capital. We cannot predict the extent to which investor interest in
our stock, if any, will lead to an increase in our market price or the
development of a more active trading market or how liquid that market might
become.




If
the price of our stock continues to decline and we cannot prepay or repay the
notes we have issued, we will be in default and the holders of the notes will
have the remedies available to creditors. Some or all of our assets could be
liquidated, our operations may be disrupted and our business may
suffer.





If the
market price of our common stock falls below $0.03 per share for 10 consecutive
trading days, holders of the notes may require us to prepay (within 60 days of
the receipt of a notice of such election) the principal outstanding at the time
of such prepayment plus a premium equal to 140% of the principal amount being
prepaid. If we are unable to meet such obligation under the notes, we will be in
default, and the holders of the notes will have the remedies available to
creditors. All of our assets are subject to security agreements, and the holders
of these notes, in the event of default, could foreclose and liquidate some or
all of our assets. The claims of our creditors to our assets are senior to those
of our stockholders.




These
disclosure requirements may have the effect of reducing the trading activity in
the secondary market for Global Matrechs common stock as it is subject to these
penny stock rules. These rules severely limit the liquidity, if any, of our
common stock, and would likely have a material adverse effect on its market
price and on our ability to raise additional capital.





Our
common stock is deemed to be a “penny stock,” which may make it more difficult
for investors to sell these shares due to suitability and disclosure
requirements.




Due to
the current price of our common stock, $0.0005 on December 5, 2008, many
brokerage firms may not be willing to effect transactions in its securities,
particularly because low-priced securities are subject to SEC rules (referred to
as the “penny stock rules”) imposing additional sales requirements on
broker-dealers who sell low-priced securities (generally those below $5.00 per
share). These disclosure requirements may have the effect of reducing the
trading activity in the secondary market for Global Matrechs common stock as it
is subject to these penny stock rules. These rules severely limit the liquidity,
if any, of our common stock, and would likely have a material adverse effect on
its market price and on our ability to raise additional capital.





The penny
stock rules require a broker-dealer, prior to a transaction in a penny stock, to
deliver a standardized risk disclosure document prepared by the Commission,
that: (a) contains a description of the nature and level of risk in the market
for penny stocks in both public offerings and secondary trading; (b) contains a
description of the broker’s or dealer’s duties to the customer and of the rights
and remedies available to the customer with respect to a violation to such
duties or other requirements of Securities’ laws; (c) contains a brief, clear,
narrative description of a dealer market, including bid and ask prices for penny
stocks and the significance of the spread between the bid and ask price; (d)
contains a toll-free telephone number for inquiries on disciplinary actions; (e)
defines significant terms in the disclosure document or in the conduct of
trading in penny stocks; and (f) contains such other information and is in such
form, including language, type, size and format, as the SEC may require by rule
or regulation.




In
addition, the broker-dealer also must provide, prior to effecting any
transaction in a penny stock, the customer with: (a) bid and offer quotations
for the penny stock; (b) the compensation of the broker-dealer and its
salesperson in the transaction; (c) the number of shares to which such bid and
ask prices apply, or other comparable information relating to the depth and
liquidity of the market for such stock; and (d) monthly account statements
showing the market value of each penny stock held in the customer’s
account.




Finally,
the penny stock rules require that prior to a transaction in a penny stock not
otherwise exempt from those rules, the broker-dealer must make a special written
determination that the penny stock is a suitable investment for the purchaser
and receive the purchaser’s written acknowledgment of the receipt of a risk
disclosure statement, a written agreement to transactions involving penny
stocks, and a signed and dated copy of a written suitability statement. These
requirements may reduce the potential market for our common stock by reducing
the number of potential investors, brokers and traders. This may make it more
difficult for investors in our common stock to sell shares to third parties or
to otherwise dispose of them. This could cause our stock price to
decline.




18


We cannot
predict the extent to which investor interest in our common stock or a business
combination, if any, will lead to an increase in its market price or the
development of an active trading market or how liquid that market, if any, might
become.





ITEM 1B.
UNRESOLVED STAFF COMMENTS





None




ITEM
2. PROPERTIES





Since
December 31, 2004, we have occupied approximately 550 square feet in one office
building located at 90 Grove Street, Suite 201, Ridgefield,
Connecticut  06877. Our lease term expired in September
2006.  We are currently renting 180 square feet of space on a
month-to-month basis and we currently pay rent of $1,500 per
month.  We also rent space for a satellite office at 520 81st Street,
New York, NY  10028 on a month-to-month basis and we currently pay
rent of $1,800 per month. We believe that our present facilities are adequate to
meet our current needs. If new or additional space is required, we believe that
adequate facilities are available at competitive prices in the respective
areas.





ITEM
3 LEGAL PROCEEDINGS





On
February 9, 2005, we filed suit in the Supreme Court of the State of New York,
County of New York against Eurotech, Ltd. for its failure to fulfill its
obligations under the license agreement between the parties dated May 22, 2003.
The suit also sought the enforcement of the notes issued by Eurotech to
Woodward, LLC, which were assumed by us in the exchange agreement between
Woodward and us on January 31, 2005. The complaint sought damages totaling
$672,677 plus interest and attorney’s fees. This litigation was settled in
connection with the settlement of claims with Eurotech and Carey Naddell
individually described below.





On April
13, 2005 Carey Naddell, CEO of Eurotech, Ltd., filed suit against us in the
United States District Court - Southern District of New York for damages in the
amount of at least $240,000 with interest attorney’s fees and disbursement based
upon an alleged breach of a written service agreement.




On June
24, 2005, Eurotech, Ltd. filed a complaint against us in the Supreme Court of
the State of New York, County of New York, (Index No. 108773/05) for an alleged
failure to fulfill our obligations under our License and Exchange Agreement
dated March 27, 2003 with Eurotech, Ltd. thereby depriving Eurotech, Ltd. of its
contractual right to convert 700 shares of Series H Preferred Stock and selling
7 million shares of our common stock. Eurotech, Ltd. sought damages in an amount
to be determined at trial but believed according to the defendant to exceed
$100,000 plus interest and attorney’s fees.





On March
16, 2006, we, Naddell and Eurotech executed a full mutual release of claims,
completing a settlement of each of the above-described actions.





In
connection with the Eurotech matter, Eurotech will return 2,500 shares of Series
H, convertible preferred stock to us in full settlement of claims relating to
its failure to fulfill obligations under the license agreement, and Eurotech
obligations to Woodward, which were assumed by us on January 31,
2005.





In
connection with the Cary Naddell matter, a settlement was reached whereby this
former consultant received $175,000 in full settlement of related claims for
compensation of past services. The claim existed at December 31, 2005, yet was
resolved prior to the release of the accompanying audit report. We also believe
that the provisions of Statement of Financial Accounting Standards SFAS No. 5
“Accounting for Contingencies” (“SFAS 5”) as it pertains to contingencies is
relevant literature for purposes of accruing a contingent loss.





At
December 31, 2005, based on settlement date of March 15, 2006, we accrued a
settlement liability and related settlement expense of $175,000. Under the terms
of the settlement, $25,000 was due and paid at closing, and the balance of
$150,000 was payable in seven (7) equal monthly installments of $21,428.57
commencing on April 15, 2006 with final installment payment due on or before
October 15, 2006.On May 2, 2007 this
settlement was completed with the issuance of 20,000,000 shares of common stock
in lieu of $100,000 still owed to Mr. Naddell





On July
31, 2007, Foley Hoag, LLP (“Foley”) filed a lawsuit against the Company in
Suffolk County Massachusetts Superior Court.  Foley’s suit alleges the
Company did not pay Foley $222,295 for services  and related fees
provided by Foley to the Company.  On November 20, 2007, Foley filed a
Motion to Assess Damages, amending the amount of their claim against the Company
to $260,718, including interest.  The Company has received no further
communication regarding Foley’s claim nor is the Company contesting its
claim.




19


We are
not a party to any other material legal proceedings. From time to time, we are
involved in various routine legal proceedings incidental to the conduct of our
business.





ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS





We did
not submit any matters to a vote of security holders during the fourth quarter
of 2006.


20


PART
II





ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES





Our
common stock has been quoted on the Pink OTC Markets, Inc. under the symbol
“GBMR” (f/k/a GMTH and HCOM) since May, 2007.  Prior to that, our
common stock was quoted on the Over-the-Counter Bulletin Board from December 8,
2000. Prior to that date, it was quoted on the NASDAQ Small Cap Market. The
following table shows for the periods indicated the range of high and low bid
prices as quoted on the OTC Bulletin Board/Pink Sheets. The quotations reflect
inter-dealer prices, without retail mark-up, markdown, or commission and may not
represent actual transactions.





High*
                    
                    
                    Low*2005:First
      quarter
                    
                    $
                    2.16
                    
                    
                    $
                    0.86Second
      quarter
                    
                    
                    2.16
                    
                    
                    
                    0.64Third
      quarter
                    
                    
                    0.88
                    
                    
                    
                    0.46Fourth
      quarter
                    
                    
                    0.68
                    
                    
                    
                    0.1042006:First
      Quarter
                    
                    $
                    0.33
                    
                    
                    $
                    0.10Second
      Quarter
                    
                    
                    0.20
                    
                    
                    
                    0.045Third
      Quarter
                    
                    
                    0.09
                    
                    
                    
                    0.018Fourth
      Quarter
                    
                    
                    0.02
                    
                    
                    
                    0.00452007First
      Quarter
                    
                    $
                    0.017
                    
                    
                    $
                    0.0045Second
      Quarter
                    
                    
                    0.023
                    
                    
                    
                    0.0050Third
      Quarter
                    
                    
                    0.009
                    
                    
                    
                    0.00281Fourth
      Quarter
                    
                    
                    0.0055
                    
                    
                    
                    0.002312008First
      Quarter
                    
                    $
                    0.003
                    
                    
                    $
                    0.001Second
      Quarter
                    
                    
                    0.003
                    
                    
                    
                    0.001Third
      Quarter
                    
                    
                    0.002
                    
                    
                    
                    0.00069





*Adjusted
      for effect of 1:20 reverse stock split effective May 26,
    2006





HOLDERS
OF RECORD





We had
approximately 150 holders of record of our Common Stock as of September 30,
2008.





DIVIDENDS





We have
not paid any cash dividends on our capital stock to date and do not foresee that
we will have earnings with which to pay dividends in the foreseeable future. Our
board of directors would determine the amount of future dividends, if any, based
upon our earnings, financial condition, capital requirements and other
conditions.





SECURITIES
AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS





The
Company’s Employee Stock Option Plan (the “Stock Option Plan”) was adopted by
the Company’s stockholders in September 1996 and amended in 2005. Shares of
common stock may be sold or awarded to officers, key employees and consultants.
On March 3, 1999 at a Special Meeting of Stockholders, the Company’s
stockholders approved an amendment to the Stock Option Plan, which increased the
number of shares reserved for issuance under the Stock Option Plan to 2,000,000,
in 2005 to 15,000,000 shares and in 2006, post reverse split, the Board of
Directors recommended increasing the number of shares reserved for issuance
another 15,000,000 shares. Options granted under the Stock Option Plan may be
either (i) options intended to qualify as “incentive stock options” under
Section 422 of the Internal Revenue Code or (ii) non-qualified stock
options.




21


Prior to
2006, the options granted to purchase shares under the Stock Option Plan
generally vested 25% per year over the first four years and expire ten years
after the grant date. The exercise price of options granted was at or above the
fair market value of the stock on the grant date.  Options granted in
2006 were fully vested on the grant date.





The
Company’s Non-Employee Directors’ Stock Option Plan (the “Directors’ Plan”) was
adopted by the Company’s stockholders in September 1996. Shares of common stock
may be sold or awarded to directors who are not officers or employees of the
Company (“Non-Employee Directors”). The Company has reserved 300,000 shares of
common stock for issuance under the Directors’ Plan.







The
Directors’ Plan provides for the automatic granting of an option to purchase
10,000 shares of common stock to each Non-Employee Director who is first
appointed or elected to the Board of Directors. Also, each Non-Employee Director
is automatically granted an option to purchase 5,000 shares of common stock on
the date of each annual meeting of the Company’s stockholders. Furthermore, the
Directors’ Plan allows the Board of Directors to make extraordinary grants of
options to Non-Employee Directors.





The
following table provides information as of December 31, 2006 regarding shares
authorized for issuance under our equity compensation plans, including
individual compensation arrangements.  The equity compensation plans
approved by our stockholders are our Stock Option Plan and Directors’ Plan. As
of December 31, 2006:




Plan
      Category
                        
                        Number of
                          securities
                          to be issued
                          upon
                          exercise of
                          outstanding
                          options,
                          warrants and
                          rights
                        
                        
                        Weighted-
                          average
                          exercise price
                          of
                          outstanding
                          options,
                          warrants
                          and rights
                        
                        
                        Number of
                          securities
                          remaining
                          available
                          for future
                          issuance
                          under equity
                          compensation
                          plansEquity
      Compensation Plans Approved
                          by
      Security Holders
                        
                        
                        5,390,052
                        
                        
                        $
                        0.021
                        
                        
                        
                        10,464,316Equity
      Compensation Plans Not Approved
                          by
      Security Holders
                        
                        
                        80,000
                        
                        
                        $
                        0.780
                        
                        
                        
                        670,000Total
                        
                        
                        5,470,052
                        
                        
                        $
                        0.0325
                        
                        
                        
                        11,134,316




Option
activity under all of the stock option plans is summarized as
follows:




YEARS ENDED DECEMBER 31,2006
                            
                            
                            2005WEIGHTED-
                              AVERAGE
                            
                            
                            
                            
                            
                            WEIGHTED-
                              AVERAGEEXERCISE
                            
                            
                            
                            
                            
                            EXERCISESHARES
                            
                            
                            PRICE
                            
                            
                            SHARES
                            
                            
                            PRICEOutstanding
      at beginning of year
                            
                            
                            99,371
                            
                            
                            $
                            6.60
                            
                            
                            
                            64,371
                            
                            
                            $
                            6.60Granted
                            
                            
                            5,286,313
                            
                            
                            
                            0.02
                            
                            
                            
                            80,000
                            
                            
                            
                            1.00Exercised
                            
                            
                            -
                            
                            
                            
                            -Forfeited
                            
                            
                            (-
                            )
                            
                            
                            -
                            
                            
                            
                            (45,000
                            )
                            
                            
                            .0.80Outstanding
      at end of year
                            
                            
                            5,385,634
                            
                            
                            
                            0.02
                            
                            
                            
                            99,371
                            
                            
                            
                            6.60Options
      exercisable at year end
                            
                            
                            5,385,684
                            
                            
                            
                            0.02
                            
                            
                            
                            99,371
                            
                            
                            
                            6.60Shares
      available for future grant
                            
                            
                            10,464,316
                            
                            
                            
                            
                            
                            
                            
                            750,629Weighted-average
      fair value of options granted during this year at the shares’ fair
      value
                            
                            
                            0.02
                            
                            
                            
                            
                            
                            
                            
                            0.80




22


The
following table summarizes information about options outstanding at December 31,
2006.





EXERCISE PRICE
                                      
                                      
                                      SHARES
                                      
                                      
                                      WEIGHTED AVERAGE
                                        REMAINING
                                        CONTRACTUAL LIFE$0.0061
      - $0.027
                                      
                                      
                                      
                                      3,769621
                                      
                                      
                                      
                                      6.5$0.03
      - $0.05
                                      
                                      
                                      
                                      1,616,063
                                      
                                      
                                      
                                      8.95,385,684
                                      
                                      
                                      
                                      7.7





The pro
forma impact on the Company’s net loss per share had compensation cost for all
of the Company’s stock-based compensation plans been recorded at the date of
grant based on the method prescribed by SFAS No. 123 is shown
below:





FOR
      THE YEARENDEDDECEMBER
      31,2005Loss
      applicable to common shareholders:As
      reported
                    
                    $
                    (6,109,806
                    )Pro
      forma
                    
                    
                    (6,153,306
                    )Basic
      and diluted loss per share:As
      reported
                    
                    $
                    (0.07
                    )Pro
      forma
                    
                    
                    (0.07
                    )




RECENT
SALES OF UNREGISTERED SECURITIES AND USE OF PROCEEDS FROM REGITERED
SECURITIES





For the
year ended December 31, 2006, we issued and sold an aggregate 10,088,851 shares
pursuant to private equity line agreements.  We received gross cash
proceeds of $638,238 in consideration for sold shares.  The shares
were sold to the purchaser at a discount of 8% to the market per
share.  We are required to pay a placement fee equal to 1% of any
proceeds received under the private equity line credit
agreements.  The issuance of the shares was exempt from registration
under Section 4(2) of the Securities Act as a sale to an accredited investor not
involving any public offering.  The resale of the shares is registered
under the Securities Act pursuant to our registration statements on Form SB-2
(File nos. 333-126526, 333-131106 and 333-137833).  We have used or
intend to use the proceeds from these issuances for general corporate
purposes.  On January 13, 2006, the holder of a warrant for conversion
of 575,000 shares (pre reverse split) of common stock converted their warrant
for $5,750.





Please
refer to Note 18-Subsequent Events in the accompanying financial statements and
related notes for disclosure relating to the Company’s financings subsequent to
December 31, 2006.





ISSUER
PURCHASES OF EQUITY SECURITIES.





None.




23


ITEM
6. SELECTED FINANCIAL DATA





The
following selected financial data presented for Global Matrechs and its
Subsidiaries on a consolidated basis should be read in conjunction with the
Financial Statements, including the related notes, and Item 7–“Management's
Discussion and Analysis of Financial Condition and Results of
Operation".





Year Ending December 31,2006
                  
                  
                  2005
                  
                  
                  2004(1)
                  
                  
                  2003(1)
                  
                  
                  2002(1)(Restated)
                  
                  
                  (Restated)
                  
                  
                  (Restated)Results
      of Operation DataSales
                  
                  $
                  44,311
                  
                  
                  $
                  125
                  
                  
                  $
                  620
                  
                  
                  $
                  8,246
                  
                  
                  $
                  -Gross
      Profit (loss)
                  
                  
                  12,845
                  
                  
                  
                  95
                  
                  
                  
                  62
                  
                  
                  
                  (485
                  )
                  
                  
                  -Operating
      loss
                  
                  
                  (1,653,429
                  )
                  
                  
                  (2,720,733
                  )
                  
                  
                  (1,471,111
                  )
                  
                  
                  (440,825
                  )
                  
                  
                  (240,033
                  )Interest
      expense, net of income
                  
                  
                  1,337,155
                  
                  
                  
                  5,529,463
                  
                  
                  
                  1,621,520
                  
                  
                  
                  160,099
                  
                  
                  
                  -Change
      in fair value of derivatives
                  
                  
                  (1,287,845
                  )
                  
                  
                  (2,928,808
                  )
                  
                  
                  87,171
                  
                  
                  
                  98,678
                  
                  
                  
                  92,674Other
      (income)
                  
                  
                  (14,109
                  )
                  
                  
                  (20,962
                  )
                  
                  
                  (211,395
                  )
                  
                  
                  (91,826
                  )
                  
                  
                  (26,146
                  )Loss
      from continuing operations
                  
                  
                  (1,667,672
                  )
                  
                  
                  (5,300,426
                  )
                  
                  
                  (2,968,407
                  )
                  
                  
                  (607,776
                  )
                  
                  
                  (306,561
                  )Gain
      (loss) from discontinued operations
                  
                  
                  -
                  
                  
                  
                  (809,380
                  )
                  
                  
                  (30,022
                  )
                  
                  
                  50,978
                  
                  
                  
                  118,001Net
      loss
                  
                  
                  (1,667,672
                  )
                  
                  
                  (6,109,806
                  )
                  
                  
                  (2,998,429
                  )
                  
                  
                  (556,798
                  )
                  
                  
                  (188,560
                  )Deemed
      preferred stock (dividend) recovery
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,278,412
                  
                  
                  
                  (1,004,681
                  )Net
      loss applicable to common shareholders
                  
                  
                  (1,667,672
                  )
                  
                  
                  (6,109,806
                  )
                  
                  
                  (2,998,429
                  )
                  
                  
                  721,614
                  
                  
                  
                  (1,193,241
                  )Comprehensive
      loss
                  
                  
                  (73,061
                  )
                  
                  
                  (119,927
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Total
      comprehensive loss
                  
                  
                  (1,740,733
                  )
                  
                  
                  (6,229,733
                  )
                  
                  
                  (2,998,429
                  )
                  
                  
                  721,614
                  
                  
                  
                  (1,193,241
                  )Net
      income (loss) per common share - basic & dilutedContinuing
      operations
                  
                  
                  (0.08
                  )
                  
                  
                  (1.23
                  )
                  
                  
                  (3.54
                  )
                  
                  
                  (0.38
                  )
                  
                  
                  (0.03
                  )Discontinued
      operations
                  
                  
                  -
                  
                  
                  
                  (0.19
                  )
                  
                  
                  (0.04
                  )
                  
                  
                  0.03
                  
                  
                  
                  0.01Total
                  
                  
                  (0.08
                  )
                  
                  
                  (1.42
                  )
                  
                  
                  (3.57
                  )
                  
                  
                  (0.35
                  )
                  
                  
                  (0.02
                  )Weighted
      average common shares outstanding
                  
                  
                  22,033,999
                  
                  
                  
                  4,296,367
                  
                  
                  
                  839,508
                  
                  
                  
                  1,591,007
                  
                  
                  
                  10,734,375Consolidated
      Balance Sheet Data:Cash
                  
                  $
                  1,397
                  
                  
                  $
                  67,993
                  
                  
                  $
                  131,470
                  
                  
                  $
                  71,818
                  
                  
                  $
                  160,342Current
      assets
                  
                  
                  103,499
                  
                  
                  
                  275,294
                  
                  
                  
                  608,895
                  
                  
                  
                  373,493
                  
                  
                  
                  403,501Current
      liabilities
                  
                  
                  3,850,447
                  
                  
                  
                  7,308,681
                  
                  
                  
                  3,389,297
                  
                  
                  
                  7,434,198
                  
                  
                  
                  2,109,069Total
      assets
                  
                  
                  153,499
                  
                  
                  
                  577,243
                  
                  
                  
                  2,834,876
                  
                  
                  
                  1,350,281
                  
                  
                  
                  507,554Long-term
      liabilities
                  
                  
                  803,700
                  
                  
                  
                  4,211,062
                  
                  
                  
                  1,157,750
                  
                  
                  
                  -
                  
                  
                  
                  2,109,069Stockholders'
      deficit
                  
                  
                  (4,479,750
                  )
                  
                  
                  (10,942,500
                  )
                  
                  
                  (7,840,394
                  )
                  
                  
                  (7,152,917
                  )
                  
                  $
                  7,874,518





Note:


(1)
            The
      balance sheet data as of December 31, 2004 and 2003 and the statement of
      operations data for the years ended December 31, 2004, 2003 and 2002 have
      been derived from the financial statements for such
    periods.




24


ITEM
      7
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS





MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS





The
following discussion of our financial condition and results of operation should
be read in conjunction with the financial statements and related notes that
appear elsewhere in this prospectus. This discussion contains forward-looking
statements and information relating to our business that reflect our current
views and assumptions with respect to future events and are subject to risks and
uncertainties, including the risks in the section entitled “Risk Factors”, that
may cause our or our industry’s actual results, levels of activity, performance
or achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by these
forward-looking statements.





These
forward-looking statements speak only as of the date of this report. Although we
believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, or
achievements. Except as required by applicable law, including the securities
laws of the United States, we expressly disclaim any obligation or undertaking
to disseminate any update or revisions of any of the forward-looking statements
to reflect any change in our expectations with regard thereto or to conform
these statements to actual results.





Our
financial statements are stated in United States Dollars (US$) and are prepared
in accordance with accounting principles generally accepted in the United
States.





Overview




Who
we are




We are
the successor to a variety of businesses dating back to 1994. We have undergone
material changes to our business and our financial structure during the period
covered by the financial statements included in this annual report.




Prior to
May 31, 2004, we derived revenue from professional web development
services, software licensing, application development, insurance and securities
sales commissions, hosting fees and transactions fees. On May 31, 2004, we
sold substantially all of our assets used in the operation of our hosting and
web site maintenance business and retained a 15% interest in the surviving
entity. On May 18, 2007 we sold this 15% interest back to the management of
Tulix for $50,000. As a result of this sale, our business consisted exclusively
of the marketing of technologies licensed from Eurotech, Ltd. under a licensing
agreement dated May 22, 2003.




On
December 31, 2004, we completed the acquisition of True to Form, Limited (“True
to Form”), a maker of specialized lighting products for a range of markets. On
December 29, 2005, we completed the sale of True to Form back to its original
owner. Our primary source of operating revenue had been, prior to this sale, the
specialty lighting group. However, during the first three quarters of 2005, True
to Form was unprofitable. As a result of the sale of True to Form, we have once
again narrowed the focus of our business to marketing the technologies we
currently license from Eurotech. A more detailed description of the sale of True
to Form is provided below.





Our
Business




As noted
above, our current business focus is marketing and selling the technologies we
license from Eurotech to manufacturers and other parties. These technologies
include:




·             NUCAPTM, formerly called EKOR,
a silicon based elastomer developed jointly by scientists at the I.V. Kurchatov
Institute and members of the Euro-Asian Physical Society, both based in Moscow,
Russia for the purposes of long term isolation of radioactive or otherwise
hazardous materials.




·             HNIPU, a hybrid polyurethane
with uses in a number of industrial application contexts such as manufacturing
automotive components, paints, foams, plastics and truck bed liners; aerospace
sealants, industrial adhesives, coatings, flooring, glues; industrial equipment
and machinery; and consumer goods such as appliances, footwear, furniture and
plastic products.




We also
license several other technologies relating to hazardous materials handling,
electromagnetic radiography, and chemical processing. We are currently seeking
manufacturing partners for these products.


25


We have,
to date, made what we believe to be some very significant inroads with NuCap and
HNIPU, but have not yet derived significant revenue from these as well as our
other technologies that we license from Eurotech. The development and
commercialization of NuCap, HNIPU and the other technologies we license will
depend largely on the success of our marketing efforts. We have identified and
signed contracts with manufacturing partners for both NuCap- and HNIPU, but we
cannot be certain that we will be able to conduct our activities in such a way
that builds interest in these products, or that any such interest will result in
revenue to us. Furthermore, even if these licensed technologies do become a
source of revenue for us, there is no guarantee such revenue will be sufficient
to offset our administrative costs. Although the exclusive focus of our business
is on the marketing of these licensed technologies, there can be no assurance
that these efforts will succeed.





On
December 31, 2004, we acquired all of the stock of True To Form, a designer,
developer, manufacturer and retailer of specialty lighting products. As a result
of this transaction, True to Form became our wholly owned subsidiary. The sole
shareholder of True To Form was, prior to the acquisition, Mark J. Allen, who is
also a member of our Board of Directors. Following the acquisition, Mr. Allen
continued as the President of True To Form and served as our Executive Vice
President. The acquisition was the result of arm’s length negotiations and was
unanimously approved by the disinterested members of our Board of
Directors.




On
December 29, 2005 we completed the transfer of all of the issued and outstanding
capital stock of True To Form Limited, Inc. back to Mr. Allen pursuant to the
terms of a Stock Purchase Agreement between him, True to Form, and us. As a
result of this sale, we no longer hold any equity interest in True To Form. The
consideration was determined on the basis of these negotiations. The
consideration for the sale of True to Form consists of:




·             The
issuance by True To Form to us of a promissory note described below in the
initial principal amount of $250,000, which note accrues interest at an annual
rate of one percent plus the prime rate as reported by a nationally recognized
commercial bank and has a maturity date of January 1, 2011;




·             The
cancellation of our guaranty of the amounts owed under a promissory note issued
by True to Form to Mr. Allen in connection with our acquisition of True to Form;
and




·             The
surrender by Mr. Allen of the 10,000,000 shares of our common stock that were
issued to him as partial consideration for our purchase of True to Form on
December 31, 2004 and the cancellation of all other equity interest in us held
by Mr. Allen.




In
addition, we agreed to the cancellation of amounts owed under a note issued by
us to True to Form for working capital purposes in the aggregate amount of
$280,000.





In
connection with this transaction, Mr. Allen resigned from his positions as
Executive Vice President and Director of Global Matrechs. This action was not,
to the knowledge of any of our executive officers, because of a disagreement on
any matter relating to our operations, policies or practices.




Recent
Material Transactions and Other Events




We have
undergone material changes to our business and our financial structure during
the period covered by the financial statements included in this annual
report.





In
connection with the Eurotech matter, Eurotech will return 2,500 shares of Series
H, convertible Preferred Stock to us in full as settlement of claims relating to
its failure to fulfill obligations under the license agreement, and Eurotech’s
obligations to Woodward, which were assumed by us on January 31,
2005.  As of May 2, 2007 we settled the litigation with Carey Naddell
and the balance of the Series H Preferred shares were returned to
us.





In
connection with the Cary Naddell matter, a settlement was reached whereby this
former consultant received $175,000 in full settlement of related claims for
compensation of past services.  The claim existed at December 31,
2005, yet was resolved prior to the release of the accompanying audit
report.  We also believe that the provisions of SFAS No. 5 as it
pertains to contingencies are relevant literature for purposes of accruing a
contingent loss.





At
December 31, 2005, based on a settlement date of March 15, 2006, we accrued a
settlement liability and related settlement expense of
$175,000.  Under the terms of the settlement, $25,000 was due and paid
at closing, and the balance of $150,000 was payable in seven (7) equal monthly
installments of $21,428.57 commencing on April 15, 2006 with final installment
payment due on or before October 15, 2006. On May 2, 2007 this settlement was
completed with the issuance of 20,000,000 shares of common stock in lieu of
$100,000 still owed to Mr. Naddell.


26


Private
Equity Credit Agreement




Summary.On September 14,
2006, we entered into the Private Equity Credit Agreement with Brittany Capital
Management Limited, a limited liability company organized and existing under the
laws of The Bahamas. Under the Private Equity Credit Agreement, we may draw up
to an aggregate $15 million, from time to time at our discretion, in exchange
for shares of our common stock. Each draw under the Private Equity Credit
Agreement is structured as a put option, wherein we require Brittany to purchase
a number of shares of our common stock after a discount to the market price is
applied over the course of a commitment period extending 36 months after the
effective date of the registration statement of which this prospectus forms a
part.





We are
required to draw down a minimum of one hundred thousand dollars under the
Brittany Private Equity Credit Agreement. If we draw a lesser amount, we must
pay Brittany an amount equal to eight percent of the difference between that
amount and the minimum. Based on our current assessment of our financing needs,
we intend to draw in excess of the one hundred thousand dollar minimum. As of
the filing date of this Annual Report, we have drawn down $599,019.




Put Shares. Each draw under
the Private Equity Credit Agreement is structured as a put option, wherein we
require Brittany to purchase a number of shares of our common stock after a
discount to the market price is applied. For a given put, we must deliver a
notice to Brittany indicating the dollar amount we wish to draw down. Five
trading days after delivery of this notice, Brittany must deliver this amount in
two equal installments, one each on the fifth and tenth trading day following
the delivery of the notice. In exchange, we must issue to Brittany, in the case
of the first installment, the number of shares of common stock obtained by
dividing the amount of the installment by 92% of the average of the three
closing bid prices immediately preceding the installment date, and in the case
of the second installment, the number of shares obtained by dividing the amount
of the installment by 92% of the average of the three lowest closing bid prices
during the ten trading day period immediately preceding the installment date. We
refer to the shares we sell under the agreement as “put shares.” The issuance of
put shares to Brittany is to take place from time to time, at our discretion,
over the course of a commitment period extending to October 2009.





Blackout Shares.If we suspend
sales of common stock pursuant to the registration statement covering shares
issuable under the equity line within 15 trading days of a sale of common stock
to Brittany and our stock price declines during the suspension period, we will
be required to issue that number of additional shares of our common stock which,
when combined with the shares purchased during the 15 trading days immediately
preceding the suspension, will equal the number of shares Brittany would have
received had the purchase been made at the conclusion of the suspension period
(at the lower per share price). Any obligation to deliver blackout shares
arising under the Private Equity Credit Agreement would be irrevocable, and
Brittany would have no discretion regarding whether or not to receive
them.




Fees. We are required to pay
Southridge Investment Group, LLC, formerly Greenfield Capital Partners, LLC, a
registered broker-dealer, a finder’s fee, in cash, equal to 1% of the amounts we
draw down from the equity line as consideration for services related to the
establishment of the Private Equity Credit Agreement.




Number of shares issuable under the
Private Equity Credit Agreement.We cannot predict the actual number of
shares of common stock that may be issued under the Private Equity Credit
Agreement, in part because the purchase price of the shares will fluctuate based
on prevailing market conditions and we have not determined the total amount of
cash advances we intend to draw. However, for illustrative purposes, we have
calculated the number of shares we would have to issue in connection with a
hypothetical draw amount of $50,000 based on the assumptions set forth
below:




Shares
Issuable Under Private Equity Credit Agreement for $50,000 Draw at Various
Market Prices




Hypothetical Market Price
                        
                        
                        Discounted Market
                          Price
                        
                        
                        Shares to be issued$
                        0.025
                        
                        
                        $
                        0.0230
                        
                        
                        
                        2,173,913$
                        0.020
                        
                        
                        $
                        0.0187
                        
                        
                        
                        2,717,391$
                        0.015
                        
                        
                        $
                        0.0138
                        
                        
                        
                        3,623,188$
                        0.010
                        
                        
                        $
                        0.0092
                        
                        
                        
                        5,434,783$
                        0.005
                        
                        
                        $
                        0.0046
                        
                        
                        
                        10,869,565




Based on
the closing price of our stock of $0.0009 on September 30, 2008, we would have
to issue to Brittany 16.7 billion shares of our common stock in order to draw
down the entire $15 million available to us under the Private Equity Credit
Agreement.  We have registered the resale of 7,863,636 shares we may
issue under the agreement pursuant to a Registration Statement on Form SB-2
(File # 333-137833), which was declared effective by the Securities &
Exchange Commission on October 25, 2006. Given the current price per share of
our common stock, it is very unlikely that these shares will be sufficient to
draw down the entire amount available to us under the agreement. If we desire to
draw down amounts under the Private Equity Credit Agreement after we have
exhausted the shares offered under our current registration statement, we will
have to file a new registration statement to registering the additional shares
that we would issue for these further draws.  As of the filing date of
this Annual Report, we had issued 4,807,692 shares under this
agreement.


27




Dilution. The issuance and
sale of shares under the Private Equity Credit Agreement will have a significant
dilutive impact on our stockholders for the following reasons:




·             As
described above, the lower our stock price is, the more shares we would have to
issue for a given draw down amount, and the more shares we issue, the greater
the extent of dilution to the ownership interest of our current stockholders. To
illustrate, if we issue and sell all of the shares being offered under our
current registration statement, they would represent approximately 5% of our
outstanding common stock after giving effect to such issuance.




·             Because
the shares we may issue under the Private Equity Credit Agreement are
discounted, the issuance of these shares will also have a financially dilutive
impact on our current stockholders.




·             
Brittany’s sale of material amounts of our common stock into the market may
result in significant downward pressure on the price of the common stock as the
supply of freely tradable shares increases. Furthermore, this downward pressure
may encourage short sales, which could further depress on the price of the
common stock.




Finally,
if we are to utilize the full $15 million available under the Private Equity
Credit Agreement, given the current price of our common stock, it is very likely
our shareholder will need to approve an increase to the common stock authorized
for issuance under our Certificate of Incorporation, whether by increasing the
number of shares we are authorized to issue, effecting a reverse split of our
common stock (thereby decreasing the number of shares outstanding), or both. At
the market price of our common stock as of September 30, 2008, it would require
16.7 billion shares to draw down the full $15.0 million available under the
agreement, and we have only 533.9 million shares of common stock available for
issuance as of September 30, 2008.





Critical
Accounting Policies




In
preparing financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and revenues and expenses during the periods
presented.  Actual results may differ from these
estimates.





Significant
estimates during 2006 and 2005 include valuation of available for sale
marketable securities pursuant to SFAS No. 115, the valuation of stock
options/warrants granted for services, the value of warrants issued in
connection with debt and equity related financings, valuation of all components
of derivative liabilities, valuation and related amortization of intangible
assets and the valuation allowance for deferred tax assets since the Company had
continuing operating losses.




Impairment
of Long-lived Assets




We review
the carrying value of intangibles and other long-lived assets for impairment at
least annually or whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.  Recoverability of
long-lived assets is measured by comparison of its carrying amount to the
undiscounted cash flows that the asset or asset group is expected to
generate.  If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the property, if any, exceeds its fair market
value.  Goodwill represents the excess of the cost of our acquired
subsidiaries or assets over the fair value of their net assets at the date of
acquisition.  Under Statement of Financial Accounting Standards
(“SFAS”) No. 142, goodwill is no longer subject to amortization over its
estimated useful life; rather, goodwill is subject to at least an annual
assessment for impairment applying a fair-value based test.





Impairment
charges taken during the years ended December 31, 2006 and December 31, 2005
were $1,949 and $525,986, respectively.





We
account for long-lived assets in accordance with the provisions of Statement of
Financial Accounting Standards No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets” (“SFAS 144”).  SFAS No. 144 requires
that long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.  Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future undiscounted net
cash flows expected to be generated by the asset.  If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the
assets.  Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell the asset.


28





During
the year ended December 31, 2005, we recognized and charged to operations an
impairment charge of $525,986 in connection with non-recoverable license
technology.





Revenue
Recognition




We follow
the guidance of the SEC’s Staff Accounting Bulletin No. 104 for revenue
recognition.  In general, we record revenue when persuasive evidence of an
arrangement exists, services have been rendered or product delivery has
occurred, the sales price to the customer is fixed or determinable, and
collectability is reasonably assured.  We generated revenues only through
our wholly-owned subsidiary.  These revenues were included as a
component of discontinued operations.




Income
Taxes




As part
of the process of preparing financial statements, we are required to estimate
income taxes in each of the jurisdictions in which it operates. Significant
judgment is required in determining the income tax expense provision. We
recognize deferred tax assets and liabilities based on differences between the
financial reporting and tax bases of assets and liabilities using the enacted
tax rates and laws that are expected to be in effect when the differences are
expected to be recovered. We assess the likelihood of our deferred tax assets
being recovered from future taxable income. We then provide a valuation
allowance for deferred tax assets when we do not consider realization of such
assets to be more likely than not. We consider future taxable income and ongoing
prudent and feasible tax planning strategies in assessing the valuation
allowance. Any decrease in the valuation allowance could have a material impact
on net income in the year in which such determination is made.




Basic
and Diluted Loss Per Share





In
accordance with Statement of Financial Accounting Standards No. 128, “Earnings
per Share” (“EPS”), basic earnings per share is computed by dividing the net
income (loss) less preferred dividends for the period by the weighted average
number of shares outstanding.  Diluted earnings per share are computed
by dividing net income (loss) less preferred dividends by the weighted average
number of shares outstanding including the effect of share
equivalents.  Common share equivalents consist of shares issuable upon
the exercise of certain common stock purchase warrants, stock options, and
convertible preferred stock. At December 31, 2006 and 2005, we had 76,000,000 and 48,700,000
(after application of the 20:1 reverse split in April 2006)potential
common share equivalents.  We have excluded these common share
equivalents from our computation of earnings per share due to their antidilutive
effect as we have reflected a net loss at December 31, 2006 and 2005,
respectively.  Accordingly, the basic and diluted EPS are the
same.




Stock-Based
Compensation





Prior to
January 1, 2006, we accounted for our stock options issued to employees pursuant
to APB 25, "Accounting for Stock Issued to Employees”.  Accordingly,
we would recognize employee stock-based compensation expense only if it granted
options at a price lower than the closing price of our common stock on the date
of grant. Any resulting compensation expense would then have been recognized
ratably over the associated service period. We provided proforma disclosure
amounts in accordance with SFAS No. 148, "Accounting for Stock-Based
Compensation -Transition and Disclosure", as if the fair value method defined by
SFAS 123 had been applied to its stock-based compensation.





Effective January 1, 2006, we adopted
the fair value recognition provisions of SFAS 123R, using the modified
prospective transition method and therefore, has not restated prior periods'
results. Under this transition method, employee stock-based compensation expense
for the year ended December 31, 2006 has included compensation expense for all
stock-based compensation awards granted, but not yet fully vested, prior to
January 1, 2006, utilizing the fair value of the options as determined at the
original grant date in accordance with the provisions of SFAS 123. 
Stock-based compensation expense for all share-based payment awards granted on
or after January 1, 2006 is based on the grant-date fair value estimated in
accordance with the provisions of SFAS 123R.





We recognize these compensation costs
over the requisite service period of the award, which is generally the vesting
term of the options.





Stock-based employee compensation
expense relating to our stock option plans (See Note 8) reflected in net loss
for the years ended December 31, 2006, 2005 and 2004 was $76,701, $15,799, and
zero, respectively.  Of the December 31, 2006 expense, $49,193 related
to unvested options outstanding prior to January 1, 2006, the incremental impact
to the consolidated financial statements as a result of adopting SFAS
123R.





Recently
Issued Accounting Standards




On June
5, 2003, the United States Securities and Exchange Commission (“SEC”) adopted
final rules under Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”),
as amended by SEC Release No. 33-8934 on June 26, 2008.  Commencing
with its annual report for the fiscal year ending December 31, 2009, the Company
will be required to include a report of management on its internal control over
financial reporting. The internal control report must include a
statement:


29





Of
      management’s responsibility for establishing and maintaining adequate
      internal control over its financial
reporting;





Of
      management’s assessment of the effectiveness of its internal control over
      financial reporting as of year end;
and





Of
      the framework used by management to evaluate the effectiveness of the
      Company’s internal control over financial
  reporting.





Furthermore,
in the following year, it is required to file the auditor’s attestation report
separately on the Company’s internal control over financial reporting on whether
it believes that the Company has maintained, in all material respects, effective
internal control over financial reporting.





In
December 2007, the FASB issued FASB Statement No. 141 (Revised 2007)“Business Combinations”
(“SFAS No. 141(R)”), which requires the Company to record fair value estimates
of contingent consideration and certain other potential liabilities during the
original purchase price allocation, expense acquisition costs as incurred and
does not permit certain restructuring activities previously allowed under
Emerging Issues Task Force Issue No. 95-3 to be recorded as a component of
purchase accounting.  SFAS No. 141(R) applies prospectively to
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008, except for the presentation and disclosure requirements, which shall
be applied retrospectively for all periods presented.  The Company has
not determined the effect that the adoption of SFAS No. 141(R) will have on the
financial results of the Company.





In
December 2007, the FASB issued FASB Statement No. 160“Noncontrolling Interests in
Consolidated Financial Statements - an amendment of ARB No. 51” (“SFAS
No. 160”), which causes noncontrolling interests in subsidiaries to be included
in the equity section of the balance sheet.  SFAS No. 160 applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008, except for the presentation and disclosure requirements,
which shall be applied retrospectively for all periods presented.  The
Company has not determined the effect that the adoption of SFAS No. 160 will
have on the financial results of the Company.





In March
2008, the FASB issued FASB Statement No. 161“Disclosures about Derivative
Instruments and Hedging Activities an amendment of FASB Statement No.
133” (“SFAS No. 161”), which changes the disclosure requirements for
derivative instruments and hedging activities.  Pursuant to SFAS
No.161, entities are required to provide enhanced disclosures about (a) how and
why an entity uses derivative instruments, (b) how derivative instruments and
related hedged items are accounted for under Statement 133 and its related
interpretations, and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance, and cash
flows.  SFAS No. 161 is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008 with early
application encouraged.  SFAS No. 161 encourages but does not require
disclosures for earlier periods presented for comparative purposes at initial
adoption.  In years after initial adoption, this Statement requires
comparative disclosures only for periods subsequent to initial
adoption.  The Company does not expect the adoption of SFAS No. 161 to
have a material impact on the financial results of the Company.





Management
does not believe that any other recently issued, but not yet effective
accounting pronouncements, if adopted, would have a material effect on the
accompanying  financial statements.





RESULTS
OF OPERATIONS FOR YEARS ENDED


DECEMBER
31, 2006 COMPARED TO DECEMBER 31, 2005




Net sales
were $44,311 and $125 for the years ended December 31, 2006 and, 2005,
respectively. These consisted of the sales of samples of NuCapTM and
HNIPU.





Cost of
sales included costs of raw materials, handling and freight charges. Costs of
sales were $31,466 and $30 for the years ended December 31, 2006 and 2005,
respectively.





The
December 31, 2006 gross profit was $12,845 compared with gross profit for the
year ended December 31, 2005 of $95.





Selling, general and administrative
expenses include salaries for administrative personnel, insurance and other
administrative expenses, as well as expenses associated with maintaining the
corporation’s records and reporting compliance as a public corporation. General
and administrative expenses decreased to $1,666,274 in 2006 from $2,572,895 in
2005. Much of the decrease was due to the cost of professional services for fund
raising, legal and consulting services incurred in 2005.


30





Depreciation
and amortization was zero in the year ended December 31, 2006 and $147,933 in
the year ended December 31, 2005. The Company had no fixed assets to depreciate
during either year and the intangible assets were fully amortized at December
31, 2005.





Interest
expense, consisting of the amortization of beneficial conversion features and
warrants associated with various convertible loans, was $1,337,155 for the year
ended December 31, 2006 compared to $5,529,463 for the year ended December 31,
2005.  The decrease was primarily due to the reduction in placement of
convertible loans during 2006 and the timing of the amortization of the related
beneficial conversion features.





The
change in fair value of derivative instruments for the years ending December 31,
2006 and 2005 was income of $1,287,845 and $2,928,808, respectively, due to a
decrease in our common stock price.





We
recorded a loss from discontinued operations of zero and $809,380 in the years
ended December 31, 2006 and 2005, respectively.  The loss during
fiscal 2005 included the loss on our discontinued operation of
TTF.





RESULTS
OF OPERATIONS FOR YEARS ENDED


DECEMBER
31, 2005 COMPARED TO DECEMBER 31, 2004




Net sales
were $125 and $620 for the years ended December 31, 2005 and December 31, 2004,
respectively. These consisted of the sale of samples of NuCapTM and HNIPU and
were recognized upon shipment of the materials.





Cost of
sales includes costs of raw materials, handling and freight charges. Costs of
sales were $30 and $558 for the years ended December 31, 2005 and 2004,
respectively. This cost represents 24% of net sales in 2005 and 90% of net sales
in  2004.





December
31, 2005 saw a gross profit of $95 compared with gross profit for the year ended
December 31, 2004 of $62.





There
were no product development expenditures in 2005 or 2004. As of the end of 2004
there have been no expenditures for product development related to the Licensed
Technologies Division.





Selling,
general and
administrative expenses include salaries for administrative personnel, insurance
and other administrative expenses, as well as expenses associated with
maintaining the corporation’s records and reporting in compliance with its
status as a public corporation. General and administrative expenses increased to
$1,621,520 in 2005 from $1,321,161 in 2004. Much of the increase is the cost of
professional services for legal and consulting services.





Depreciation
andamortization
was $147,933 in the year ended December 31, 2005 and $197,244 in the year ended
December 31, 2004. The 25% decreaseis due to a 100%
impairment charge in connection with the value of the licensed
technologies.





Interest
expense for the year ended December 31, 2005 was $5,529,463 and consisted of the
amortization of beneficial conversion feature and warrants associated with
various convertible loans. Interest for the year ended December 31, 2004 was
$1,621,520 and consisted of $34,072 in interest expense on various loans,
$212,617 in interest charges on the Series B, C, D and E preferred stock,
$1,030,646 of amortization of beneficial conversion feature associated with
various convertible loans and $344,185 of interest expense related to the
amortization of warrants associated with various convertible loans.





Other
income for the years ending December 31, 2005 and 2004 was $0 and $211,395,
respectively. This income predominantly consists of the settlement of accrued
expenses, which were settled for less than the amount, which had been
estimated.





Change in
fair value of derivative instruments for the years ending December 31, 2005 and
2004 was income of $2,928,808 and expense of $87,171, respectively, due to a
change in our common stock price.





We
recorded a loss from discontinued operations of $809,380 and $30,022 in the
years ended December 31, 2005 and 2004, respectively, for our discontinued
operation of TTF in 2005 and Internet services in 2004.





Liquidity
and Capital Resources




Our sources of capital are extremely
limited.  We have incurred operating losses since inception and as of
December 31, 2006, we had an accumulated deficit of $38.1
million.


31





Cash
Provided by Financing Activities




We have
continued to finance our business primarily through private placement sales of
our common stock, convertible securities, and notes. Cash provided by financing
activities for the year ended December 31, 2006 was $1,013,934, compared to
$1,920,000 for the year ended December 31, 2005.




Private
Placements with Southridge Partners, LP





On
January 31, 2005, we entered into a Second Securities Purchase Agreement with
Southridge Partners, LP, one of our existing investors, whereby we agreed to
sell a convertible promissory note in the principal amount of $250,000 and
warrant to purchase up to 10,000,000 shares of our common stock to Southridge in
exchange for its $250,000 investment. The note was convertible, at the option of
Southridge, into shares of our common stock at a conversion price of $0.02 per
share. The interest rate of this note was two percent (2%) per annum. Southridge
was entitled to require us to repurchase some or all of its note if the market
price of our common stock falls below $0.03 per share for ten (10) consecutive
trading days, at a repurchase price equal to 140% of the principal amount of the
note. In the event we defaulted under the terms of the note, the entire
outstanding principal (and any outstanding interest accrued thereon) was to
become immediately due and payable, and the interest rate automatically
increased to 18% per annum. This note was paid off on January 2,
2007.





Under the
terms of the purchase agreement, Southridge had the option, and at any time
prior to July 1, 2005 to purchase an additional note in the principal amount of
up to $1,500,000, and otherwise on substantially the same terms as the note
issued on January 31, 2005. During the nine months ended September 30, 2005,
Southridge exercised this option on March 2, April 11, and May 2, 2005,
purchasing notes in the aggregate principal amount of $425,000 and warrants to
purchase up to 17,000,000 shares of our common stock at an exercise price of
$0.025 per share. All of these transactions were exempt from registration
pursuant to the provisions of Section 4(2) of the Securities Act. On July 8,
2005, Southridge Partners, LP and we terminated its option to purchase
additional notes.





We have
secured the payment of the notes with a subordinated security interest in our
accounts, general intangibles, inventories, and other collateral. In addition,
in the event we propose to register securities under the Securities Act, we are
required to notify Southridge in advance of such registration and, at its
request (subject to limited exceptions), include the shares of our common stock
underlying its notes and warrant on the registration statement filed in
connection with such registration (and assume any expenses associated
therewith). The warrants have an expiration date of January 31, 2010 and contain
a cashless exercise provision whereby the Southridge may pay the exercise price
associated with any exercise by having us withhold a number of shares otherwise
issuable upon such exercise having a fair market value equal to the applicable
aggregate exercise price. In the event such provision is used with respect to an
exercise, we would receive no proceeds upon such exercise.





Exchange
Agreement with Woodward, LLC





On
January 31, 2005, we entered into an Exchange Agreement with Woodward, LLC
pursuant to which we acquired promissory notes, and have accordingly assumed all
rights pertaining thereto, issued by Eurotech, Ltd. The notes are currently in
default and have an aggregate outstanding principal amount of $290,000. The
notes carry a default annual interest rate of 18% and are past due in their
entirety. In exchange for these notes, we issued to Woodward a promissory note
with an annual interest rate of two percent (2%) in the principal amount of
$250,000, which is convertible at the election of Woodward into shares of our
common stock at the conversion price equal to 80% of the average of the seven
(7) lowest closing bid prices for the ten (10) trading days immediately
preceding the date we receive written notice from Woodward of its election to
effect such a conversion. Under the terms of the Exchange Agreement, in the
event we propose to register securities under the Securities Act.  We
are required to notify Woodward in advance of such registration and, at its
request (subject to limited exceptions), include the shares of our common stock
underlying the note on the registration statement filed in connection with such
registration, and assume any expenses associated therewith.  The
maturity date is December 2008.  This note was assigned to Aberdeen
Avenue, LLC on May 24, 2006.





Private
Placements with MacNab, LLC





On June
14, July 13, August 1, September 14, 2005, and October 3, 2005, we entered into
Securities Purchase Agreements with MacNab, LLC, each in substantially the same
form, pursuant to which we sold nonnegotiable 2% secured convertible promissory
notes in the aggregate principal amount of $595,000, and warrants to purchase up
to 23,800,000 shares of our common stock for an aggregate purchase price of
$595,000. The notes and warrants are on substantially the same terms as the
notes and warrants issued to Southridge, as described above.  On May
24, 2006, these notes were assigned to Aberdeen Avenue, LLC with the maturity
date extended to December 31, 2008.





On July
13, 2006, we entered into a nonnegotiable promissory note for $150,000 that was
payable in the amount of $180,000.  The maturity date was extended to
June 30, 2008 in the amount of $220,000.


32





Debt
Issuance to Southridge Partners, LP.





On
January 31, 2005, March 2, 2005, April 11, 2005, May 12, 2005, December 7, 2005,
June 20, 2006, September 13, 2006, October 19, 2006, December 1, 2006 and
December 21, 2006, we issued  promissory notes in the aggregate
principal amount of $1,295,000 to Southridge with a maturity date of June 30,
2008 and a current interest rate of 2%. In addition on January 10, 2007, and
January 25, 2007, we issued promissory notes in the aggregate principal amount
of $90,000 to Southridge that matures on December 31, 2008.   In
the event of a default, the annual interest rate on all of these notes will
increase to 18% and Southridge may, at its option, demand immediate payment of
all amounts due under these notes.   The January 31, 2005, March
2, 2005 and May 12, 2005 notes in the aggregate amount of $550,000 were amended
on May 24, 2006 whereby December 31, 2008 has been established as the new
maturity date for each of these notes.  While no notice of default has
been received from Southridge regarding the remaining notes, the Company and
Southridge are negotiating the terms of the amendments to these remaining
notes.





Promissory
Notes Sold to Aberdeen




On July
13, 2006, we executed a promissory note agreement with Aberdeen, one of our
existing investors, pursuant to which we received gross proceeds of $150,000.
The principal value of the note is $180,000 which is payable in full on or
before November 30, 2006. If the Company fails to pay the principal amount in
full on or before the maturity date, then the principal amount increases to
$200,000. The note does not otherwise incur interest. The note contains usual
and customary events of default.  We are currently seeking to
renegotiate the terms of this note.





On
September 13, 2006, we executed an additional promissory note agreement with
Aberdeen pursuant to which it received gross proceeds of $50,000. The principal
value of the note is $60,000 which is payable in full on or before November 30,
2006. If the Company fails to pay the principal amount in full on or before the
maturity date, then the principal amount increases to $75,000. The note does not
otherwise incur interest. The note contains usual and customary events of
default. We are currently seeking to renegotiate the terms of this
note.





Amendment
of Convertible Promissory Notes




On May
24, 2006, we entered into an agreement to amend the terms of the promissory
notes issued to MacNab, LLC and Southridge. Under the terms of the amendment, we
have, among other things, modified the conversion price from a fixed rate of
$.60 per share to a variable rate based on 80% of the market price of our common
stock and eliminated a provision which permitted the holder to force us to
repurchase its note at a 40% premium over the outstanding principal in the event
shares of our common stock trade below $.60 for 10 consecutive trading days.
MacNab, LLC waived all penalties due from the Company, which amounted to more
than $500,000. While we believe that this amendment was in the best interests of
the company, stockholders will be subject to significant dilution of their
shares of common stock in the event our stock price declines.





On July
12, 2006, we (i) issued 450,000 shares of common stock to Consulting for
Strategic Growth 1, Inc. for services to be rendered during July, August and
September 2006, (ii) granted non-qualified stock options to the members of the
Board of Directors, with an exercise price of $0.05 as follows; 250,000 to Mr.
K.I.F Gothner, 100,000 to Mr. Tom Folsom and 1,000,000 to Mr. Michael Sheppard,
(iii) issued to Peter Gulko non-qualified stock options for the purchase of
186,063 shares of common stock at an exercise price of $0.05, and (iv) granted
to each member of the Board non-qualified stock options for the purchase of
250,000 shares of common stock on each of September 30, 2006 and December 29,
2006 at an exercise price per share equal to the then-current market price of
our common stock.





On October 20, 2006 we issued a
non-qualified option for 350,000 shares of common stock to Future Now Capital
Markets Group, Inc. as consideration for services rendered.  This
option is exercisable on a cashless basis at a price of $0.0129 a share and will
expire October 19, 2011.





On
November 14, 2006, we issued a non-qualified option for an additional 150,000
shares of common stock to Future Now Capital Markets Group, Inc. as
consideration for services rendered.  This option is exercisable on a
cashless basis at a price of $0.0070 a share and will expire November 13,
2011.





On
December 27, 2006 we issued a non-qualified option for 1,582,750 shares of
common stock to a consultant and Future Now Capital Markets Group, Inc. for
consideration of services rendered at a price of $0.0065 a share and will expire
December 28, 2011.


33


On April
2, 2007, our Board of Directors resolved that we (i) complete negotiating the
application for D & O insurance, (ii) complete the settlement agreement with
Carey Naddell in lieu of cash, legal fees and penalty, for 20,000,000 shares of
the Company’s common stock with registration rights, (iii) engage an advisor for
$12,500 and warrants worth $12,500, (iv) sell its minority interest in Tulix for
$50,000, (v) issue Future Now Capital Markets Group, Inc. 1,250,000 shares for
services rendered along with $15,000, (vi) has the authority to borrow up to
$350,000, and (vii) options be granted to Peter Gulko, a consultant for services
rendered for 1,578,912 shares of common stock and to the Board of Directors for
1,100,000 shares of common stock.





Going
Concern and Financing Requirements





The
report of our independent registered public accounting firm found in this Annual
Report on Form 10-K includes a going-concern qualification, which indicates an
absence of obvious or reasonably assured sources of future funding that will be
required by us to maintain ongoing operations. If we are unable to obtain
additional funding, we may not be able to continue operations. To date, we have
funded our operations through equity investments and issuances of debt.
Additionally, we had an accumulated deficit of approximately $38.1 million as of
December 31, 2006. This deficit indicates that we may be unable to meet our
future obligations unless additional funding sources are obtained. There is no
assurance that we will be able to raise any additional capital that we require
to continue operations.




Our
audited interim financial statements included with this Annual Report on Form
10-K have been prepared assuming that we will continue as a going concern. As
shown in the accompanying audited financial statements, we had negative working
capital of approximately $3.7 million.




In the
event that we are unable to raise additional financing on acceptable terms, then
we may have to scale back our plan of operations and operating expenditures or
seek the protection of the bankruptcy courts. We anticipate that we will
continue to incur losses until such time as the revenues we are able to generate
revenue from sales and licensing of our products exceed our increased operating
expenses. There can be no assurance that we will be able to generate
revenue.





Off-Balance
Sheet Arrangements





We have
no off-balance sheet arrangements that have or are reasonably likely to have a
current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that is material to stockholders.




Contractual
Obligations




The
Company had no contractual obligations as of December 31, 2006.





Seasonality





Seasonal
issues have an insignificant impact on the Company’s business.





Future
Operating Results




Future
operating results, which reflect management’s current expectations, may be
impacted by a number of factors that could cause actual results to differ
materially from those stated herein.  These factors include worldwide
economic and political conditions, terrorist activities, industry specific
factors and governmental agencies.




Item
7A.  Quantitative and Qualitative Disclosures about Market
Risk




Exchange
Rate, Interest Rate and Supply Risks




The
Company has no exchange rate risks as we conduct 100% of our operations in the
United States of America, and we conduct our transactions in US
dollars.  The Company is exposed to extensive market risk in the areas
of financing and interest cost.  Please refer to Item 1A.  Risk
Factors for additional disclosure about risk.  Increases in our
borrowing rates, as small as 100 basis points, could significantly increase our
losses and hinder our ability to generate sufficient working
capital.  The slightest disruption in our supply chain could also
significantly increase our losses and hinder our ability to purchase our
products for resale and application.  The Company has no protection
against interest rate risk or supply disruptions.  While the Company
does not engage in any other sort of hedging activity it does hold investment
securities at September 30, 2008.





34




Item
8. Financial Statements and Supplementary Data





Our
financial statements and the related notes thereto called for by this item
appear under the caption “Financial Statements” beginning on page F-1 attached
hereto of this Annual Report on Form 10-K.





ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND


FINANCIAL
DISCLOSURE





Dismissal
of Sherb & Company, LLP as Certifying Accountant




On April
28, 2006, at the recommendation of our board of directors, we dismissed our
independent registered public accounting firm, Sherb & Company, LLP
(“Sherb”) of Boca Raton, Florida. During the fiscal years ended
December 31, 2004 and 2005, and during the interim period ended April 28,
2006, there were no disagreements with Sherb on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, that, if not resolved to the satisfaction of Sherb, would have caused
it to make reference thereto in its reports regarding our financial statements
for such years.




The
reports of Sherb contained in our audited financial statements for the fiscal
years ended December 31, 2004 and December 31, 2005 each contained a
going-concern qualification, which indicates an absence of obvious or reasonably
assured sources of future funding that will be required by us to maintain
ongoing operations. The aforementioned reports did not contain any other adverse
opinion or disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principles.




Appointment
of Mantyla McReynolds, LLC as Certifying Accountant




On April
28, 2006, we appointed Mantyla McReynolds, LLC (“Mantyla”) of Salt Lake City,
Utah, as our independent registered public accounting firm. During the fiscal
years ended December 31, 2004 and December 31, 2005 and the subsequent
interim period through April 28, 2006, we did not consult with Mantyla regarding
the application of accounting principles to any specified transaction, the type
of audit opinion that might be rendered on our financial statements, or any
matter that was the subject of a disagreement with Sherb & Company, LLP or a
reportable event as defined in applicable SEC rules.





Resignation
of Mantyla as Certifying Accountant





On
February 7, 2008, the Company was advised that its independent accountant,
Mantyla had resigned as the principal independent accountant for the
Company.





Mantyla
never issued an audit report or gave an audit opinion.





The
Company's board of directors, acting as the Audit Committee, unanimously
recommended and approved the decision to accept the resignation of Mantyla as
the Company’s independent registered public accounting firm.





Through
February 7, 2008, there were no disagreements with Mantyla on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
Mantyla, would have caused it to make reference to the subject matter of such
disagreements in connection with its audit report. There were no reportable
events as defined in Item 304(a)(1)(v) of Regulation S-K.





The
Company has given permission to Mantyla to respond fully to the inquiries of the
successor auditor, including those concerning the subject matter of this
reportable event.





Appointment
of Li & Company, PC as Certifying Accountant





The
Company engaged Li & Company, PC (“Li”) as its new independent registered
public accounting firm as of February 26, 2008.





During
the years ended December 31, 2005 and December 31, 2004, and through February
26, 2008, the Company did not consult with Li with regard to any of the matters
or events as set forth in Item 304(a)(2)(i) and (ii) of Regulation
S-K.


35


ITEM
9A. CONTROLS AND PROCEDURES





Disclosure
Controls and Procedures




We
maintain disclosure controls and procedures, which are designed to provide
reasonable assurance that information required to be disclosed in the reports we
file or submit under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission’s rules and forms, and that such
information is accumulated and communicated to our management, including our
chief executive officer and chief financial officer, as appropriate, to allow
timely decisions regarding required disclosure.





However,
during the course of this evaluation, our chief executive officer and chief
financial officer made the following observations:





•
            Due
      to the significant commitment of Company time and resources required in
      connection with the review of the Company’s financial statements and the
      auditing of the Company’s 2004 financial statements, the Company did not
      timely file its Annual Report on Form 10-KSB for the fiscal year ended
      December 31, 2004 or its Quarterly Reports on Form 10-QSB for the quarters
      ended March 31, 2005, June 30, 2005 and September 30, 2005.  In
      addition, the Company was unable to timely file its Annual Reports on Form
      10-K for the years ended December 31, 2006 and 2007 and its Quarterly
      Reports on Form 10-Q for the quarters ended March 31, 2007 and 2008, June
      30, 2007 and 2008 and September 30, 2007 and
  2008.




Management
concluded that the problems set forth above necessitated a conclusion that our
disclosure controls and procedures were ineffective as of December 31,
2006.  Our management has concluded that the problems set forth above
were largely the result of inadequate staffing, competence and segregation of
duties in our accounting and financial reporting functions and insufficient
analysis, documentation and review of the selection and application of generally
accepted accounting principles to significant non-routine transactions, which we
have since addressed by retaining an outside consultant to assist with some of
the highly technical issues relating to the company’s capital
structure.  While we were able to timely file our quarterly report on
Form 10-QSB for the quarter ended September 30, 2005, we were unable to file
this Annual Report on Form 10-K, indicating that the issues relating to the
timeliness of our reporting have not been successfully resolved.





Management
believes that additional progress in strengthening our controls and procedures
will continue throughout fiscal years 2007 and 2008.  To further
ensure that our disclosure controls and procedures continue to be effective, we
intend to hire an accounting professional to increase our capabilities related
to interpretive research into complex accounting issues promptly after we raise
sufficient financing to permit us to do so.





Management
continues to consider methods to improve the quality and timeliness of reporting
and will continue to evaluate and address any issues it identifies relating to
the processes and resources necessary for effective disclosure controls and
procedures.





Changes
in Internal Control over Financial Reporting




There
were no changes in our internal control over financial reporting during the
quarter ended December 31, 2006 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.




ITEM
9B. OTHER INFORMATION





Please refer to ITEM 1. Business-History of
this Annual Report on Form 10-K for disclosures relating to promissory notes
issued by the Company in the fourth quarter of 2006 for which the Company did
not file the required Form 8-K’s.


36





GLOBAL
MATRECHS, INC.





December
31, 2006, 2005 and 2004





INDEX
TO FINANCIAL STATEMENTS





PageReport
      of Independent Registered Public Accounting Firm
                      
                      F-2Report
      of Independent Registered Public Accounting Firm
                      
                      F-3Balance
      Sheets as of December 31, 2006 and 2005
                      
                      F-4Statements
      of Operations for the Years Ended
                      
                      F-5December
      31, 2006, 2005 and 2004Statements
      of Stockholders' Deficit for the Years Ended
                      
                      F-6December
      31, 2006, 2005 and 2004Statements
      of Cash Flows for the Years Ended
                      
                      F-7,
      F-8December
      31, 2006, 2005 and 2004Notes
      to the Financial Statements
                      
                      F-9


F-1





REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Stockholders of


Global
Matrechs, Inc.


Ridgefield,
Connecticut





We have
audited the accompanying balance sheet of Global Matrechs, Inc. as of December
31, 2006 and the related statements of operations, stockholders’ deficit and
cash flows for the year then ended.  These financial statements are
the responsibility of the Company’s management.  Our responsibility is
to express an opinion on these financial statements based on our
audits.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting.  Accordingly, we express no such opinion. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audit provides a reasonable basis
for our opinion.





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Global Matrechs, Inc. as of
December 31, 2006 and the results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States of America.





The
accompanying financial statements have been prepared assuming that Global
Matrechs, Inc. will continue as a going concern.  As discussed in Note
3 to the financial statements, the Company had an accumulated deficit and a
working capital deficiency at December 31, 2006 and had a net loss and cash used
in operations for the year ended December 31, 2006, respectively. These
conditions raise substantial doubt about its ability to continue as a going
concern. Management’s plans in regards to these matters are also described in
Note 3. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.





/s/ Li & Company, PCLi
      & Company, PCSkillman,
      New JerseyJanuary
      15, 2009


F-2


REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM









F-3




GLOBAL
MATRECHS, INC.


BALANCE
SHEET





December
      31,2006
                                  
                                  
                                  2005ASSETSCurrent
      Assets:Cash
                                  
                                  $
                                  1,397
                                  
                                  
                                  $
                                  67,993Investment
      in available for sale marketable securitiess-short term
                                  
                                  
                                  54,603
                                  
                                  
                                  
                                  108,666Accounts
      receivable, net of  allowance for doubtful  accounts
      of$5,500
      and $0 at December 31, 2006 and 2005, respectively
                                  
                                  
                                  8,793
                                  
                                  
                                  
                                  -Inventories
                                  
                                  
                                  7,407
                                  
                                  
                                  
                                  28,590Notes
      receivable-current portion
                                  
                                  
                                  -
                                  
                                  
                                  
                                  50,000Prepaid
      expenses and other current assets
                                  
                                  
                                  31,299
                                  
                                  
                                  
                                  20,045Total
      Current Assets
                                  
                                  
                                  103,499
                                  
                                  
                                  
                                  275,294Notes
      receivable-less current portion
                                  
                                  
                                  -
                                  
                                  
                                  
                                  250,000Investment,
      at cost
                                  
                                  
                                  50,000
                                  
                                  
                                  
                                  51,949Total
      Assets
                                  
                                  $
                                  153,499
                                  
                                  
                                  $
                                  577,243LIABILITIES
      AND STOCKHOLDERS' DEFICITCurrent
      Liabilities:Notes
      payable, current portion
                                  
                                  $
                                  375,000
                                  
                                  
                                  $
                                  200,000Convertible
      debentures and notes payable,net
      of unamortized debt discounts of $378,965 and $1,113,080as
      of December 31, 2006 and 2005,  respectively
                                  
                                  
                                  2,559,241
                                  
                                  
                                  
                                  4,590,456Accounts
      payable and accrued expenses
                                  
                                  
                                  764,668
                                  
                                  
                                  
                                  1,405,352Accrued
      interest
                                  
                                  
                                  261,458
                                  
                                  
                                  
                                  -Derivative
      financial instruments
                                  
                                  
                                  (130,818
                                  )
                                  
                                  
                                  1,112,873Total
      Current Liabilities
                                  
                                  
                                  3,829,549
                                  
                                  
                                  
                                  7,308,681Convertible
      preferred stock
                                  
                                  
                                  803,700
                                  
                                  
                                  
                                  4,211,062Total
      Liabilities
                                  
                                  
                                  4,633,249
                                  
                                  
                                  
                                  11,519,743COMMITMENTS
      AND CONTINGENCIESStockholders'
      Deficit:Convertible
      preferred stock; Series H, par value $.01, authorized 13,500 shares;
      8,662and
      12,442 shares issued and outstanding, respectively
                                  
                                  
                                  86
                                  
                                  
                                  
                                  124Convertible
      preferred stock; Series I, par value $.01, authorized 490.5 shares;
      490.5shares
      issued and outstanding, $49,050 liquidation value
                                  
                                  
                                  5
                                  
                                  
                                  
                                  5Common
      stock; $.0001 par value; 900,000,000 and 300,000,000
sharesauthorized
      at December 31, 2006 and 2005, respectively;72,126,697
      and 7,334,615 shares issued and outstandingat
      December 31, 2006 and 2005, respectively
                                  
                                  
                                  7,213
                                  
                                  
                                  
                                  733Additional
      paid in capital
                                  
                                  
                                  33,845,160
                                  
                                  
                                  
                                  25,648,119Accumulated
      deficit
                                  
                                  
                                  (38,139,226
                                  )
                                  
                                  
                                  (36,471,554
                                  )Accumulated
      other comprehensive loss
                                  
                                  
                                  (192,988
                                  )
                                  
                                  
                                  (119,927
                                  )Total
      Stockholders' Deficit
                                  
                                  
                                  (4,479,750
                                  )
                                  
                                  
                                  (10,942,500
                                  )Total
      Liabilities and Stockholders' Deficit
                                  
                                  $
                                  153,499
                                  
                                  
                                  $
                                  577,243


See
accompanying notes to the financial statements


F-4


GLOBAL
MATRECHS, INC.


STATEMENTS OF
OPERATIONS




For
      the years ended December 31,2006
                                        
                                        
                                        2005
                                        
                                        
                                        2004Net
      Sales
                                        
                                        $
                                        44,311
                                        
                                        
                                        $
                                        125
                                        
                                        
                                        $
                                        620Cost of Sales(exclusive
      of depreciation and amortizationshown
      separately below)
                                        
                                        
                                        31,466
                                        
                                        
                                        
                                        30
                                        
                                        
                                        
                                        558Gross
      Profit
                                        
                                        
                                        12,845
                                        
                                        
                                        
                                        95
                                        
                                        
                                        
                                        62Operating
      Expenses:Selling,
      general and administrative
                                        
                                        
                                        1,666,274
                                        
                                        
                                        
                                        2,572,895
                                        
                                        
                                        
                                        1,273,929Depreciation
      and amortization
                                        
                                        
                                        -
                                        
                                        
                                        
                                        147,933
                                        
                                        
                                        
                                        197,244Total
      Operating Expenses
                                        
                                        
                                        1,666,274
                                        
                                        
                                        
                                        2,720,828
                                        
                                        
                                        
                                        1,471,173Loss
      from Operations
                                        
                                        
                                        (1,653,429
                                        )
                                        
                                        
                                        (2,720,733
                                        )
                                        
                                        
                                        (1,471,111
                                        )Other
      Income (Expense):Other
      income
                                        
                                        
                                        14,109
                                        
                                        
                                        
                                        20,962
                                        
                                        
                                        
                                        211,395Other
      expense
                                        
                                        
                                        20,958
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Interest
      expense, net
                                        
                                        
                                        (1,337,155
                                        )
                                        
                                        
                                        (5,529,463
                                        )
                                        
                                        
                                        (1,621,520
                                        )Change
      in fair value of derivative instruments
                                        
                                        
                                        1,287,845
                                        
                                        
                                        
                                        2,928,808
                                        
                                        
                                        
                                        (87,171
                                        )Total
      Other Expenses
                                        
                                        
                                        (14,243
                                        )
                                        
                                        
                                        (2,579,693
                                        )
                                        
                                        
                                        (1,497,296
                                        )Loss
      from continuing operations
                                        
                                        
                                        (1,667,672
                                        )
                                        
                                        
                                        (5,300,426
                                        )
                                        
                                        
                                        (2,968,407
                                        )Discontinued
      operationsLoss
      from discontinued operations
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (809,380
                                        )
                                        
                                        
                                        (30,022
                                        )Net
      loss applicable to common shareholders
                                        
                                        
                                        (1,667,672
                                        )
                                        
                                        
                                        (6,109,806
                                        )
                                        
                                        
                                        (2,998,429
                                        )Comprehensive
      lossUnrealized
      loss on available for sale marketable securities
                                        
                                        
                                        (73,061
                                        )
                                        
                                        
                                        (119,927
                                        )
                                        
                                        
                                        -Total
      comprehensive loss
                                        
                                        $
                                        (1,740,733
                                        )
                                        
                                        $
                                        (6,229,733
                                        )
                                        
                                        $
                                        (2,998,429
                                        )Net
      loss per share basic and dilutedNet
      loss from continuing operations
                                        
                                        $
                                        (0.08
                                        )
                                        
                                        $
                                        (1.24
                                        )
                                        
                                        $
                                        (0.18
                                        )Net
      loss from discontinued operations
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (0.19
                                        )
                                        
                                        
                                        -Basic
      and diluted loss per common share
                                        
                                        $
                                        (0.08
                                        )
                                        
                                        $
                                        (1.43
                                        )
                                        
                                        $
                                        (0.18
                                        )Weighted
      average number of common shares outstanding -basic
      and diluted
                                        
                                        
                                        22,033,999
                                        
                                        
                                        
                                        4,287,167
                                        
                                        
                                        
                                        16,790,165
  See
accompanying notes to the financial statements
  F-5


GLOBAL
MATRECHS, INC.


STATEMENT
OF CHANGES IN STOCKHOLDERS’ DEFICIT


FOR THE YEARS ENDED DECEMBER
31, 2006, 2005 AND 2004




AccumulatedAdditional
                                            
                                            
                                            
                                            
                                            
                                            OtherPreferred
                                            
                                            
                                            Common
                                            
                                            
                                            Treasury
                                            
                                            
                                            Paid-In
                                            
                                            
                                            Accumulated
                                            
                                            
                                            Comprehensive
                                            
                                            
                                            Stockholders’Shares
                                            
                                            
                                            Amount
                                            
                                            
                                            Shares
                                            
                                            
                                            Amount
                                            
                                            
                                            Stock
                                            
                                            
                                            Capital
                                            
                                            
                                            Deficit
                                            
                                            
                                            Loss
                                            
                                            
                                            DeficitBalance,
      December 31, 2003
                                            
                                            
                                            13,500
                                            
                                            
                                            $
                                            135
                                            
                                            
                                            
                                            749,958
                                            
                                            
                                            $
                                            75
                                            
                                            
                                            $
                                            (8,659
                                            )
                                            
                                            $
                                            20,218,851
                                            
                                            
                                            $
                                            (27,363,319
                                            )
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            (7,152,917
                                            )Issuance
      of Series I preferred stock
                                            
                                            
                                            490
                                            
                                            
                                            
                                            5
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            5Receipt
      of Treasury stock
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (245,250
                                            )
                                            
                                            
                                            (25
                                            )
                                            
                                            
                                            (318,825
                                            )
                                            
                                            
                                            318,847
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (3
                                            )Issuance
      of Common Stock
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            107,554
                                            
                                            
                                            
                                            11
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            105,054
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            105,065Beneficial
      conversion feature on promissory notes
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            526,459
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            526,459Issuance
      of warrants for services rendered
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            258,942
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            258,942Conversion
      of Series H preferred stock to common stock
                                            
                                            
                                            (150
                                            )
                                            
                                            
                                            (2
                                            )
                                            
                                            
                                            75,000
                                            
                                            
                                            
                                            8
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (6
                                            )
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Conversion
      of temporary equity to common stock
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            1,107,510
                                            
                                            
                                            
                                            111
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            820,373
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            820,484Acquisition
      of True To Form Ltd.
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            500,000
                                            
                                            
                                            
                                            50
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            599,950
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            600,000Net
      loss
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (2,998,429
                                            )
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (2,998,429
                                            )Balance,
      December 31, 2004
                                            
                                            
                                            13,840
                                            
                                            
                                            $
                                            138
                                            
                                            
                                            
                                            2,294,772
                                            
                                            
                                            $
                                            230
                                            
                                            
                                            $
                                            (327,484
                                            )
                                            
                                            $
                                            22,848,471
                                            
                                            
                                            $
                                            (30,361,748
                                            )
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            (7,840,394
                                            )Retirement
      of treasury stock
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            327,484
                                            
                                            
                                            
                                            (327,484
                                            )
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Conversion
      of temporary equity to common stock
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            2,306,462
                                            
                                            
                                            
                                            231
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            2,301,294
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            2,301,525Conversion
      of Series H preferred stock to common stock
                                            
                                            
                                            (908
                                            )
                                            
                                            
                                            (9
                                            )
                                            
                                            
                                            454,000
                                            
                                            
                                            
                                            45
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (36
                                            )
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Conversion
      of promissory notes to common shares
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            296,393
                                            
                                            
                                            
                                            30
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            235,476
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            235,506Beneficial
      conversion feature on promissory notes
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            250,000
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            250,000Equity
      line advances
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            2,368,841
                                            
                                            
                                            
                                            237
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            484,893
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            485,130Issuance
      of common stock for services
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            114,148
                                            
                                            
                                            
                                            11
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            138,249
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            138,260Issuance
      of stock options for services
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            15,799
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            15,799Cancellation
      of stock warrants
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (227,593
                                            )
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (227,593
                                            )Cancellation
      of shares - discontinued operations
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (500,000
                                            )
                                            
                                            
                                            (50
                                            )
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (70,950
                                            )
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (71,000
                                            )Net
      loss
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            (6,109,806
                                            )
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (6,109,806
                                            )Accumulated
      other comprehensive loss
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (119,927
                                            )
                                            
                                            
                                            (119,927
                                            )Balance,
      December 31, 2005
                                            
                                            
                                            12,932
                                            
                                            
                                            $
                                            129
                                            
                                            
                                            
                                            7,334,615
                                            
                                            
                                            $
                                            733
                                            
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            25,648,119
                                            
                                            
                                            $
                                            (36,471,554
                                            )
                                            
                                            $
                                            (119,927
                                            )
                                            
                                            $
                                            (10,942,500
                                            )Account
      for old shares
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            1,026,066
                                            
                                            
                                            
                                            102
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (102
                                            )
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Conversion
      of temporary equity to common stock
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            15,465,746
                                            
                                            
                                            
                                            1,548
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            3,410,854
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            3,412,402Cancellation
      of Series H
                                            
                                            
                                            (1,500
                                            )
                                            
                                            
                                            (15
                                            )
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            15
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Conversion
      of Series H preferred stock to common stock
                                            
                                            
                                            (2,280
                                            )
                                            
                                            
                                            (23
                                            )
                                            
                                            
                                            1,140,000
                                            
                                            
                                            
                                            114
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (91
                                            )
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Conversion
      of promissory notes to common shares
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            36,441,533
                                            
                                            
                                            
                                            3,644
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            1,061,841
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            1,065,485Beneficial
      conversion feature on promissory notes
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            666,499
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            666,499Equity
      line advances
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            10,088,851
                                            
                                            
                                            
                                            1,009
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            637,229
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            638,238Warrant
      exercise
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            28,750
                                            
                                            
                                            
                                            3
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            5,693
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            5,696Stock
      issued for services
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            601,136
                                            
                                            
                                            
                                            60
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            38,569
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            38,629Options
      issued for compensation
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            71,938
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            71,938Remeasurement
      of notes
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            2,304,596
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            2,304,596Net
      loss
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (1,667,672
                                            )
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (1,667,672
                                            )Accumulated
      other comprehensive loss
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (73,061
                                            )
                                            
                                            
                                            (73,061
                                            )Balance
      December 31, 2006
                                            
                                            
                                            9,152
                                            
                                            
                                            $
                                            91
                                            
                                            
                                            
                                            72,126,697
                                            
                                            
                                            $
                                            7,213
                                            
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            33,845,160
                                            
                                            
                                            $
                                            (38,139,226
                                            )
                                            
                                            $
                                            (192,988
                                            )
                                            
                                            $
                                            (4,479,750
                                            )




See
accompanying notes to the financial statements





F-6


GLOBAL
MATRECHS, INC.
 STATEMENTS OF CASH
FLOWS
  For
      the Years Ended December 31,2006
                                
                                
                                2005
                                
                                
                                2004Cash
      flows from operating activities:Net
      loss
                                
                                $
                                (1,667,672
                                )
                                
                                $
                                (6,109,806
                                )
                                
                                $
                                (2,998,429
                                )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Amortization
      of intangibles
                                
                                
                                -
                                
                                
                                
                                147,933
                                
                                
                                
                                197,244Recovery
      of bad debts
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (47,232
                                )Asset
      impairment charge
                                
                                
                                1,949
                                
                                
                                
                                525,986
                                
                                
                                
                                -Change
      in fair value of warrants
                                
                                
                                (1,287,845
                                )
                                
                                
                                (2,928,808
                                )
                                
                                
                                57,639Change
      in fair value of conversion feature-preferred stock
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                29,534Stock
      and derivatives granted in exchange for services rendered
                                
                                
                                87,822
                                
                                
                                
                                300,734
                                
                                
                                
                                -Options
      issued as compensation
                                
                                
                                71,939
                                
                                
                                
                                -
                                
                                
                                
                                -Accrual
      of interest
                                
                                
                                261,458
                                
                                
                                
                                -
                                
                                
                                
                                -Amortization
      of beneficial conversion feature
                                
                                
                                734,115
                                
                                
                                
                                4,469,525
                                
                                
                                
                                1,920,245Remeasurement
      of notes
                                
                                
                                1,076,250
                                
                                
                                
                                -
                                
                                
                                
                                -Loss
      from discontinued operations
                                
                                
                                -
                                
                                
                                
                                809,380
                                
                                
                                
                                124,385(Increase)
      decrease in operating assets:Accounts
      receivable
                                
                                
                                (8,793
                                )
                                
                                
                                -
                                
                                
                                
                                321,650Inventories
                                
                                
                                21,183
                                
                                
                                
                                (28,590
                                )
                                
                                
                                -Prepaid
      expenses and other current assets
                                
                                
                                (11,254
                                )
                                
                                
                                (5,528
                                )
                                
                                
                                65,344Increase
      (decrease) in operating liabilities:Accounts
      payable and accrued expenses
                                
                                
                                (640,684
                                )
                                
                                
                                1,041,432
                                
                                
                                
                                (137,453
                                )Net
      cash used in operating activities
                                
                                
                                (1,361,532
                                )
                                
                                
                                (1,777,742
                                )
                                
                                
                                (467,073
                                )Cash
      flows from investing activities:Repayment
      of Tulix loan
                                
                                
                                -
                                
                                
                                
                                72,858
                                
                                
                                
                                -Loan
      to Tulix
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (71,225
                                )Issuance
      of note receivable
                                
                                
                                -
                                
                                
                                
                                (50,000
                                )
                                
                                
                                -Notes
      receivable
                                
                                
                                300,000
                                
                                
                                
                                -
                                
                                
                                
                                -Purchase
      of investments
                                
                                
                                (18,998
                                )
                                
                                
                                (228,593
                                )
                                
                                
                                -Net
      cash used in investing activities
                                
                                
                                281,002
                                
                                
                                
                                (205,735
                                )
                                
                                
                                (71,225
                                )Cash
      flows from financing activities:Proceeds
      from warrant exercise
                                
                                
                                5,696
                                
                                
                                
                                -
                                
                                
                                
                                -Proceeds
      from issuance of loan payable
                                
                                
                                175,000
                                
                                
                                
                                200,000
                                
                                
                                
                                -Proceeds
      from issuance of convertible loans payable
                                
                                
                                195,000
                                
                                
                                
                                1,270,000
                                
                                
                                
                                597,950Proceeds
      from equity line
                                
                                
                                638,238
                                
                                
                                
                                450,000
                                
                                
                                
                                -Net
      cash provided by financing activities
                                
                                
                                1,013,934
                                
                                
                                
                                1,920,000
                                
                                
                                
                                597,950Net
      increase (decrease) in cash:
                                
                                
                                (66,596
                                )
                                
                                
                                (63,477
                                )
                                
                                
                                59,652Cash
      at beginning of period
                                
                                
                                67,993
                                
                                
                                
                                131,470
                                
                                
                                
                                71,818Cash
      at end of period
                                
                                $
                                1,397
                                
                                
                                $
                                67,993
                                
                                
                                $
                                131,470
 See
accompanying notes to the financial statements
  F-7




GLOBAL
MATRECHS, INC.
 STATEMENTS OF CASH FLOWS
(CONTINUED)
  For
      the Years Ended December 31,2006
                                            
                                            
                                            2005
                                            
                                            
                                            2004Supplemental
      disclosure of non-cash investing and financing activity:Unrealized
      loss on securities held for sale
                                            
                                            $
                                            (73,061
                                            )
                                            
                                            $
                                            (119,927
                                            )
                                            
                                            $
                                            -Conversion
      of preferred shares into 51,907,279 shares, 55,209,230 shares
      and46,129,230
      shares of common stock in 2006, 2005 and 2004,
    respectively.
                                            
                                            $
                                            4,477,886
                                            
                                            
                                            $
                                            2,301,525
                                            
                                            
                                            $
                                            820,484Conversion
      of notes payable into 296,393 shares of common stock
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            235,506
                                            
                                            
                                            $
                                            -
 See
accompanying notes to the financial statements
  F-8


Note 1 - Nature of
Operations





Global
Matrechs, Inc. f/k/a Homecom Communications, Inc. (“Global” or the “Company”)
markets and sells technologies, licensed from Eurotech, Ltd. (“Eurotech”), to
manufacturers and other parties.  The Company was organized in 1994
and is currently incorporated in Delaware.  Upon its organization, the
Company provided complex, web-based software applications and integration
services to businesses seeking to take advantage of the Internet. Over time,
Global has been the successor to many businesses since and has undergone
material changes to its business and financial structure.  In 2008,
the Company formed Fairfield Consumer Group, Inc. (“Fairfield”), a wholly owned
subsidiary.  Fairfield is currently inactive.





Prior to
May 31, 2004, Global derived revenue from professional web development services,
software licensing, application development, insurance and securities sales
commissions, hosting fees and transactions fees. On May 31, 2004, The Company
sold substantially all of its assets used in the operation of its hosting and
web site maintenance business and retained a 15% interest in the surviving
entity. As a result of this sale, Global’s business consisted exclusively of the
marketing of technologies licensed from Eurotech under a licensing agreement
dated May 22, 2003.





On
December 31, 2004, Global completed the acquisition of True To Form, Ltd. (“True
To Form” or “TTF”), a maker of specialized lighting products for a range of
markets. As a result of this transaction, TTF became a wholly-owned subsidiary.
The acquisition was a result of arm’s length negotiations and was unanimously
approved by the disinterested members of our Board of Directors.





On
December 29, 2005, Global completed the sale of TTF back to its original owner.
During 2005, the accompanying financial statements account for the disposal of
TTF as a component of discontinued operations.





Note 2 - Going Concern and
Management’s Plans





The accompanying financial statements
have been prepared in conformity with United States generally accepted
accounting principles, which contemplate continuation of the Company as a going
concern and assume realization of assets and the satisfaction of liabilities in
the normal course of business. The Company has incurred losses from continuing
operations during the years ended December 31, 2006, 2005 and 2004 of
approximately, $1.7 million, $5.3 million and $3.0 million resulting in an
accumulated deficit balance of approximately $38.1 million as of December 31,
2006.  Net cash used in operations during the years ended December 31,
2006, 2005 and 2004 was approximately $1.4 million, $1.8 million and $0.5
million, respectively.  At December 31, 2006, the Company has a
working capital deficiency of $3.7 million.  These factors raise
substantial doubt about the Company’s ability to continue as a going
concern.  These financial statements do not include any adjustments
relating to the recoverability of the recorded assets or the classification of
the liabilities that may be necessary should the Company be unable to continue
as a going concern.





The
Company continues to experience negative cash flows from operations and is
dependent on continued financing from investors to sustain its activities.
Management is planning to grow its current business and to obtain additional
capital principally through the sale of debt and equity securities. The
realization of assets and satisfaction of liabilities in the normal course of
business is dependent upon the Company obtaining additional equity capital and
ultimately obtaining profitable operations. However, no assurances can be given
that the Company will be successful in these activities. Should any of these
events not occur, the accompanying financial statements will be materially
affected. The financial statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going concern.





The Company will require some
combination of new financing, restructuring of existing financing and improved
operating results in order to maintain adequate liquidity.   The
Company must also bring current each of its Securities and Exchange Commission
(“SEC”) filings as part of a plan to raise additional capital.  In
addition to the filing of this Annual Report on Form 10-K for the year ended
December 31, 2006, the Company must also complete and file its Quarterly Report
on Form 10-Q for the quarters ended March 31, 2007, June 30, 2007, September 30,
2007, March 31, 2008, June 30, 2008 and September 30, 2008 and its Annual Report
on Form 10-K for the year ended December 31, 2007.


F-9





There can be no assurance that the
financing or the cost saving measures as identified above will be satisfactory
in addressing the short-term liquidity needs of the Company.  In the
event that these plans cannot be effectively realized, there can be no assurance
that the Company will be able to continue as a going concern.





Note 3 – Summary of
Significant Accounting Policies





Use
of Estimates





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reporting amounts of revenues and expenses
during the reported period.





Significant
estimates during 2006 and 2005 include valuation of available for sale
marketable securities pursuant to SFAS No. 115 “Accounting for Certain
Investments in Debt and Equity Securities” (“SFAS 115”), the valuation of stock
options/warrants granted for services, the value of warrants issued in
connection with debt and equity related financings, valuation of all components
of derivative liabilities, valuation and related amortization of intangible
assets and the valuation allowance for deferred tax assets since the Company had
continuing operating losses.




Cash
equivalents





The
Company considers all highly liquid investments with maturities of three months
or less at the time of purchase to be cash equivalents.





Concentrations of Credit
Risk





Cash:  The Company
maintains its cash with various financial institutions.  No cash
deposits were in excess of the federally insured limits at December 31, 2006 or
2005.








Marketable
Securities





The
Company classifies its investments as “available-for-sale” in accordance with
the provisions of SFAS 115. Investments intended to be held for more than one
year are classified as long-term investments.





Available-for-sale
securities are carried at fair value with the unrealized gain or loss, net of
tax, reported in other comprehensive income. Unrealized losses considered to be
“other-than-temporary” are recognized currently in earnings. The cost of
securities sold is based on the specific identifications method. The fair value
of most investment securities is determined by currently available market
prices. Where quoted market prices are not available, the market price of
similar types of securities that are traded in the market is used to estimate
fair value.





At
December 31, 2006, the Company maintained a portfolio consisting of the common
stock of one publicly traded entity.





The
Company periodically reviews its investments in marketable securities and
impairs any securities whose value is considered non-recoverable. There was no
impairment during the years ended December 31, 2006 and 2005.





Non-Marketable
Securities





Certain
securities that the Company may invest in can be determined to be
non-marketable. Non-marketable securities where the Company owns less than 20%
of the investee are accounted for at cost pursuant to the Accounting Principles
Board APB No. 18, “The Equity
Method of Accounting for Investments in Common Stock” (“APB 18”). The
Company is currently carrying one such investment as a non-current asset due to
the likelihood and expectation of not liquidating the investment within the next
twelve months.


F-10





The
Company periodically reviews its investments in non-marketable securities and
impairs any securities whose value is considered non-recoverable. There was a
$1,949 impairment loss charged to operations during the year ended December 31,
2006 and no such loss during the year ended December 31, 2005.





Trade
accounts receivable





Trade
accounts receivable are recorded at the invoiced amount, net of an allowance for
doubtful accounts.  The allowance for doubtful accounts is the
Company’s best estimate of the amount of probable credit losses in the Company’s
existing accounts receivable. The Company determines the allowance based on
historical write-off experience, customer specific facts and economic
conditions.  Bad debt expense is included in general and
administrative expenses, if any.





Outstanding
account balances are reviewed individually for
collectability.  Account balances are charged off against the
allowance after all means of collection have been exhausted and the potential
for recovery is considered remote.  The Company does not have any
off-balance-sheet credit exposure to its customers.





Inventories





The
Company values inventories, consisting of purchased products, at the lower of
cost or market.  Cost is determined using the first-in, first-out
method.  The Company regularly reviews materials and supplies and,
when necessary, records a provision for excess or obsolete inventories based
primarily on current purchase price, if any.





Intangibles
and Other Long-Lived Assets





The
Company reviews the carrying value of intangibles and other long-lived assets
for impairment at least annually or whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of long-lived assets is measured by comparison of its carrying
amount to the undiscounted cash flows that the asset or asset group is expected
to generate. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the
property, if any, exceeds its fair market value. Goodwill represents the excess
of the cost of the Company’s acquired subsidiaries or assets over the fair value
of their net assets at the date of acquisition. Under SFAS No. 142, “Goodwill
and Other Intangible Assets” (“SFAS 142”) goodwill is no longer subject to
amortization over its estimated useful life; rather, goodwill is subject to at
least an annual assessment for impairment applying a fair-value based
test.





The
Company accounts for long-lived assets in accordance with the provisions of SFAS
No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS
144”). SFAS 144 requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future
undiscounted net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell the asset.





During
the year ended December 31, 2005, the Company recognized and charged to
operations an impairment charge of $525,986 in connection with non-recoverable
license technology.  There was no such charge during the year ended
December 31, 2006.





In
connection with the disposition of TTF, during the year ended December 31, 2005,
the Company disposed of $1,469,108 of goodwill that was recorded as part of the
acquisition (See note 15).





Derivatives





The
Company accounts for derivatives in accordance with SFAS No. 133 and the related
interpretations. SFAS No. 133, as amended, requires companies to recognize all
derivative instruments as either assets or liabilities in the balance sheet at
fair value. The accounting for changes in the fair value of a derivative
instrument depends on: (i) whether the derivative has been designated and
qualifies as part of a hedging relationship, and (ii) the type of hedging
relationship. For those derivative instruments that are designated and qualify
as hedging instruments, a company must designate the hedging instrument based
upon the exposure being hedged as either a fair value hedge, cash flow hedge or
hedge of a net investment in a foreign operation. At December 31, 2006, the
Company had not entered into any transactions that were considered hedges under
SFAS No. 133.


F-11




Financial
instruments





The
Company evaluates its convertible debt, options, warrants or other contracts to
determine if those contracts or embedded components of those contracts qualify
as derivatives to be separately accounted for under SFAS No. 133 and related
interpretations including Emerging Issues Task Force (“EITF”) Issue No. 00-19
“Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock”(“EITF Issue No. 00-19”). The result of this accounting treatment
is that the fair value of the embedded derivative is marked-to-market each
balance sheet date and recorded as a liability. In the event that the fair value
is recorded as a liability, the change in fair value is recorded in the
Statement of Operations as other income or expense. Upon conversion or exercise
of a derivative instrument, the instrument is marked to fair value at the
conversion date and then that fair value is reclassified to equity.





In
circumstances where the embedded conversion option in a convertible instrument
is required to be bifurcated and there are also other embedded derivative
instruments in the convertible instrument that are required to be bifurcated,
the bifurcated derivative instruments are accounted for as a single, compound
derivative instrument.





The
classification of derivative instruments, including whether such instruments
should be recorded as liabilities or as equity, is re-assessed at the end of
each reporting period. Equity instruments that are initially classified as
equity that become subject to reclassification under SFAS 133 are reclassified
to liability at the fair value of the instrument on the reclassification date.
Derivative instrument liabilities are classified in the balance sheet as current
or non-current based on whether or not net-cash settlement of the derivative
instrument is expected within 12 months of the balance sheet date.





The fair
value model utilized to value the various compound embedded derivatives in the
secured convertible notes comprises multiple probability-weighted scenarios
under various assumptions reflecting the economics of the secured convertible
notes, such as the risk-free interest rate, expected Company stock price and
volatility, likelihood of conversion and or redemption, and likelihood of
default status and timely registration.  At inception, the fair value
of the single compound embedded derivative was bifurcated from the host debt
contract and recorded as a derivative liability, which resulted in a reduction
of the initial notional carrying amount of the secured convertible notes (as
unamortized discount which will be amortized over the term of the notes under
the effective interest method).





Revenue recognition





The
Company follows the guidance of the United States Securities and Exchange
Commission’s Staff Accounting Bulletin (“SAB”) No. 101 “Revenue Recognition” (“SAB
No. 101”), as amended by SAB No. 104 (“SAB No. 104”) for revenue
recognition.  The Company records revenue when persuasive evidence of
an arrangement exists, product delivery has occurred and the title and risk of
loss transfer to the buyer, the sales price to the customer is fixed or
determinable, and collectability is reasonably assured.  The Company
derives the majority of its revenue from sales contracts with customers with
revenues being generated upon the shipment of goods. Persuasive evidence of an
arrangement is demonstrated via invoice, product delivery is evidenced by
warehouse shipping log as well as a signed bill of lading from the trucking or
rail company and title transfers when the goods arrive at their destination,
based on free on board (“FOB”) destination; the sales price to the customer is
fixed upon acceptance of the purchase order and there is no separate sales
rebate, discount, or volume incentive.  When the Company recognizes
revenue, no provisions are made for returns because, historically, there have
been very few sales returns and adjustments that have impacted the ultimate
collection of revenues.


F-12




Stock
Based Compensation





Prior to
January 1, 2006, the Company accounted for its stock options issued to employees
pursuant to APB 25, ”Accounting for Stock Issued to
Employees”.  Accordingly, the Company would recognize employee
stock-based compensation expense only if it granted options at a price lower
than the closing price of the Company’s common stock on the date of grant. Any
resulting compensation expense would then have been recognized ratably over the
associated service period. The Company provided proforma disclosure amounts
in accordance with SFAS No. 148, ”Accounting for Stock-Based
Compensation-Transition and Disclosure“, as if the fair value method defined by
SFAS 123 had been applied to its stock-based compensation.





Effective January 1, 2006, the Company
adopted the fair value recognition provisions of SFAS 123R, using the modified
prospective transition method and therefore, has not restated prior periods'
results. Under this transition method, employee stock-based compensation expense
for the year ended December 31, 2006 has included compensation expense for all
stock-based compensation awards granted, but not yet fully vested, prior to
January 1, 2006, utilizing the fair value of the options as determined at the
original grant date in accordance with the provisions of SFAS 123. 
Stock-based compensation expense for all share-based payment awards granted on
or after January 1, 2006 is based on the grant-date fair value estimated in
accordance with the provisions of SFAS 123R.





The Company recognizes these
compensation costs over the requisite service period of the award, which is
generally the vesting term of the options.





Stock-based employee compensation
expense relating to the Company’s stock option plans (See Note 8) reflected in
net loss for the years ended December 31, 2006, 2005 and 2004 was $76,701,
$15,799, and zero, respectively.  Of the December 31, 2006 expense,
$49,193 related to unvested options outstanding prior to January 1, 2006, the
incremental impact to the consolidated financial statements as a result of
adopting SFAS 123R.





Advertising





In
accordance with Accounting Standards Executive Committee Statement of Position
93-7, (“SOP 93-7”) costs incurred for producing and communicating advertising of
the Company, are charged to operations as incurred. Advertising expense for the
years ended December 31, 2006 and 2005 was zero and $600,
respectively.





Income
Taxes




The Company provides for income taxes
based on the provisions of SFAS No. 109, “Accounting for Income Taxes” (“SFAS
109”), which requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statements and tax returns in different years.  Under this
method, deferred income tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.  Valuation allowances are
provided against deferred tax assets to the extent that it is more likely than
not that the deferred tax assets will not be realized.





Deferred tax assets pertaining to
windfall tax benefits on exercise of non-qualified stock options and the
corresponding credit to additional paid-in capital are recorded if the related
tax amount either reduces income taxes payable or results in an income tax
refund.  The Company has elected the “with and without approach”
regarding ordering of windfall tax benefits to determine whether the windfall
tax benefit did reduce income taxes payable or resulted in an income tax refund
in the current year.  Under this approach, the windfall tax benefits
would be recognized in additional paid-in capital only if an incremental income
tax benefit is realized after considering all other income tax benefits
presently available to the Company.





The Tax Reform Act of 1986 limits the
use of net operating loss and tax credit carry forwards in certain situations
where disqualifying changes occur in the stock ownership of a
company.  In the event the Company experiences a disqualifying change
in ownership, utilization of the carry forwards could be
restricted.


F-13





Earnings
per Share





In
accordance with SFAS No. 128, “Earnings per Share” (“SFAS 128”), basic earnings
per share (“EPS”) is computed by dividing the net income (loss) less preferred
dividends for the period by the weighted average number of shares outstanding.
Diluted EPS is computed by dividing net income (loss) less preferred dividends
by the weighted average number of shares outstanding including the effect of
share equivalents. Common share equivalents consist of shares issuable upon the
exercise of certain common stock purchase warrants, stock options, and
convertible preferred stock. At December 31, 2006 and 2005, the Company had
76,000,000, and 48,700,000 potential common share equivalents. The Company has
excluded these common share equivalents from its computation of earnings per
share due to their antidilutive effect as the Company has reflected a net loss
at December 31, 2006 and 2005, respectively. Accordingly, the basic and diluted
EPS are the same.





Comprehensive
Income (Loss)





The
Company computes comprehensive income (loss) in accordance with SFAS No. 130,
“Reporting Comprehensive Income” (“SFAS 130”). Comprehensive income arises out
of the Company’s accounting policy for available-for-sale securities. For the
year ended December 31, 2006, the Company reported a comprehensive loss of
$73,061.





Fair
Value of Financial Instruments




SFAS No.
107, “Disclosures about Fair Value of Financial Instruments,” (“SFAS 107”)
requires disclosures of information about the fair value of certain financial
instruments for which it is practicable to estimate the value. For purpose of
this disclosure, the fair value of a financial instrument is the amount at which
the instrument could be exchanged in a current transaction between willing
parties, other than in a forced sale or liquidation.





The
carrying amounts of the Company’s short-term financial instruments, including
inventory, certain notes receivable, investments in available for sale
marketable securities, accounts payable and accrued expenses, loans payable and
notes payable approximate fair value due to the relatively short period to
maturity for these instruments.





Segments





In
connection with the sale of TTF on December 29, 2005, the Company only has one
reportable and identifiable segment. Therefore, the presentation of segment
analysis pursuant to SFAS No. 131 “Disclosures About Segments of an Enterprise
and Related Information” (“SFAS 131”) is not required.





Recent
Accounting Pronouncements




On June
5, 2003, the United States Securities and Exchange Commission (“SEC”) adopted
final rules under Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”),
as amended by SEC Release No. 33-8934 on June 26, 2008.  Commencing
with its annual report for the fiscal year ending December 31, 2009, the Company
will be required to include a report of management on its internal control over
financial reporting. The internal control report must include a
statement:





Of
management’s responsibility for establishing and maintaining adequate internal
control over its financial reporting;





Of
management’s assessment of the effectiveness of its internal control over
financial reporting as of year end; and





Of the
framework used by management to evaluate the effectiveness of the Company’s
internal control over financial reporting.





Furthermore,
it is required to file the auditor’s attestation report separately on the
Company’s internal control over financial reporting on whether it believes that
the Company has maintained, in all material respects, effective internal control
over financial reporting.





In
December 2007, the FASB issued FASB Statement No. 141 (Revised 2007)“Business Combinations”
(“SFAS No. 141(R)”), which requires the Company to record fair value estimates
of contingent consideration and certain other potential liabilities during the
original purchase price allocation, expense acquisition costs as incurred and
does not permit certain restructuring activities previously allowed under
Emerging Issues Task Force Issue No. 95-3 to be recorded as a component of
purchase accounting.  SFAS No. 141(R) applies prospectively to
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008, except for the presentation and disclosure requirements, which shall
be applied retrospectively for all periods presented.  The Company has
not determined the effect that the adoption of SFAS No. 141(R) will have on the
financial results of the Company.


F-14





In
December 2007, the FASB issued FASB Statement No. 160“Noncontrolling Interests in
Consolidated Financial Statements - an amendment of ARB No. 51” (“SFAS
No. 160”), which causes noncontrolling interests in subsidiaries to be included
in the equity section of the balance sheet.  SFAS No. 160 applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008, except for the presentation and disclosure requirements,
which shall be applied retrospectively for all periods presented.  The
Company has not determined the effect that the adoption of SFAS No. 160 will
have on the financial results of the Company.





In March
2008, the FASB issued FASB Statement No. 161“Disclosures about Derivative
Instruments and Hedging Activities an amendment of FASB Statement No.
133” (“SFAS No. 161”), which changes the disclosure requirements for
derivative instruments and hedging activities.  Pursuant to SFAS
No.161, entities are required to provide enhanced disclosures about (a) how and
why an entity uses derivative instruments, (b) how derivative instruments and
related hedged items are accounted for under Statement 133 and its related
interpretations, and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance, and cash
flows.  SFAS No. 161 is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008 with early
application encouraged.  SFAS No. 161 encourages but does not require
disclosures for earlier periods presented for comparative purposes at initial
adoption.  In years after initial adoption, this Statement requires
comparative disclosures only for periods subsequent to initial
adoption.  The Company does not expect the adoption of SFAS No. 161 to
have a material impact on the financial results of the Company.





In May 2008, the FASB issued SFAS No.
162 “The Hierarchy of Generally Accepted Accounting Principles”.  The
new standard 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 (GAAP) in the United States (the GAAP
hierarchy).  SFAS No. 162 will become effective 60 days following the
SEC’s approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, The Meaning
of Present Fairly in Conformity With Generally Accepted Accounting
Principles.  Adoption of SFAS No. 162, upon its effectiveness, is not
expected to have a material impact on the Company's consolidated financial
position, results of operations or cash flows.





Management
does not believe that any other recently issued, but not yet effective
accounting pronouncements, if adopted, would have a material effect on the
accompanying financial statements.





Reclassifications





Certain reclassifications have been
made to prior year’s financial statements in order to conform to the current
year presentation.





Note 4
-Investment
- Marketable and Non-Marketable Securities





Marketable
Securities





The
composition of marketable securities is as follows:





Cost
                                  
                                  
                                  Fair Value
                                  
                                  
                                  Unrealized LossCommon
      stock 2006
                                  
                                  $
                                  228,593
                                  
                                  
                                  $
                                  54,603
                                  
                                  
                                  $
                                  172,990Cost
                                  
                                  
                                  Fair Value
                                  
                                  
                                  Unrealized LossCommon
      stock 2005
                                  
                                  $
                                  228,593
                                  
                                  
                                  $
                                  108,666
                                  
                                  
                                  $
                                  119,927




F-15





There was
minimal investment income for the year ended December 31, 2006 and
2005.





Non-Marketable
Securities





Prior to
2006, the Company obtained an interest in a private company in exchange for
$51,949. The value of this investment at December 31, 2006 and 2005 was $50,000
and $51,949, respectively.   The Company sold this investment in
2007 (See Note 17).





Note 5 -
Inventories





Inventories
consist of finished goods of NuCapTM products and are stated at the lower of cost
or market utilizing the first-in, first-out method. At December 31, 2006 and
2005, the Company had $7,407 and $28,590 of purchased products,
respectively.  During 2006 and 2005, there were inventory write-downs
of $6,483 and zero, respectively.





Note 6 - Notes
Receivable





In
December 2005, the Company advanced working capital to an unrelated third party
for $50,000 and recorded a note receivable. Pursuant to the terms of the note,
the instrument had a stated interest of $12,500, was unsecured and due April 30,
2007.  The note has been non-performing and as such, in the year ended
December 31, 2006, the Company established a 100% reserve against the
note.





On
December 29, 2005, in connection with the sale of TTF, the Company recorded as
partial consideration a note receivable totaling
$250,000.    The note has been non-performing and as such,
in the year ended December 31, 2006, the Company established a 100% reserve
against the note.





Note 7 - Notes
Payable





Promissory
Notes Sold to Aberdeen




On July
13, 2006, the Company executed a promissory note agreement with Aberdeen, one of
our existing investors, pursuant to which we received gross proceeds of
$150,000. The principal value of the note is $180,000 which is payable in full
on or before November 30, 2006. If the Company fails to pay the principal amount
in full on or before the maturity date, then the principal amount increases to
$200,000. The note does not otherwise incur interest. The note contains usual
and customary events of default.  The Company is currently seeking to
renegotiate the terms of this note.





On
September 13, 2006, the Company executed an additional promissory note agreement
with Aberdeen pursuant to which it received gross proceeds of $50,000. The
principal value of the note is $60,000 which is payable in full on or before
November 30, 2006. If the Company fails to pay the principal amount in full on
or before the maturity date, then the principal amount increases to $75,000. The
note does not otherwise incur interest. The note contains usual and customary
events of default.  The Company is currently seeking to renegotiate
the terms of this note.





Promissory
Notes Sold to Southridge





During
2006, the Company borrowed $175,000 from Southridge Partners, LP (“Southridge”)
under note arrangements with varying maturities.   On December 7,
2005, the Company borrowed $200,000 from Southridge, maturing on February 10,
2006, bearing interest at an annual rate of 8%.  The above notes have
either not reached maturity or have otherwise been extended.





Note 8 - Derivative
Liabilities and Convertible Notes Payable





On
various dates during 2006, the Company borrowed an aggregate of $195,000 from
Southridge pursuant to the terms of a convertible promissory note. Under the
terms of this agreement, the convertible notes bore interest at 2% per annum,
were unsecured and mature twenty-four months from the date of
issuance.


F-16





In
connection with the above convertible debt issuances, the convertible debt was
classified as conventional convertible debt pursuant to EITF 00-19. EITF 00-19
does not apply if the hybrid contract is a conventional convertible debt
instrument in which the holder may only realize the value of the conversion
option by exercising the option and receiving the entire proceeds in a fixed
number of shares or the equivalent amount of cash (at the discretion of the
issuer).  Since the time that Issue No. 00-19 was issued, complex
structures have arisen such that the term “conventional convertible debt
instrument” is no longer adequately defined.




In Issue
No. 05-2, “The Meaning of  “Conventional Convertible Debt Instrument’
in EITF 00-19,” the EITF concluded that an instrument with the following
characteristics should be considered “conventional ” for purposes of applying
Issue No. 00-19:


·
              The
      holder has an option to convert the instrument into a fixed number of
      shares (or a corresponding amount of cash at the issuer’s discretion);
      and
  ·
              The
      holder’s ability to exercise the option is based on either the passage of
      time or a contingent event.




As a
result of applying the definitions of EITF 00-19 and EITF 05-2, the Company has
accounted for the convertible debt financings pursuant to the provisions of APB
No. 14, EITF No. 98-5 and EITF No. 00-27. The Company computed a debt discount
on the aggregate $195,000 in convertible debt financing in 2006.  The
allocation was based on the allocable proceeds of the debt financings between
the fair values of the beneficial conversion option of the related convertible
debt instruments.  The Company began amortizing all debt discounts to
interest expense over the related term of the convertible
debt.





On
January 31, 2005, the Company entered into an Exchange Agreement with Woodward,
LLC (“Woodward”) pursuant to which Global acquired convertible promissory notes,
and have accordingly assumed all rights pertaining thereto, issued by Eurotech.
The notes are currently in default and have an aggregate outstanding principal
amount of $290,000. The notes carry a default annual interest rate of 18% and
are past due in their entirety. In exchange for these notes, we issued to
Woodward a promissory note in the principal amount of $250,000, which is
convertible at the election of Woodward into shares of our common stock at the
conversion price equal to 80% of the average of the seven (7) lowest closing bid
prices for the ten (10) trading days immediately preceding the date we receive
written notice from Woodward of its election to effect such a conversion.
Accordingly, no gain or loss was recognized in connection with the exchange
agreement. See Note 14.





Under the
terms of the exchange agreement, the Company issued a two (2)-year convertible
promissory note to Woodward for $250,000. The promissory note provides for
conversion into shares of common stock at a conversion price of $0.02. The
Company allocated $250,000 to the beneficial conversion feature to be amortized
over two years; the term of the promissory note. During 2005, the Company
amortized $114,384 of the beneficial conversion feature to interest expense. In
addition, should the common stock fall below $0.03 cents for ten consecutive
trading days, any holder of these notes may force prepayment at 140% of the
principle amount, plus interest. Conversion and exercise rights are restricted
in that any of these note or warrant holders may not at any time have beneficial
ownership of more than 4.999% of the total number of issued and outstanding
shares of Global common stock.  As of December 31, 2005, the stock
price was below $0.03 where it has remained since October 2005. Accordingly,
$100,000 is included in accounts payable and accrued expenses as a contingent
liability in the event that the note holders assert this prepayment
penalty.




The
aggregate contingent liability for penalties relating to 140% forced repayment
provisions included in all convertible promissory notes was $718,000 at December
31, 2005.  In May 2006, all notes where extended and the liability was
therefore removed.




Brittany





On June
1, 2004, as part of the agreement to issue Preferred Series I (See Note
8), the Company borrowed $75,000 from Brittany. Under the terms of the
convertible promissory note, Brittany, at its option, can convert the note into
1,500,000 shares of common stock at a price equal to the greater/lesser of $.05
per share or 80% of fair market value, at the time of conversion. The Company
allocated $60,000 to the beneficial conversion feature, to be amortized over a
period of twenty-four months; the period in which the holder can convert. During
2005, the Company amortized $30,000 of the beneficial conversion feature to
interest expense. During 2005, Brittany assigned this note to MacNab, LLC
(“MacNab”).


F-17





MacNab





During
July 2004, the Company restructured its borrowings from MacNab into a
convertible promissory note of $542,950. Under the terms of the convertible
promissory note, McNab, at its option, can convert the note into shares of
common stock at a price of $.05 per share or 80% of fair market value, at the
time of conversion. The Company allocated $325,770 to the beneficial conversion
feature, to be amortized over a period of twenty-four months; the term of the
promissory note.  Also during July 2004, the Company borrowed an
additional $82,950 from McNab under substantially the same terms. During 2005,
the Company amortized $196,064 of the beneficial conversion feature to interest
expense. On October 19, 2005, McNab converted $16,000 of these promissory notes
into 828,966 shares of common stock.




The value
of the warrants on these 2005 borrowings exceeded the proceeds received.
Accordingly, the notes have been discounted in full and the excess of $248,423
has been charged to interest expense during the period. In addition, the
beneficial conversion feature of these notes was valued at $906,400. Since the
conversion is at the option of the holder, and the note has already been
discounted in full due to the cashless warrant feature, the value of the
beneficial conversion feature was amortized to interest expense in full during
2005.





Southridge





On
October 19, 2004, we entered into a securities purchase agreement with
Southridge. Southridge purchased a nonnegotiable 2% secured convertible
promissory note in the principal amount of $250,000 and we issued a warrant to
purchase 10,000,000 shares of our common stock.





On
January 31, 2005, we entered into a Second Securities Purchase Agreement with
Southridge whereby we agreed to sell a convertible promissory note in the
principal amount of $250,000 and warrant to purchase up to 10,000,000 shares of
our common stock to Southridge in exchange for its $250,000
investment.





Under the
terms of the purchase agreement, Southridge had the option, and at any time
prior to July 1, 2005, to purchase an additional note in the principal amount of
up to $1,500,000, on substantially the same terms as the note issued on January
31, 2005. During the year ended December, 2005, Southridge exercised this option
on March 2, April 11, and May 2, 2005, purchasing notes in the aggregate
principal amount of $425,000 and warrants to purchase up to 17,000,000 shares of
our common stock. On July 8, 2005, Southridge and Global terminated its
option to purchase additional notes.





The value
of the warrants on these borrowings exceeded the proceeds received. Accordingly,
the notes have been discounted in full and the excess of $967,636 has been
charged to interest expense during 2005. In addition, the beneficial conversion
feature of these notes was valued at $1,702,500. Since the conversion is at the
option of the holder, and the note has already been discounted in full due to
the cashless warrant feature, the value of the beneficial conversion feature was
amortized to interest expense in full during 2005.





DeNuccio, Colonial and Deer
Creek





On
October 21, 2004, the Company entered into a securities purchase agreement with
Dean M. DeNuccio. Mr. DeNuccio purchased a nonnegotiable 2% secured convertible
promissory note in the principal amount of $25,000 and Global issued to Mr.
DeNuccio a warrant to purchase 1,000,000 shares of its common
stock.





On
November 5, 2004, the Company entered into a securities purchase agreement with
Colonial Fund, LLC (“Colonial”). Colonial purchased a nonnegotiable 2% secured
convertible promissory note in the principal amount of $50,000 and Global issued
it a warrant to purchase 2,000,000 shares of its common stock (see below for
further discussion of the terms and conditions). On October 26, 2005, Colonial
converted this note into 2,549,444 shares of the Company’s common
stock.


F-18





On
December 3, 2004, the Company and Deer Creek Fund, LLC (“Deer Creek”) entered
into a securities purchase agreement relating to the private placement of a 2%
secured convertible promissory note in the aggregate principal amount of $50,000
and a warrant to purchase 2,000,000 shares of its common (see below for further
discussion of the terms and conditions). On October 26, 2005, Deer Creek
converted this note into 2,549,444 shares of our common stock.




The value
of the warrants on these borrowings exceeded the proceeds received. Accordingly,
the notes have been discounted in full and the excess of $70,326 was charged to
interest expense during 2004. In addition, the beneficial conversion feature of
these notes was valued at $287,500. Since the conversion is at the option of the
holder, and the note has already been discounted in full due to the cashless
warrant feature, the value of the beneficial conversion feature was amortized to
interest expense in full during 2004.  During 2006, these notes were
fully converted.





Woodward,
LLC




Convertible Promissory
Note




During
2004, Global entered into a securities purchase agreement with certain unrelated
third parties. Total gross proceeds raised were $125,000. The notes bore
interest at 2% and were secured by all assets of the Company. In connection with
the issuance of these convertible promissory notes, the Company granted
5,000,000 warrants to purchase common stock. On October 26, 2005, these
investors converted an aggregate $226,978 of note principal and accrued interest
representing their entire outstanding debt in exchange for 5,098,888 shares of
common stock.





Convertible Preferred
Stock





In
connection with the issuance of various series of Preferred Stock, the Company
re-measured its convertible preferred stock conversion option at fair value,
which aggregated $666,499 at December 31, 2005.  See Note
10.





Note 9 - Stockholders’
Deficit





Preferred Stock
Conversions





For the
period January 1, 2005 through December 31, 2005, 12.4525 shares of Series B
preferred stock, 59.13 shares of Series C preferred stock, and 908 shares of
Series H preferred stock were converted into 55,209,230 shares of common stock
of the Company. See Notes 3 and 4.  For the year ended December 31,
2006, 2,280 shares of Series H preferred stock were converted into 1,140,000
shares of our common stock.  In addition, 1,500 shares of Series H
preferred stock were canceled during the year ended December 31,
2006.





COMMON STOCK, WARRANTS AND
OPTIONS ISSUED FOR SERVICES





Reverse
stock Split




On May
26, 2006, the Company filed an Amendment to the Certificate of Incorporation
with the Delaware Secretary of State, pursuant to which the Company effectuated
a 20-to-1 reverse stock split, thereby decreasing the number of issued and
outstanding shares. The accompanying financial statements and footnotes have
been retroactively stated to reflect the reverse stock split.





Since
January 1, 2006, the Company has issued 601,136 shares of common stock in
exchange for $38,629 of services rendered to unrelated consultants. The common
stock was valued at the per share market price of our common stock on the date
of issuance, the fair value at the date of issuance.


F-19





Common Stock Issued Under
Equity Line of Credit





During
2006, in connection with our agreement with Brittany, we issued 10,088,851
shares of common stock for $638,238.




Treasury
Stock




During
2006, the Company had no treasury stock activity.  During 2005, the
Company formally cancelled and retired treasury stock aggregating
$327,484.




Note 10 - Issuance of Series
B, C, and E Preferred Stock





Series B Preferred
Stock





The
Company issued Series B Preferred Stock totaling $2,500,000 on March 25, 1999
(the “Issuance Date”). The Series B Preferred Stock investors were issued 125
shares of preferred stock, having a stated value of $20,000 per share, and
225,000 warrants to purchase common stock at $5.70 per share. The Company paid
offering costs of $216,250, resulting in net proceeds to the Company of
$2,283,750 for the preferred shares and warrants.





The
Series B Preferred Stock bears no dividends and is convertible at the option of
the holder at the earlier of 90 days after issuance or the effective date of a
registration statement covering the shares. The warrants are exercisable at any
time and expire five years from the date of issuance, and accordingly expired on
March 25, 2004.





During
2005, 12.4525 shares of Series B Preferred Stock were converted into 6,510,010
shares of Common Stock. As of December 31, 2005 all shares Series B Preferred
Stock were converted into common stock.




Series C Preferred
Stock





On July
28, 1999, the Company completed a private placement of $3,500,000 principal
amount of the Company’s Series C Convertible Preferred Stock, par value $.01 per
share (the “Series C Preferred Stock”) and warrants to acquire up to 59,574
shares of Common Stock (the “Series C Preferred Warrants”). The Warrants expired
on July 27, 2004. The Series C Preferred Stock has an initial stated value of
$20,000 per share, which stated value increases at the rate of 6% per year from
issuance through August 14, 2004 at which time all stated increases ceased (such
stated value, as increased from time to time, is referred to as the “Series C
Stated Value”). Each Series C Preferred Share is convertible, from and after 120
days following the date of issuance, at the option of the holder, into such
number of shares of Common Stock as is determined by dividing the Series C
Stated Value by the lesser of (a) $5.875, and (b) 82.5% of the average of the
closing bid prices for the five trading days preceding the date of
conversion.





During
2005, 59.13 shares of Series C Preferred Stock were converted into 39,619,220
shares of common stock. During 2006, 10.99 shares were converted into 24,551,556
shares of common stock. As of December 31, 2006, all shares of Series C
Preferred stock were converted into common stock





Series E Preferred
Stock





On April
14, 2000, the Company completed a private placement of $2,127,000 principal
amount of the Company’s Series E Convertible Preferred Stock, par value $.01 per
share (the “Series E Preferred Stock”) and warrants to acquire 66,667 shares of
common stock (the “Series E Preferred Warrants”). The warrants expired on April
14, 2005. The Series E Preferred Stock has an initial stated value of $20,000
per share, which stated value increases at the rate of 8% per year through
August 14, 2004 at which time all stated increases ceased. Each Series E
Preferred Share is convertible 120 days following the date of issuance, at the
option of the holder, into such number of shares of common stock as is
determined by dividing the Series E Stated Value by the lesser of (a) $3.53, or
(b) 82.5% of the average of the closing bid prices for the five trading days
preceding the date of conversion. As of December 31, 2006 all shares of Series E
Preferred stock were converted into 15,582,175 shares of common
stock.


F-20





Note 11 - Eurotech
Transaction and Issuance of Series F, G and H Preferred
Stock





On May
22, 2003, the Company entered into a License and Exchange Agreement with
Eurotech. Under the provisions of that agreement the Company issued two series
of preferred stock in consideration for the licensing arrangement.





On May
22, 2003, the Company issued 13,500 shares of the Company’s Series F Convertible
Preferred Stock, par value $.01 per share. Each Series F Share was convertible
into 10,000 shares of common stock and has a stated value of $1,000 per share.
The holders of the outstanding shares of Series F Preferred Stock have cancelled
and surrendered their Series F Shares and have been subsequently issued shares
of Series H Preferred Stock.





On May
22, 2003, the Company issued 1,069 shares of the Company’s Series G Convertible
Preferred Stock, par value $.01 per share. The Series G shares have a stated
value of $1,000 per share. Each Series G Preferred Share is convertible, from
and after 120 days following the date of issuance, at the option of the holder,
into such number of shares of Common Stock as is determined by dividing $1,000
per share by a number equal to 82.5% of the average of the closing bid prices
for the five trading days preceding the date of conversion. No holder of Series
G Shares may convert Series G Shares into shares of common stock if the
aggregate shares of Common Stock beneficially owned by such holder and its
affiliates would exceed 9.9% of the outstanding shares of Common Stock following
such conversion (excluding, for purposes of the calculation, the unconverted
Series G Shares). The Series G Preferred Stock has no mandatory conversion date.
In determining the accounting for the beneficial conversion feature, the Company
allocated $986,223 to the preferred stock based on its relative fair value at
the Issuance Date. The Company then allocated $153,413 of the Series G value to
additional paid in capital for the beneficial conversion feature. The beneficial
conversion feature will be recognized as a deemed dividend to the preferred
shareholders over the minimum period in which the preferred shareholders can
realize that return beginning on the date when the shares are first convertible.
During 2006, 265.3 shares were converted into 45,465,512 shares of common stock.
As of December 31, 2006, 803.7 shares remain outstanding.




On
September 30, 2003, the Company issued 13,500 shares of the Company’s Series H
Convertible Preferred Stock, par value $.01 per share. Each Series H Share is
convertible into 500 shares, provided, however, that no holder of Series H
shares may convert Series H shares into shares of common stock if the aggregate
shares of common stock beneficially owned by such holder and its affiliates
would exceed 9.9% of the outstanding shares of common stock following such
conversion (excluding, for purposes of the calculation, the unconverted Series H
Shares). During 2006 and prior, 2280 shares of Series H Preferred Stock were
converted into 1,140,000 shares of common stock. As of December 31, 2006, 8,662
shares remain outstanding.




See Note
14 for disclosure relating to additional matters.





Note 12 - Issuance of Series
I Preferred Stock





In June
2004, the Company entered into a second exchange agreement with Brittany to
acquire 5,640,000 shares of the Company’s common stock at $0.10 per share. On
September 24, 2004, Brittany received 490.5 shares of Series I convertible
preferred stock, $0.01 par value per share, of the Company in exchange for
4,905,000 shares of common stock of the Company. Each share of Series I
preferred stock has a stated value of $100 and is convertible into 10,000 shares
of common stock; provided, however, that a holder of Series I preferred stock
may not convert their shares if the aggregate number of shares of common stock
beneficially owned by the holder and its affiliates would exceed 9.9% of the
outstanding shares of common stock following such conversion (excluding, for
purposes of this calculation, the unconverted shares of Series I preferred
stock). In addition, Brittany agreed to loan the Company up to $100,000. As of
December 31, 2006, the Company had borrowed $75,000. See Note 6.  As
of December 31, 2006, 490.5 shares of series Preferred I stock remain
outstanding.





Note 13 - Stock Option
Plans





The
Company’s Employee Stock Option Plan (the “Stock Option Plan”) was adopted by
the Company’s stockholders in September 1996 and amended in 2005. Shares of
common stock may be sold or awarded to officers, key employees and consultants.
On March 3, 1999 at a Special Meeting of Stockholders, the Company’s
stockholders approved an amendment to the Stock Option Plan, which increased the
number of shares reserved for issuance under the Stock Option Plan to 2,000,000,
in 2005 to 15,000,000 shares and in 2006, post reverse split, the Board of
Directors recommended increasing the number of shares reserved for issuance by
another 15,000,000 shares. Options granted under the Stock Option Plan may be
either (i) options intended to qualify as “incentive stock options” under
Section 422 of the Internal Revenue Code or (ii) non-qualified stock
options.


F-21





Prior to
2006, the options granted to purchase shares under the Stock Option Plan
generally vested 25% per year over the first four years and expire ten years
after the grant date. The exercise price of the options was at or above the fair
market value of the stock on the grant date. Options granted in 2006 were fully
vested on the grant date.





The
Company’s Non-Employee Directors’ Stock Option Plan (the “Directors’ Plan”) was
adopted by the Company’s stockholders in September 1996. Shares of common stock
may be sold or awarded to directors who are not officers or employees of the
Company (“Non-Employee Directors”). The Company has reserved 300,000 shares of
common stock for issuance under the Directors’ Plan.





The
Directors’ Plan provides for the automatic granting of an option to purchase
10,000 shares of common stock to each Non-Employee Director who is first
appointed or elected to the Board of Directors. Also, each Non-Employee Director
is automatically granted an option to purchase 5,000 shares of common stock on
the date of each annual meeting of the Company’s stockholders. Furthermore, the
Directors’ Plan allows the Board of Directors to make extraordinary grants of
options to Non-Employee Directors.





Option
activity under all of the stock option plans is summarized as
follows:





YEARS ENDED DECEMBER 31,2006
                                          
                                          
                                          2005SHARES
                                          
                                          
                                          WEIGHTED-AVERAGE
                                            EXERCISE
                                            PRICE
                                          
                                          
                                          SHARES
                                          
                                          
                                          WEIGHTED-AVERAGE
                                            EXERCISE
                                            PRICEOutstanding
      at beginning of year
                                          
                                          
                                          99,371
                                          
                                          
                                          $
                                          6.60
                                          
                                          
                                          
                                          64,371
                                          
                                          
                                          $
                                          6.60Granted
                                          
                                          
                                          5,286,313
                                          
                                          
                                          
                                          0.02
                                          
                                          
                                          
                                          80,000
                                          
                                          
                                          
                                          1.00Exercised
                                          
                                          
                                          -
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          -Forfeited
                                          
                                          
                                          -
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          (45,000
                                          )
                                          
                                          
                                          0
      .80Outstanding
      at end of year
                                          
                                          
                                          5,385,684
                                          
                                          
                                          
                                          0.02
                                          
                                          
                                          
                                          99,371
                                          
                                          
                                          
                                          6.60Options
      exercisable at year end
                                          
                                          
                                          5,385,684
                                          
                                          
                                          
                                          0.02
                                          
                                          
                                          
                                          99,371
                                          
                                          
                                          
                                          6.60Shares
      available for future grant
                                          
                                          
                                          10,464,316
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          750,629Weighted-average
      fair value of options granted during this year at the shares’ fair
      value
                                          
                                          
                                          0.02
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          0.80





The
following table summarizes information about fixed options outstanding at
December 31, 2006.





EXERCISE PRICE
                          
                          
                          SHARES
                          
                          
                          WEIGHTED AVERAGE
                            REMAINING
                            CONTRACTUAL LIFE$0.006
      - $0.027
                          
                          
                          
                          3,769,621
                          
                          
                          
                          6.5$0.03
      - $0.05
                          
                          
                          
                          1,616,063
                          
                          
                          
                          8.95,385,684
                          
                          
                          
                          7.7




F-22





The pro
forma impact on the Company’s net loss per share had compensation cost for all
of the Company’s stock-based compensation plans been recorded at the date of
grant based on the method prescribed by SFAS No. 123 is shown
below:





FOR THE YEARENDED DECEMBER 31,2005Loss
      applicable to common shareholders:As
      reported
                      
                      $
                      (6,109,806
                      )Pro
      forma
                      
                      
                      (6,153,306
                      )Basic
      and diluted income (loss) per share:As
      reported
                      
                      $
                      (0.07
                      )Pro
      forma
                      
                      $
                      (0.07
                      )








Note 14 - Commitments and
Contingencies





Legal
Settlement and Related Loss Contingency Accruals





On
February 9, 2005, Global filed suit in the Supreme Court of the State of New
York, County of New York against Eurotech, Ltd. for its failure to fulfill its
obligations under the license agreement between the parties dated May 22, 2003.
The suit also sought the enforcement of the notes issued by Eurotech to
Woodward, LLC that were assumed by Global in the exchange agreement between
Woodward and the Company on January 31, 2005. The complaint sought damages
totaling $672,677 plus interest and attorney’s fees. This litigation was settled
in connection with the settlement of claims with Eurotech and Carey Naddell
individually described below.





On April
13, 2005 Carey Naddell, CEO of Eurotech, Ltd., filed suit against the Company in
the United States District Court - Southern District of New York for damages in
the amount of at least $240,000 with interest attorney’s fees and disbursement
based upon an alleged breach of a written service agreement.




On June
24, 2005, Eurotech, Ltd. filed a complaint against the Company in the Supreme
Court of the State of New York, County of New York, (Index No. 108773/05) for an
alleged failure to fulfill Company obligations under the License and Exchange
Agreement dated March 27, 2003 with Eurotech, Ltd. thereby depriving Eurotech,
Ltd. of its contractual right to convert 700 Series H Preferred Stock and
selling 7 million shares of Global common stock. Eurotech, Ltd. sought damages
in an amount to be determined at trial but believed according to the defendant
to exceed $100,000 plus interest and attorney’s fees.





On March
16, 2006, Global, Naddell and Eurotech executed a full mutual release of claims,
completing a settlement of each of the above-described actions.





In
connection with the Eurotech matter, Eurotech will return 2,500 shares of Series
H, convertible Preferred Stock to Global in full settlement of claims relating
to its failure to fulfill obligations under the license agreement, and Eurotech
obligations to Woodward, which were assumed by Global on January 31,
2005.  See Note 18-Subsequent Events for additional disclosure
relating to the settlement of this matter.





In
connection with the Cary Naddell matter, a settlement was reached whereby this
former consultant received $175,000 in full settlement of related claims for
compensation of past services. The claim existed at December 31, 2005, yet was
resolved prior to the release of the accompanying audit report.





At
December 31, 2005, based on settlement date of March 15, 2006, Global accrued a
settlement liability and related settlement expense of $175,000. Under the terms
of the settlement, $25,000 was due and paid at closing, and the balance of
$150,000 was payable in seven (7) equal monthly installments of $21,428.57
commencing on April 15, 2006 with final installment payment due on or before
October 15, 2006.On May 2, 2007 this
settlement was completed with the issuance of 20,000,000 shares of common stock
in lieu of $100,000 still owed to Mr. Naddell.


F-23





The
Company is not a party to any other material legal proceedings. From time to
time, we are involved in various routine legal proceedings incidental to the
conduct of our business.





Other
Matters





From
time-to-time, the Company is a party to claims and legal proceedings arising in
the ordinary course of business. The Company’s management evaluates the exposure
to these claims and proceedings individually and in the aggregate and allocates
additional monies for potential losses on such litigation if it is possible to
estimate the amount of loss and determine if the loss is probable.





Note 15 - Acquisitions,
Divestitures and Discontinued Operations





On
December 31, 2004 Global acquired True To Form, Ltd. for total consideration of
$1.1 million, consisting of $500,000 in notes to be held by True To Form and
guaranteed by its assets and 10,000,000 shares of the Company’s common stock.
The acquisition was accounted for as a purchase transaction. The value of the
shares was determined by using the average closing stock price of the two days
before and after the public announcement of the transaction. The note was due in
two payments with $100,000 due in 2005 and $400,000 due in 2010. The note
accrued interest at the rate of 8% per annum.





On
December 29, 2005 Global completed the transfer of all of the issued and
outstanding capital stock of True To Form Ltd., Inc. back to Mr. Allen pursuant
to the terms of a Stock Purchase Agreement between him, True To Form, and
Global. As a result of this sale, Global no longer holds any equity interest in
True To Form. The consideration was determined on the basis of these
negotiations. The consideration for the sale of True To Form consists
of:




·
     the issuance by True To Form to Global of a promissory
note described below in the initial principal amount of $250,000, which note
accrues interest at an annual rate of one percent plus the prime rate as
reported by a nationally recognized commercial bank and has a maturity date of
January 1, 2011;




·
     the cancellation of Global’s guaranty of the amounts
owed under a promissory note issued by True To Form to Mr. Allen in connection
with Global’s acquisition of True To Form;




·
     the surrender by Mr. Allen of the 10,000,000 shares of
Global common stock that were issued to him as partial consideration for our
purchase of True To Form on December 31, 2004 and the cancellation of all other
equity interest in Global Matrechs held by Mr. Allen. The shares were valued at
$71,000 based on the quoted closing trading price of the Company’s common stock
on December 29, 2005.




In
addition, Global agreed to the cancellation of amounts owed under a note issued
by Global to True To Form for working capital purposes in the aggregate amount
of $280,000.





In
connection with this transaction, Mr. Allen resigned from his positions as
Executive Vice President and Director of Global Matrechs. This action was not,
to the knowledge of any executive officer of the Company, because of a
disagreement on any matter relating to the Company’s operations, policies or
practices.





During
the year ended December 31, 2005, Global reported a loss on discontinued
operations of $425,856, and a loss on disposition of $383,524 in connection with
the disposition of True To Form.




Note 16 - Income
Taxes





Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of the
Company’s deferred tax assets and liabilities are as follows, as
of:


F-24





December 31,2006
                
                2005Temporary
      differences:Unrealized
      loss on marketable securities
                
                $
                29,000
                
                
                $
                48.000Options
      and warrants issued for services
                
                
                15,000
                
                
                
                65,000Net
      operating loss carry forward
                
                
                9,957,000
                
                
                
                9,302,000Deferred
      tax asset
                
                
                10,001,000
                
                
                
                9,415,000Valuation
      allowance
                
                
                (10,001,000
                )
                
                
                (9,415,000
                )Net
      deferred tax asset
                
                $
                —
                
                
                $
                —





At
December 31, 2006, the Company had net operating loss carry forwards for income
tax purposes of approximately $8.0 million, which expire at various
times through 2026.  Realization of these assets is contingent on
having future taxable earnings. In addition, certain stock transactions from
1997 through 2006 have resulted in ownership changes as defined in Internal
Revenue Code Section 382. As a consequence of these ownership changes, the
utilization of the Company’s net operating loss carry forwards is significantly
limited. Based on the cumulative losses in recent years and the limitation on
the use of the Company’s net operating losses, management believes that a full
valuation allowance should be recorded against the deferred tax
asset.





The
difference between the expected income tax benefit and the actual tax benefit
computed by using the Federal statutory rate of 35% is as follows:





Year ended December 31,2006
                  
                  2005Expected
      income tax (benefit) at statutory
                  
                  $
                  (2,800,000
                  )
                  
                  $
                  (2,181,000
                  )Federal
      rate of 35%State
      tax (benefit), net of Federal effect
                  
                  
                  (400,000
                  )
                  
                  
                  (312,000
                  )Adjustment
      to prior year’s valuation allowance
                  
                  
                  -
                  
                  
                  
                  (263,000
                  )Permanent
      differences
                  
                  
                  1,847,000
                  
                  
                  
                  1,633,000Increase
      in valuation allowance
                  
                  $
                  1,353,000
                  
                  
                  $
                  1,123,000




F-25


Note
17 - Selected Quarterly Financial Data (Unaudited and Restated)





The following tables set forth our
unaudited consolidated financial results for the last eight fiscal quarters
ended December 31, 2006:





For the Year Ended December 31, 2005FirstQuarter
                                
                                
                                SecondQuarter
                                
                                
                                ThirdQuarter
                                
                                
                                FourthQuarter(Restated)Total
      revenues as previously reported
                                
                                $
                                369,681
                                
                                
                                $
                                -
                                
                                
                                $
                                125
                                
                                
                                $
                                -Adjustments
                                
                                
                                (369,681
                                )
                                
                                N.A.
                                
                                
                                N.A.
                                
                                
                                N.A.Restated
      total revenues
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                125
                                
                                
                                $
                                -Gross
      profit as previously reported
                                
                                $
                                221,478
                                
                                
                                $
                                -
                                
                                
                                $
                                95
                                
                                
                                $
                                -Adjustments
                                
                                
                                (221,478
                                )
                                
                                N.A.
                                
                                
                                N.A.
                                
                                
                                N.A.Restated
      gross profit
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                95
                                
                                
                                $
                                -Net
      income (loss) as previously reported
                                
                                $
                                (1,645,435
                                )
                                
                                $
                                (1,046,762
                                )
                                
                                $
                                (516,089
                                )
                                
                                $
                                (2,230,301
                                )Adjustments
                                
                                
                                (671,219
                                )
                                
                                N.A.
                                
                                
                                N.A.
                                
                                
                                N.A.Restated
      net income (loss)
                                
                                $
                                (2,316,654
                                )
                                
                                $
                                (1,046,762
                                )
                                
                                $
                                (516,089
                                )
                                
                                $
                                (2,230,301
                                )Basic
      and diluted earnings per shareContinuing
      operations:Net
      income (loss) as previously reported
                                
                                $
                                (0.57
                                )
                                
                                $
                                (0.28
                                )
                                
                                $
                                (0.11
                                )
                                
                                $
                                (0.36
                                )Adjustments
                                
                                
                                (0.23
                                )
                                
                                N.A.
                                
                                
                                N.A.
                                
                                
                                N.A.Let
      income (loss) as restated
                                
                                $
                                (0.80
                                )
                                
                                $
                                (0.28
                                )
                                
                                $
                                (0.11
                                )
                                
                                $
                                (0.36
                                )Basic
      and diluted average number of common shares
    outstanding:As
      previously reported
                                
                                
                                2,895,900
                                
                                
                                
                                3,738,553
                                
                                
                                
                                4,596,717
                                
                                
                                
                                6,168,545Adjustments
                                
                                N.A.
                                
                                
                                N.A.
                                
                                
                                N.A.
                                
                                
                                N.A.As
      restated
                                
                                
                                2,895,900
                                
                                
                                
                                3,738,553
                                
                                
                                
                                4,596,717
                                
                                
                                
                                6,168,545




(N.A. -
not applicable)
  In the
table above, earnings (loss) per share for each quarter were computed
independently using the weighted-average number of shares outstanding during the
quarter.  However, earnings (loss) per share for the year were
computed using the weighted-average number of shares outstanding during the
year.  As a result, the sum of the earnings per share for the four
quarters may not equal the full-year earnings (loss) per
share.


F-26





For the Year Ended December 31, 2006FirstQuarter
                
                
                SecondQuarter
                
                
                ThirdQuarter
                
                
                FourthQuarterTotal
      revenues
                
                $
                125
                
                
                $
                160
                
                
                $
                36,096
                
                
                $
                7,930Gross
      profit
                
                $
                125
                
                
                $
                160
                
                
                $
                13,951
                
                
                $
                (1,391
                )Net
      income (loss)
                
                $
                (818,231
                )
                
                $
                239,408
                
                
                $
                (273,036
                )
                
                $
                (815,813
                )Basic
      and diluted earnings per shareContinuing
      operations:Net
      income (loss) basic
                
                $
                (0.08
                )
                
                $
                0.01
                
                
                $
                (0.01
                )
                
                $
                (0.02
                )Net
      income (loss) diluted
                
                
                (0.08
                )
                
                
                0.01
                
                
                
                (0.01
                )
                
                
                (0.02
                )Basic
      and diluted average number of common shares
    outstanding:Basic
                
                
                9,926,350
                
                
                
                16,516,798
                
                
                
                21,589,148
                
                
                
                39,872,667Diluted
                
                
                9,926,350
                
                
                
                39,386,648
                
                
                
                21,589,148
                
                
                
                39,872,667





In the table above, earnings (loss) per
share for each quarter were computed independently using the weighted-average
number of shares outstanding during the quarter.  However, earnings
(loss) per share for the year were computed using the weighted-average number of
shares outstanding during the year.  As a result, the sum of the
earnings per share for the four quarters may not equal the full-year earnings
(loss) per share.


F-27


Note 18 - Subsequent
Events





Investing
and Financing Transactions





The Company has issued convertible
debt as follows:




Issued
                                                          
                                                          Maturity
                                                          
                                                          AmountAberdeen Avenue, LLC, 2% Promissory
      NotesMarch
      1, 2007
                                                          
                                                          December
      31, 2009
                                                          
                                                          $
                                                          50,000March
      29, 2007
                                                          
                                                          December
      31, 2009
                                                          
                                                          
                                                          50,000April
      12, 2007
                                                          
                                                          December
      31, 2009
                                                          
                                                          
                                                          175,000February
      11, 2008
                                                          
                                                          June
      30, 2010
                                                          
                                                          
                                                          9,000February
      21, 2008
                                                          
                                                          June
      30, 2010
                                                          
                                                          
                                                          16,000March
      10, 2008
                                                          
                                                          June
      30, 2010
                                                          
                                                          
                                                          9,000Total
      Aberdeen
                                                          
                                                          
                                                          
                                                          $
                                                          309,000Southridge Partners, LP, 2% Promissory
      NotesJanuary
      10, 2007
                                                          
                                                          July
      31, 2007
                                                          
                                                          $
                                                          30,000January
      25, 2007
                                                          
                                                          December
      31, 2008
                                                          
                                                          
                                                          60,000January
      30, 2007
                                                          
                                                          July
      30, 2009
                                                          
                                                          
                                                          35,000May
      2, 2007
                                                          
                                                          December
      31, 2009
                                                          
                                                          
                                                          40,000May
      4, 2007
                                                          
                                                          November
      4, 2008
                                                          
                                                          
                                                          10,000June
      29, 2007
                                                          
                                                          December
      31, 2008
                                                          
                                                          
                                                          16,000July
      19, 2007
                                                          
                                                          January
      19, 2009
                                                          
                                                          
                                                          40,000August
      10, 2007
                                                          
                                                          February
      9, 2009
                                                          
                                                          
                                                          65,000September
      27, 2007
                                                          
                                                          March
      27, 2009
                                                          
                                                          
                                                          15,000October
      22, 2007
                                                          
                                                          April
      22, 2009
                                                          
                                                          
                                                          35,000November
      19, 2007
                                                          
                                                          May
      19, 2009
                                                          
                                                          
                                                          75,000February
      11, 2008
                                                          
                                                          June
      30, 2010
                                                          
                                                          
                                                          100,000February
      21, 2008
                                                          
                                                          June
      30, 2010
                                                          
                                                          
                                                          64,000March
      10, 2008
                                                          
                                                          June
      30, 2010
                                                          
                                                          
                                                          36,000March
      10, 2008
                                                          
                                                          June
      30, 2009
                                                          
                                                          
                                                          15,000May
      20, 2008
                                                          
                                                          June
      30, 2010
                                                          
                                                          
                                                          60,000May
      20, 2008
                                                          
                                                          December
      31, 2009
                                                          
                                                          
                                                          20,000June
      13, 2008
                                                          
                                                          December
      31, 2009
                                                          
                                                          
                                                          16,000July
      2, 2008
                                                          
                                                          December
      31, 2009
                                                          
                                                          
                                                          15,000August
      22, 2008
                                                          
                                                          June
      30, 2010
                                                          
                                                          
                                                          12,000Total
      Southridge
                                                          
                                                          
                                                          
                                                          $
                                                          759,000Southshore Capital Fund, Ltd., 2% Promissory
      NotesAugust
      22, 2008
                                                          
                                                          June
      30, 2010
                                                          
                                                          $
                                                          3,000March
      10, 2008
                                                          
                                                          June
      30, 2010
                                                          
                                                          
                                                          9,000February
      11, 2008
                                                          
                                                          June
      30, 2010
                                                          
                                                          
                                                          9,000March
      10, 2008
                                                          
                                                          June
      30, 2010
                                                          
                                                          
                                                          9,000Total
      Southshore
                                                          
                                                          
                                                          
                                                          $
                                                          30,000Total
      Promissory Notes
                                                          
                                                          $
                                                          1,098,000




F-28




The 2%
Convertible Promissory Notes are convertible, at the option of the holder, at
any time to convert all or a portion of the outstanding principal and interest
on the promissory note into a number of shares of common stock equal to a
fraction, the numerator of which will be the amount of principal and interest
being converted and the denominator of which will be equal to the conversion
price. Under the promissory note, the conversion price is equal to eighty
percent (80%) of the average of the five lowest closing bid prices for the ten
trading days immediately preceding the date of conversion.




In
addition, under each of the promissory notes, the Company has the right to
redeem a promissory note at any time by making a cash payment to the holder
of the outstanding principal amount of that particular promissory note
multiplied by 120%, plus all accrued interest. Further, an event of default is
defined the same under each of the promissory notes. An event of default will
occur: (i) if the Company defaults on the payment of principal or interest on
the promissory note which continues for a period of twenty days; (ii) if the
Company makes an assignment for the benefit of creditors or commences
proceedings for its dissolution or applies for or consents to the appointment of
a trustee, liquidator or receiver for its or for a substantial part of its
property or business; (iii) if a trustee, liquidator or receiver is appointed
without the Company’s consent and is not discharged within sixty days after such
appointment; (iv) any governmental agency or any court assumes custody or
control of the properties or assets of the Company and is not dismissed within
sixty days; (v) except for any judgments, settlements or related litigations or
actions disclosed in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2005, any judgment or similar process in excess of $150,000 in the
aggregate is entered or filed against the Company or any of its properties or
other assets and remains unpaid, unvacated, unbonded or unstayed for a period of
sixty days; or (vi) certain bankruptcy proceedings. Upon the occurrence of an
event of default, the interest rate on that particular promissory note will be
18%.




The
Company is in the process of renegotiating the maturity date of the Southridge
Partners note that matured July 31, 2007.





Litigation





On May 2,
2007, the Company reached a revised settlement plan with a settlement in
connection with the Cary Naddell matter.   Such settlement called
for the Company to issue 20,000,000 shares in lieu of $100,000 and Naddell and
the Company have settled all issues.  The Company also agreed to
register these shares in its next registration statement.





On July
31, 2007, Foley Hoag, LLP (“Foley”) filed a lawsuit against the Company in
Suffolk County Massachusetts Superior Court.  Foley’s suit alleges the
Company did not pay Foley $222,295 for services and related fees provided by
Foley to the Company.  On November 20, 2007, Foley filed a Motion to
Assess Damages, amending the amount of their claim against the Company to
$260,718, including interest.  The Company has received no further
communication regarding Foley’s claim nor is the Company contesting its
claim.





Formation
of new subsidiary-Fairfield Consumer Group





On
February 19, 2008, the Company announced it established a separate subsidiary
focused on providing specialized finance, consulting, and strategic advisory
services to small and medium sized businesses in the retail sector that require
customized finance and sophisticated assistance.  The subsidiary plans
to offer capital in a variety of forms to its clients, including senior
asset-based loans, senior cash flow loans, mortgage loans and mezzanine loans,
equity and equity derivatives. It is anticipated that capital to client
companies will generally range from $250,000 to $3.0 million, with an
average investment size of approximately $1.0 million.  The companies
are anticipated to remain as clients of the new subsidiary for between one and
two years.





The
Company announced that Donald Jones, a veteran retail executive, will oversee
the new, subsidiary, to be called Fairfield Consumer Group, as its Managing
Director. Mr. Jones is currently Founder, Chairman, and CEO of Pogan Retail,
LLC, a consulting firm that assists companies with operational efficiencies,
brand development, and retail management, specifically providing strategic
support to emerging and early stage retail and consumer product
companies.  Pogan Retail has a team of consultants and alliances with
other advisory firms in other categories, and a national network of industry
professionals.  It has provided services to such client companies as
Liz Claiborne, Utrecht Art Supplies, Buckler Menswear, and D.O.C. Optics, New
York & Company, Tabitha Geary, Total Luxury Group, Petals Decorative
Accents, and 21 Woods.  Mr. Jones has held senior executive positions
in retailers such as IKEA, Macy's, Target Corp, and GAP, Inc.


F-29





PART
III





ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE





DIRECTORS
AND EXECUTIVE OFFICERS




Executive Officers. Our
executive officers are appointed by, and serve at the discretion of, our board
of directors.




Board Composition. Our board
of directors is divided into three classes, each of which serves a three-year
term. The term of one class of directors expires each year at the annual meeting
of stockholders. Each director also continues to serve as a director until his
or her successor is duly elected and qualified. Thomas L. Folsom is a Class I
director and Michael Sheppard is a Class III director. Mr. Sheppard was elected
at a special meeting of our stockholders held on March 22, 2004. Mr. Folsom was
appointed to fill a vacancy left by the resignations of previous directors.
Ordinarily, the three classes of directors serve for staggered terms of three
years each. However, because we have not had an annual meeting since April 26,
2006, our current directors will serve until our next annual meeting of
stockholders and thereafter until a successor is duly elected and qualified. In
the event we have a 2007 annual meeting, the term of our Class I director would
next expire at our 2008 annual meeting of stockholders, the term of our Class II
director would next expire at our 2008 annual meeting of stockholders, and the
term of our Class III director would next expire at our 2010 annual meeting of
stockholders.




Executive
Directors and Officers





As of
September 30, 2008, our directors and executive officer are as
follows:




Name
                  
                  Age
                  
                  PositionMichael
      Sheppard
                  
                  59
                  
                  Chief
      Executive Officer, President, Acting Chief Financial Officer, Chief
      Operating Officer, and Chairman of the BoardThomas
      L. Folsom
                  
                  55
                  
                  Director




Michael Sheppard has served as
our president, chief operating officer and chief financial officer since July
2004. He has served as our acting chairman of our board of directors since
November 2001. From May 2003 to July 2004, he served as our vice president and
chief operating officer of our licensed technology division. From December 2002
to May 2003, he served as a consultant to our company. From 1997 to December
2002, he served as the president and chief operating officer of Technest
Holdings, Inc. (f/k/a Financial Intranet, Inc.). From 1995 to 1997, Mr. Sheppard
served as the chief operating officer of Freelinq Communications, a provider of
real time video-on-demand via ATM/XDSL technology. From 1992 to 1995, he served
as the chief executive officer of MLS Lighting, Ltd., a company in the
entertainment sector. From 1980 to 1992, Mr. Sheppard served as the president of
Lee America, a Westward Communications Company. Mr. Sheppard received a BA and
an MFA from New York University.




Thomas L. Folsomhas served on
our Board of Directors since January 11, 2006. He is currently a principal at
TRIP, Inc., a California-based company that manages and assists in the
development of professional lighting products. Prior to that, from 1995 to 1999,
he was a Vice President at Strand Lighting, Inc. where he was responsible for
Sales, Purchasing Engineering and Documentation. He holds an MA in technical
theatre from the University of Nebraska and a BFA from Westminster College in
the field of theatre lighting and sound.





Recent
Events - Resignations





Randolph
A. Graves resigned as a director of the Company on May 16, 2005.  Mark
Allen resigned as a director of the Company on December 29, 2005.  K.
Ivan F. Gothner resigned as a director of the Company on February 29,
2008.  Each of these former directors resigned to pursue other
business interests.




Family
and Other Relationships




There are
no family relationships between any of the present directors or executive
officer of the Company.


37




Involvement in Certain Legal
Proceedings




To the
knowledge of management, no director, executive officer or affiliate of the
Company or owner of record or beneficially of more than 5% of the Company's
common stock is a party adverse to the Company or has a material interest
adverse to the Company in any proceeding.




To the
knowledge of management, during the past five years, no present director,
executive officer or person nominated to become a director or an executive
officer of the Company:




(1)
            Filed
      a petition under the federal bankruptcy laws or any state insolvency law,
      nor had a receiver, fiscal agent or similar officer appointed by a court
      for the business or property of such person, or any partnership in which
      he or she was a general partner at or within two years before the time of
      such filing, or any corporation or business association of which he or she
      was an executive officer at or within two years before the time of such
      filing;




(2)
            Was
      convicted in a criminal proceeding or named the subject of a pending
      criminal proceeding (excluding traffic violations and other minor
      offenses);




(3)
            Was
      the subject of any order, judgment or decree, not subsequently reversed,
      suspended or vacated, of any court of competent jurisdiction, permanently
      or temporarily enjoining him or her from or otherwise limiting his or her
      involvement in any type of business, commodities, securities or banking
      activities;




(4)
            Was
      the subject of any order, judgment or decree, not subsequently reversed,
      suspended or vacated, of any Federal or State authority barring,
      suspending or otherwise limiting him or her for more than 60 days from
      engaging in, or being associated with any person engaging in, any type of
      business, commodities, securities or banking
  activities;




(5)
            Was
      found by a court of competent jurisdiction in a civil action or by the SEC
      or the Commodity Futures Trading Commission (“CFTC”) to have violated any
      federal or state securities law or Federal commodities law, and the
      judgment in such civil action or finding by the SEC or CFTC has not been
      subsequently reversed, suspended or
vacated.




SECTION 16(A) BENEFICIAL OWNERSHIP
REPORTING




Section 16(a)
of the Securities and Exchange Act of 1934 requires the Company's Officers and
Directors and persons who own more than ten percent (10%) of a registered class
of the Company’s equity securities to file reports of ownership and changes in
ownership with the Securities and Exchange Commission (“SEC”). Such Officers,
Directors, and stockholders are required by SEC regulations to furnish the
Company with copies of all such reports that they file.






Based solely on a review of the Forms
3, 4 and 5, and amendment thereto and written representations provided to us, we
believe that during and prior to the fiscal year ended December 31, 2006,
Michael Sheppard, our president, chief executive officer, acting chief financial
officer and director, did not timely file an initial statement of ownership on
Form 3.  In addition, during 2004, Michael Sheppard was awarded three
options to purchase an aggregate 1,200,000 shares of our common stock, none of
which was not timely reported on Form 4.




CODE
OF ETHICS





While the Company recognizes the need
for a formal code of ethics policy, one has not been adopted, and  as
of the date of this Annual Report, a formal code of ethics policy is under
consideration.


38





AUDIT
COMMITTEE AND AUDIT COMMITTEE FINANCIAL EXPERT





We do not
have a separately designated standing Audit Committee established in accordance
with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”).  The full Board of Directors serves as the Audit
Committee.  The Board of Directors has determined that Mr. Folsom is
independent as defined by Section 10A(m)(3) of the Exchange Act, and that he is
also an “audit committee financial expert,” as that term is defined in Item
407(d)(5) of Regulation S-K under the Exchange Act.  The Company has
not adopted an Audit Committee Charter although one is under consideration as of
the date of this Annual Report.





ITEM
11. EXECUTIVE COMPENSATION





Compensation
Discussion and Analysis




The
objectives of our compensation programs are twofold: (i) to attract and retain
qualified and talented professional individuals to perform the duties of our
executive offices and (ii) to fairly reward our executive officers for their
overall performance in long term management of the affairs of our
Company.




Our full
Board of Directors serves as the Compensation Committee's and the
Committee’s  goal is to develop executive compensation policies that
offer competitive compensation opportunities for all executives which are based
on personal performances, individual initiative and achievement, as well as
assisting us in attracting and retaining qualified executives. The Compensation
Committee also endorses the position that stock ownership by management and
stock-based compensation arrangements are beneficial in aligning management’s
and stockholders’ interests in the enhancement of stockholder
value.




Compensation
that we pay to our executive officers generally consists of the following
elements: base salary, annual bonus and long-term compensation in the form of
stock options and, when applicable, matching contributions under our 401(k)
Savings Plan. Compensation levels for executive officers for each fiscal year is
determined by a consideration of each officer's initiative and contribution to
overall corporate performance and the officer's managerial abilities and
performance in any special projects that the officer may have undertaken.
Competitive base salaries that reflect the individual's level of responsibility
are important elements of the Compensation Committee's executive compensation
philosophy. Subjective considerations of individual performance are considered
in establishing annual bonuses and other incentive compensation. In addition,
the Compensation Committee considers our financial position and cash flow in
making compensation decisions.




In
addition, we have certain broad-based employee benefit plans in which all of our
employees, including the named executives, are permitted to participate on the
same terms and conditions relating to eligibility and subject to the same
limitations on amounts that may be contributed. While we have a 401(k) Savings
Plan which provides for matching contributions at managements discretion, no
such matching contributions have been made since the inception of the
plan.




We choose
to pay each element of compensation described above in order to best meet our
goal of attracting and retaining qualified and talented professional
individuals.   We consider the salary component of our
compensation program as important and we try to be competitive with what we
believe to be the compensation of other companies of similar size and scope of
operations.  To date, we have not engaged the services of a
compensation review consultant or service in view of the cost of such services
compared to our size and revenues.  We include the stock option
element of compensation in order to provide additional compensation in the long
term commensurate with the Company’s growth and increased share value that may
result from the executive-recipient’s performance.  The award of a
bonus upon review of the Company’s performance provides an additional incentive
for increased performance.  The lack of other compensation benefits
such as other insurance, retirement or retirement savings plans compels the
importance of the salary and stock option elements of our compensation
program.




We
determine the amount for each element to pay by reviewing annually the existing
compensation levels of our executive officers and the Company’s performance
since the last annual review, and consider whether an increase or decrease in
the compensation level may be appropriate during the upcoming annual period
using the factors described above. The Company has no existing formula for
determination of the salary, stock options or bonus elements of
compensation.


39





Each
compensation element and our decisions regarding that element fit into our
overall compensation objectives and affect our decisions regarding other
elements in the following manner:  As stated above, we consider the
salary and stock option elements to be the significant elements of overall
compensation and are intended to serve primarily as current and long-term
compensation, respectively.  Our review of salary levels and
consideration of bonus awards on an annual basis and vesting of options over a
forward period enable us to attempt to meet our objectives of attracting and
maintaining qualified and talented professional individuals in service as our
executive officers.




COMPENSATION COMMITTEE
REPORT





The Report of the Compensation
Committee (the “Compensation Report”) does not constitute soliciting material
and should not be deemed filed or incorporated by reference into any other
Company filing under the Securities Act of 1933 or the Securities Exchange Act
of 1934, except to the extent the Company specifically incorporates this
Compensation Report by reference therein.





Recommendations of the Compensation
Committee.We have reviewed and discussed the Compensation Discussion
& Analysis (“CD&A”) with the Company’s management. Based on this review
and these discussions, we recommended to the Board of Directors that the
CD&A be included in the Company’s Annual Report on Form 10-K for the fiscal
year ended December 31, 2006.





This report has been furnished by
the Compensation Committee of the Board of Directors.





Thomas L.
Folsom, Chairman


Michael
Sheppard





December
15, 2008





Summary
Compensation Table




The
following table sets forth certain summary information with respect to the
compensation paid to the Company's former Chief Executive Officer, current
Acting Chief Executive Officer, Chief Operating Officer and Chief Financial
Officer for services rendered in all capacities to the Company for the fiscal
years ended December 31, 2006, 2005 and 2004. Other than as listed below, the
Company had no executive officers whose total annual salary and bonus exceeded
$100,000 for that fiscal year:


40


Summary
Compensation Table




Name and
                                Principal
                                Position
                              
                              Year
                              
                              Salary
                                ($)
                              
                              
                              Bonus
                                ($)(1)
                              
                              
                              Stock
                                Awards
                                ($)
                              
                              
                              Option
                                Awards
                                ($)
                              
                              
                              Non-equity
                                incentive plan
                                compensation
                                ($)
                              
                              
                              Change in
                                pension value
                                and
                                nonqualified
                                deferred
                                compensation
                                earnings ($)
                              
                              
                              All
                                Other
                                Compensation
                                ($)
                              
                              
                              Total ($)Michael
                                Sheppard
                                (2)
                                President,
                                Chief
                                Executive
                                Officer
      and Chief Operations Officer
                              
                              2006
                              
                              $
                              184,900
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              $
                              10,120
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              $
                              195,0202005
                              
                              $
                              163,750
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              $
                              2,092
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              $
                              165,8432004
                              
                              $
                              158,000
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              $
                              2,090
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              $
                              160,090


Notes:


(1)
              Each
      of the Company’s executive officers also is eligible to receive cash
      bonuses to be awarded at the discretion of the Compensation Committee of
      the Board of Directors.





(2)
              Michael
      Sheppard served as our vice president of our licensed technologies
      division until July 2004 when he was appointed by the board of directors
      to serve as our president, acting chief financial officer and chief
      operating officer.





Grants of Plan-Based
Awards




Estimated
      future payouts under
                              non-equity
      incentive plan
                              awards
                            
                            
                            Estimated
      future payouts under
                              equity
      incentive plan awards
                            
                            
                            All other
      stock
                              awards:
                                Number
      of shares of
                            
                            
                            All other option
      awards:
                              Number of
      securities underlying
                            
                            
                            Exercise

                                or base
                                price
      of
                                option
                            
                            
                            Grant
                                datefair
                                value
      of stockName
                            Grant
      date
                            
                            Threshold
                              ($)
                            
                            
                            Target
                              ($)
                            
                            
                            Maximum
                              ($)
                            
                            
                            Threshold
                              (#)
                            
                            
                            Target
                              (#)
                            
                            
                            Maximum
                              (#)
                            
                            
                            stock
      or units
                              (#)
                            
                            
                            options
                              (#)
                            
                            
                            awards
                              ($/Sh)
                            
                            
                            and
      option awards(a)
                            (b)
                            
                            (c)
                            
                            
                            (d)
                            
                            
                            (e)
                            
                            
                            (f)
                            
                            
                            (g)
                            
                            
                            (h)
                            
                            
                            (i)
                            
                            
                            (j)
                            
                            
                            (k)
                            
                            
                            (l)Michael
      Sheppard
                            02/09/06
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            50,000
                            (1)
                            
                            $
                            0.009
                            
                            
                            $
                            89902/09/06
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            12,500
                            (1)
                            
                            $
                            0.009
                            
                            
                            
                            9007/12/06
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            1,000,000
                            (1)
                            
                            $
                            0.050
                            
                            
                            
                            17,96309/29/06
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            250,000
                            (1)
                            
                            $
                            0.018
                            
                            
                            
                            4,49512/29/06
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            250,000
                            (1)
                            
                            $
                            0.006
                            
                            
                            
                            1,623




(1)
              Each
      of these options were fully vested as of the grant date, were issued
      pursuant to the Company’s Employee Stock Option Plan and expire ten years
      from the grant date.


41




Outstanding
equity awards at fiscal year-end table




Option
      awards
                          
                          Stock
      awardsName
                          
                          Number of
                            securities
                            underlying
                            unexercised
                            options
                            (#) exercisable
                          
                          
                          Number of
                            securities
                            underlying
                            unexercised
                            options
                            (#)
                            unexercisable
                          
                          
                          Equity incentive
                            plan awards:
                            number of
                            securities
                            underlying
                            unexercised
                            unearned
                            options
                            (#)
                          
                          
                          Option
                            exercise
                            price
                            ($)
                          
                          Option
                            expiration
                            date
                          
                          Number of
                            shares or
                            units of
                            stock that
                            have not
                            vested
                            (#)
                          
                          
                          Market
                            value of
                            shares or
                            units of
                            stock that
                            have not
                            vested
                            (#)
                          
                          
                          Equity
                            incentive plan
                            awards:
                            number of
                            unearned
                            shares, units or
                            other rights
                            that have not
                            vested
                            (#)
                          
                          
                          Equity
                            incentive plan
                            awards: market
                            or payout value
                            of unearned
                            shares, units or
                            other rights
                            that have not
                            vested
                            ($)(a)
                          
                          (b)
                          
                          
                          (c)
                          
                          
                          (d)
                          
                          
                          (e)
                          
                          (f)
                          
                          (g)
                          
                          
                          (h)
                          
                          
                          (i)
                          
                          
                          (j)Michael
      Sheppard
                          
                          
                          600,000
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          $
                          0.050
                          
                          01/30/13300,000
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          $
                          0.030
                          
                          12/09/14300,000
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          $
                          0.040
                          
                          08/18/1562,500
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          $
                          0.009
                          
                          02/08/16
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —1,000,000
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          $
                          0.050
                          
                          07/11/16250,000
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          $
                          0.018
                          
                          09/28/06250,000
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          $
                          0.006
                          
                          12/28/16




Option
exercises and stock vested table




Option
      awards
                          
                          
                          Stock
      awardsName
                          
                          Number of shares
                            acquired on
                            exercise
                            (#)
                          
                          
                          Value
                            realized on
                            exercise
                            ($)
                          
                          
                          Number of shares
                            acquired on vesting
                            (#)
                          
                          
                          Value
                            realized on
                            vesting
                            ($)(a)
                          
                          (b)
                          
                          
                          (c)
                          
                          
                          (d)
                          
                          
                          (e)—
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —




There were no options exercised or
vested during the fiscal year ending December 31, 2006 other than those noted as
issued above.




Pension
benefits




Name
                        
                        Plan name
                        
                        
                        Number of years credited service
                          (#)
                        
                        
                        Present value of
                          accumulated benefit
                          ($)
                        
                        
                        Payments during last fiscal year
                          ($)(a)
                        
                        (b)
                        
                        
                        (c)
                        
                        
                        (d)
                        
                        
                        (e)—
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —





There
were no pension plans in-place during year 2006 for the Company’s Chief
Executive Officer, Chief Financial Officer or any of the Company’s most highly
compensated executive officers whose compensation exceeded $100,000 for
2006.


42




Nonqualified
defined contribution and other nonqualified deferred compensation
plans.




Name
                            
                            Executive contributions
                              in last FY
                              ($)
                            
                            Registrant contributions
                              in last FY
                              ($)
                            
                            
                            Aggregate earnings in
                              last FY
                              ($)
                            
                            
                            Aggregate
                              withdrawals/distributions
                              ($)
                            
                            
                            Aggregate balance at
                              last FYE
                              ($)(a)
                            
                            (b)
                            
                            (c)
                            
                            
                            (d)
                            
                            
                            (e)
                            
                            
                            (f)—
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —




There were no
nonqualified defined contribution and other nonqualified deferred compensation
plans in place during year 2006 for the Company’s Chief Executive Officer, Chief
Financial Officer or any of the Company’s most highly compensated executive
officers whose compensation exceeded $100,000 for 2006.




Director
Compensation





Directors
who are employed as executive officers receive no additional compensation for
service on the board.  All directors are reimbursed for travel and
other expenses relating to attendance at board and committee meetings. Directors
who are not employees of the Company are eligible to receive $1,000 per Board
meeting attended. However, we have never made payments to our directors for
attending meetings.  Directors are eligible to receive automatic
grants of stock options under the Company’s Non-Employee Directors Stock Option
Plan and may receive additional grants of options under such plan at the
discretion of the Compensation Committee of the Board of Directors. None of our
directors received any compensation for services as directors in
2005.  Tom Folsom and K.I.F Gothner received compensation in
2006.




Name
                                      
                                      Fees
                                        Earned
      or
                                        Paid in
                                        Cash
      ($)
                                      
                                      
                                      Stock
                                        Awards
                                        ($)
                                      
                                      
                                      Option
                                        Awards
                                        ($)
                                      
                                      
                                      Non-equity
                                        incentive
      plan
                                        compensation
                                        ($)
                                      
                                      
                                      Nonqualified
                                        deferred
                                        compensation
      earnings
                                        ($)
                                      
                                      
                                      All
      Other
                                        Compensation
      ($)
                                      
                                      
                                      Total
      ($)Michael
      Sheppard
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —Thomas
      L. Folsom(1)
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      $
                                      8,004
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      $
                                      8,004K.
      Ivan F. Gothner(2)
                                        (Resigned
                                        February
      29, 2008)
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      $
                                      10,609
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      $
                                      10,609


.


(1)           Thomas
L. Folsom received four ten-year option grants in 2006, including 5,000 on
February 9, 2006, at an exercise price of $0.0090; 100,000 on July 12, 2006 at
an exercise price of $0.05; 250,000 on September 29, 2006 at an exercise price
of $0.018 and 250,000 on December 29, 2006 at an exercise price of
$0.006.  At December 31, 2006, Mr. Folsom held options totaling
605,000 shares of the Company’s common stock.





(2)           K.
Ivan F. Gothner received three ten-year option grants in 2006, including 250,000
on July 12, 2006 at an exercise price of $0.05; 250,000 on September 29, 2006 at
an exercise price of $0.018 and 250,000 on December 29, 2006 at an exercise
price of $0.006.  At December 31, 2006, Mr. Gothner held options
totaling 767,500 shares of the Company’s common
stock.


43




Employment
Arrangements




Employment Agreement with Mr.
Allen.On
December 31, 2004, we agreed to employ Allen and Mr. Allen agreed to render
services for our company as our Executive Vice President and President of our
whole owned subsidiary, True To Form for a period of two years, commencing on
January 1, 2005. Under this agreement, we agreed to pay Mr. Allen a base salary
equal to one hundred fifty thousand dollars annually in equal semi-monthly
installments in arrears or otherwise in accordance with our standard procedures
and policies. We also agreed to pay bonuses in cash or, at Mr. Allen’s option,
in our common stock, based on True To Form’s 12-month trailing net sales
figures, as follows:




·
            $25,000
      if net sales exceeded $1,000,000;




·
            $25,000
      if net sales exceeded $2,000,000;
and




·
            $100,000
      if net sales exceeded $4,000,000.




Pursuant
to this provision, in 2005 we issued options to purchase an aggregate 900,000
shares of our common stock to Mr. Allen. The agreement further provided that
within 30 days after December 31, 2005, we are required to issue a second
non-statutory stock option to purchase a number of shares of common stock equal
to the difference of (a) 1% of the common stock issued and outstanding as of
December 31, 2005 minus (b) 600,000. All options issuable under the agreement
were to be fully vested on the grant date. This agreement, and any equity
interests Mr. Allen had in Global Matrechs (including options already granted),
was terminated in connection with our sale of True to Form to him on December
29, 2005.  The employment agreement itself was also terminated in
connection with the sale of True to Form.




Compensation
Committee Interlocking and Insider Participation




No
interlocking relationship exists between any member of the Company's Board of
Directors serving as the Compensation Committee and any member of the
compensation committee of any other company, nor has any such interlocking
relationship existed in the past.





ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT





At the close of business on May 10,
2007, there were issued and outstanding 194,012,129 shares of our common stock.
The following table provides information regarding beneficial ownership of our
common stock as of May 10, 2007 by:




·
            each
      person known by us to be the beneficial owner of more than five percent of
      our common stock;


·
            each
      of our directors;


·
            each
      executive officer named in the summary compensation table;
    and


·
            all
      of our current directors and executive officers as a
  group.





The persons named in this table have
sole voting and investment power with respect to the shares listed, except as
otherwise indicated. The inclusion of shares listed as beneficially owned does
not constitute an admission of beneficial ownership. Shares included in the
“Right to Acquire” column consist of shares that may be purchased through the
exercise of options that vest within 60 days of May 10, 2007.




Shares Beneficially OwnedName and Address of Beneficial Owner
                        
                        Outstanding
                        
                        
                        Right to
                          Acquire
                        
                        
                        Total
                        
                        
                        PercentMichael
      Sheppard
                        
                        
                        -
                        
                        
                        
                        1,690,000
                        
                        
                        
                        1,690,000
                        
                        
                        
                        2.3
                        %K.
      Ivan F. Gothner
                        
                        
                        -
                        
                        
                        
                        767,500
                        
                        
                        
                        767,500
                        
                        
                        
                        1.1
                        %Thomas
      L. Folsom
                        
                        
                        -
                        
                        
                        
                        605,000
                        
                        
                        
                        605,000
                        
                        
                        
                        0.9
                        %All
      current directors and executive officers as a group (3
      persons)
                        
                        
                        -
                        
                        
                        
                        3,062,500
                        
                        
                        
                        3,062,500
                        
                        
                        
                        4.3
                        %


______________________


*
            Represents
      beneficial ownership of less than
1.0%.


44




EQUITY
COMPENSATION PLAN DISCLOSURE




The
information with respect to our equity compensation plan is incorporated herein
by reference to Item 5 of Part II of this Report.





ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE





We sold
substantially all of our assets used in our hosting and web site maintenance
business to Tulix Systems, Inc. Timothy R. Robinson, George Bokuchava and Nino
Doijashvili are the officers and directors of Tulix and own all of its
outstanding stock. Until, May 31, 2004, they were also our officers and
directors, with the exception of Mr. Robinson who resigned as a director on July
1, 2004. As consideration for these assets, Tulix issued to us shares of its
common stock that represents 15% of its outstanding shares; issued to us a
secured promissory note for a principal amount of $70,000; and, assumed certain
of our obligations. The promissory note was paid back in May 2006 and the 15%
interest in Tulix was sold back to the current management of Tulix for $50,000
on May 18, 2007.




In May
2003, we entered into a licensing agreement with Eurotech, Ltd. Dr. Graves, who
was then a member of our board of directors and a vice president (resigned May
16, 2005), was also the chief financial officer and a member of the board of
directors of Eurotech. In exchange for the licenses, we issued to Eurotech
11,250 shares of our Series F preferred stock and 1,069 shares of our Series G
preferred stock, and agreed to pay Eurotech a royalty of seven percent (7%) on
net sales generated by the licensed technologies and a royalty of four percent
(4%) on net sales generated by products and services that are improvements on
the licensed technologies. As of the date of this Annual Report, nothing is due
from the Company to Eurotech under the license agreement.  The holders
of the outstanding shares of our Series F preferred stock cancelled their
outstanding shares of our Series F preferred stock in exchange for shares of our
Series H preferred stock.




On May
31, 2004, we completed the sale of our internet hosting and website maintenance
business to Tulix Systems, Inc., a company in which Gia Bokuchava, Nino
Doijashvili and Timothy R. Robinson, who were officers and directors of our
Company, are officers, directors and founding shareholders. We recorded a loss
on the sale of this business of $125,030 in the fourth quarter of 2003 and
recorded an additional loss of $124,385 in the second quarter of 2004 for
adjustments to the closing as provided for in the closing documents. Mr.
Robinson, Dr. Bokuchava, and Dr. Doijashvili have subsequently resigned from the
Company and have released the Company from all further employment
obligations.




In July
2003, we executed a secured promissory note in favor of McNab, LLC that allows
us to borrow up to $542,950. McNab, LLC owns the outstanding shares of our
Series C, Series D, and Series E preferred stock. In addition, McNab, LLC agreed
to accept shares of our common stock as payment for approximately $2,000,000 of
penalties that may be owed for our failure to register for resale shares of our
common stock issuable upon conversion of its outstanding preferred
stock.




On
December 31, 2004 we entered into an agreement and plan of Merger (the “Merger
Agreement”) to acquire True to Form, a private company wholly and controlled by
one of our directors Mark Allen.




·             Our
subsidiary True To Form issued to Mark Allen a secured note in principal amount
of $500,000, payable over five years at an annual interest rate of 8%, with
$100,000 due after one year and the remaining principal amount due on December
31, 2009; and




·             We
issued to Mark Allen 10,000,000 shares of our common stock.




·             The
note was secured by all of the assets of True To Form under the terms of a
Security Agreement by and between True To Form and Mr. Allen, entered into on
December 31, 2004. In addition, we guaranteed the note in full pursuant to the
terms of a guaranty issued to Mr. Allen entered into on December 31, 2004, and
pledged as collateral to the note all of the common stock of True To Form in
favor of Mr. Allen pursuant to the terms of a collateral pledge agreement
entered into on December 31, 2004.


45




The sale
of these securities was exempt from registration pursuant to Section 4(2) of the
Securities Act.




Since
January 1, 2005 we have issued options to purchase 2,650,000 shares of common
stock to directors and executive officers.




On
December 29, 2005 we completed the transfer of all of the issued and outstanding
capital stock of True To Form Limited, Inc. back to Mr. Allen pursuant to the
terms of a Stock Purchase Agreement between him, True to Form, and us. As a
result of this sale, we no longer hold any equity interest in True To Form. The
consideration was determined on the basis of these negotiations. The
consideration for the sale of True to Form consists of:





·        the
issuance by True To Form to us of a promissory note described below in the
initial principal amount of $250,000, which note accrues interest at an annual
rate of one percent plus the prime rate as reported by a nationally recognized
commercial bank and has a maturity date of January 1, 2011;




·        the
cancellation of our guaranty of the amounts owed under a promissory note issued
by True to Form to Mr. Allen in connection with our acquisition of True to Form;
and




·        the
surrender by Mr. Allen of the 10,000,000 shares of our common stock that were
issued to him as partial consideration for our purchase of True to Form on
December 31, 2004 and the cancellation of all other equity interest in Global
Matrechs held by Mr. Allen.




In
addition, we agreed to the cancellation of amounts owed under a note issued by
us to True to Form for working capital purposes in the aggregate amount of
$280,000.




In
connection with this transaction, Mr. Allen resigned from his positions as
Executive Vice President and Director of Global Matrechs. This action was not,
to the knowledge of any executive officer of the Company, because of a
disagreement on any matter relating to the Company’s operations, policies or
practices.





Director
Independence




The
Over-the-Counter Bulletin Board does not have rules regarding director
independence.  Our determination of independence of directors is made using
the definition of “independent director” contained in the Marketplace Rules of
the NASDAQ Stock Market (“NASDAQ”), even though such definitions do not
currently apply to us because we are not listed on NASDAQ.  We have
determined that Mr. Folsom is “independent” within the meaning of such rules.
Michael Sheppard is not “independent” under these rules, due to his position as
an executive officer of our Company.


46


ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES





The
following table sets forth fees billed to us by our auditors during the fiscal
years ended December 31, 2006 and December 31, 2005 for: (i) services rendered
for the audit of our annual financial statements and the review of our quarterly
financial statements, (ii) services by our auditor that are reasonably related
to the performance of the audit or review of our financial statements and that
are not reported as Audit Fees, (iii) services rendered in connection with tax
compliance, tax advice and tax planning, and (iv) all other fees for services
rendered.





December 31,
                  
                  
                  December 31,2006
                  
                  
                  2005(i)  Audit
      Fees
                  
                  $
                  42,000
                  
                  
                  $
                  38,000(ii)  Audit
      Related Fees
                  
                  $
                  -
                  
                  
                  $
                  -(iii)  Tax
      Fees
                  
                  $
                  4,000
                  
                  
                  $
                  4,000(iv)  All
      Other Fees
                  
                  $
                  -
                  
                  
                  $
                  -TOTAL
                  
                  $
                  46,000
                  
                  
                  $
                  42,000





AUDIT
FEES. Consists of fees billed for professional services rendered for the audit
of Homecom Communications, Inc.’s (the former name of the Company) financial
statements and review of the interim financial statements included in quarterly
reports and services that are normally provided by Sherb & Company, LLC in
connection with statutory and regulatory filings or
engagements.  Audit and tax services for the year ended December 31,
2006 were provide by Li & Co, PC.





AUDIT-RELATED
FEES. Consists of fees billed for assurance and related services that are
reasonably related to the performance of the audit or review of Homecom
Communications, Inc.’s financial statements and are not reported under “Audit
Fees.”





TAX FEES.
Consists of fees billed for professional services for tax compliance, tax advice
and tax planning.





ALL OTHER
FEES. Consists of fees for products and services other than the services
reported above. There were no management consulting services provided in fiscal
2006 or 2005.





PRE-APPROVAL
POLICIES AND PROCEDURES. The Company does not have an audit committee. The Board
of Directors has approved Future Now Group to serve as the Company’s outside
accounting firm. It is the policy of the Company that all services provided by
Mantyla & McReynolds, LP, shall be pre-approved by the Board of Directors.
Mantyla & McReynolds, LP will provide the Board of Directors with an
engagement letter outlining the scope of the audit services proposed to be
performed during the fiscal year and the estimated fees for such services.
Pre-approval of audit and permitted non-audit services may be given by the Board
of Directors at any time up to one year before the commencement of such services
by Mantyla & McReynolds, LP. Pre-approval must be detailed as to the
particular services to be provided. Pre-approval may be given for a category of
services, provided that (i) the category is narrow enough and detailed enough
that management of the Company will not be called upon to make a judgment as to
whether a particular proposed service by Mantyla & McReynolds, LP fits
within such pre-approved category of services and (ii) the Board of Directors
also establishes a limit on the fees for such pre-approved category of
services.


47


ITEM 15.
EXHIBITS.





Filed with
                                          
                                          Incorporated by
ReferenceExhibitNo.
                                          
                                          Description
                                          
                                          this Form
                                            10-K
                                          
                                          Form
                                          
                                          Filing Date
                                          
                                          Exhibit No.2.1
                                          
                                          Agreement
      and Plan of Merger dated December 31, 2004 with True To Form, Limited, TTF
      Acquisition Corp. and Mark J. Allen
                                          
                                          
                                          
                                          8-K
                                          
                                          January
      6, 2005
                                          
                                          2.13.1
                                          
                                          Certificate
      of Amendment of Amended and Restated Certificate of
      Incorporation
                                          
                                          
                                          
                                          8-K
                                          
                                          June
      15, 2004
                                          
                                          3.13.2
                                          
                                          Amended
      and Restated Certificate of Incorporation
                                          
                                          
                                          
                                          S-1
                                          
                                          September
      18, 1996
                                          
                                          3.13.3
                                          
                                          Amended
      and Restated By-Laws
                                          
                                          
                                          
                                          S-1
                                          
                                          September
      18, 1996
                                          
                                          3.23.4
                                          
                                          Certificate
      of Designation, Rights, Preferences, Qualifications, Limitations and
      Restrictions of Series A Convertible Preferred Stock
                                          
                                          
                                          
                                          S-1/A
                                          
                                          January
      29, 1998
                                          
                                          3.33.5
                                          
                                          Certificate
      of Amendment of Certificate of Designations, Preferences and Rights of
      Series B Convertible Preferred Stock
                                          
                                          
                                          
                                          8-K
                                          
                                          June
      15, 2004
                                          
                                          3.23.6
                                          
                                          Certificate
      of Designations, Preferences and Rights of Series B Convertible Preferred
      Stock
                                          
                                          
                                          
                                          10-K
                                          
                                          March
      31, 1999
                                          
                                          10.493.7
                                          
                                          Certificate
      of Amendment of Certificate of Designations, Preferences and Rights of
      Series C Convertible Preferred Stock
                                          
                                          
                                          
                                          8-K
                                          
                                          June
      15, 2004
                                          
                                          3.43.8
                                          
                                          Certificate
      of Designations, Preferences and Rights of Series C Convertible Preferred
      Stock
                                          
                                          
                                          
                                          S-1
                                          
                                          May
      10, 1999
                                          
                                          3.53.9
                                          
                                          Certificate
      of Amendment of Certificate of Designations, Preferences and Rights of
      Series D Convertible Preferred Stock
                                          
                                          
                                          
                                          S-1
                                          
                                          May
      10, 1999
                                          
                                          3.63.10
                                          
                                          Amended
      Certificate of Designations, Preferences and Rights of Series E
      Convertible Preferred Stock
                                          
                                          
                                          
                                          S-3
                                          
                                          June
      1, 2000
                                          
                                          3.73.11
                                          
                                          Certificate
      of Designations, Preferences and Rights of Series F Convertible Preferred
      Stock
                                          
                                          
                                          
                                          10-K
                                          
                                          April
      15, 2003
                                          
                                          3.83.12
                                          
                                          Certificate
      of Designations, Preferences and Rights of Series G Convertible Preferred
      Stock
                                          
                                          
                                          
                                          10-K
                                          
                                          April
      15, 2003
                                          
                                          3.9




48





Filed with
                                            
                                            Incorporated by
ReferenceExhibitNo.
                                            
                                            Description
                                            
                                            this Form
                                              10-K
                                            
                                            Form
                                            
                                            Filing Date
                                            
                                            Exhibit No.3.13
                                            
                                            Certificate
      of Designations, Preferences and Rights of Series H Convertible Preferred
      Stock
                                            
                                            
                                            
                                            10-Q
                                            
                                            October
      29, 2003
                                            
                                            3.13.14
                                            
                                            Certificate
      of Designations, Preferences and Rights of Series I Convertible Preferred
      Stock
                                            
                                            
                                            
                                            10-QSB
                                            
                                            August
      16, 2004
                                            
                                            3.14.1
                                            
                                            Specimen
      stock certificate
                                            
                                            
                                            
                                            S-1
                                            
                                            November
      1, 1996
                                            
                                            4.24.2
                                            
                                            2%
      Secured Convertible Promissory Note issued to Southridge Capital Partners
      dated October 19, 2004
                                            
                                            
                                            
                                            8-K
                                            
                                            October
      19, 2005
                                            
                                            4.14.3
                                            
                                            Form
      of 2% Secured Convertible Promissory Note issued to each of Colonial Fund,
      LLC and Dean DeNuccio on October 22, 2004
                                            
                                            
                                            
                                            8-K
                                            
                                            October
      22,2005
                                            
                                            4.14.4
                                            
                                            2%
      Secured Convertible Promissory Note dated December 3, 2004 issued to Deer
      Creek Fund, LLC
                                            
                                            
                                            
                                            8-K
                                            
                                            December
      8, 2004
                                            
                                            99.14.5
                                            
                                            2%
      Secured Convertible Promissory Note issued to Woodward,
LLC
                                            
                                            
                                            
                                            8-K
                                            
                                            February
      2, 2005
                                            
                                            10.44.6
                                            
                                            2%
      Secured Convertible Promissory Note issued to Southridge Partners, LP on
      January 31, 2005
                                            
                                            
                                            
                                            8-K
                                            
                                            February
      2, 2005
                                            
                                            10.24.7
                                            
                                            Nonnegotiable
      2% Secured Convertible Promissory Note issued to Southridge Partners, LP
      on March 2, 2005
                                            
                                            
                                            
                                            8-K
                                            
                                            March
      7, 2005
                                            
                                            4.24.8
                                            
                                            Non-negotiable
      2% Secured Convertible Promissory Note issued to Southridge Partners, LP
      on April 11, 2005
                                            
                                            
                                            
                                            8-K
                                            
                                            April
      15, 2005
                                            
                                            4.24.9
                                            
                                            Non-negotiable
      2% Secured Convertible Promissory Note issued to Southridge Partners, LP
      on May 12, 2005
                                            
                                            
                                            
                                            8-K
                                            
                                            May
      17, 2005
                                            
                                            4.24.10
                                            
                                            Non-negotiable
      2% Secured Convertible Promissory Note issued to McNab, LLC on June 14,
      2005
                                            
                                            
                                            
                                            8-K
                                            
                                            June
      20, 2005
                                            
                                            4.14.11
                                            
                                            Non-negotiable
      2% Secured Convertible Promissory Note issued McNab, LLC on August 1,
      2005
                                            
                                            
                                            
                                            8-K
                                            
                                            August
      1, 2005
                                            
                                            4.24.12
                                            
                                            Non-negotiable
      2% Secured Convertible Promissory Note issued McNab, LLC on September 14,
      2005
                                            
                                            
                                            
                                            8-K
                                            
                                            September
      14, 2005
                                            
                                            4.2




49




Filed with
                                              
                                              Incorporated by
ReferenceExhibit
                                                No.
                                              
                                              Description
                                              
                                              this Form
                                                10-K
                                              
                                              Form
                                              
                                              Filing Date
                                              
                                              Exhibit No.4.13
                                              
                                              Non-negotiable
      2% Secured Convertible Promissory Note issued McNab, LLC on October 3,
      2005
                                              
                                              
                                              
                                              8-K
                                              
                                              October
      3, 2005
                                              
                                              4.210.1
                                              
                                              Letter
      of Engagement with Trilogy Capital Partners, Inc. dated December 22,
      2004
                                              
                                              
                                              
                                              8-K
                                              
                                              December
      16, 2004
                                              
                                              99.210.2
                                              
                                              Securities
      Purchase Agreement dated October 19, 2004 between Global Matrechs, Inc.
      and Southridge Partners, LP
                                              
                                              
                                              
                                              8-K
                                              
                                              October
      19, 2004
                                              
                                              99.110.3
                                              
                                              Form
      of Securities Purchase Agreements dated October 22, 2004 between Global
      Matrechs, Inc. and each of Colonial Fund, LLC and Dean
      DeNuccio
                                              
                                              
                                              
                                              8-K
                                              
                                              October
      22, 2004
                                              
                                              99.110.4
                                              
                                              Securities
      Purchase Agreement dated December 3, 2004 between Global Matrechs, Inc.
      and Deer Creek Fund, LLC
                                              
                                              
                                              
                                              8-K
                                              
                                              December
      8, 2004
                                              
                                              99.310.5
                                              
                                              Second
      Securities Purchase Agreement dated April 11, 2005 between Global
      Matrechs, Inc. and Southridge Partners, LP
                                              
                                              
                                              
                                              8-K
                                              
                                              April
      15, 2005
                                              
                                              10.110.6
                                              
                                              Securities
      Purchase Agreement dated May 12, 2005 between Global Matrechs,
      Inc.  and Southridge Partners, LP
                                              
                                              
                                              
                                              8-K
                                              
                                              May
      17, 2005
                                              
                                              10.110.7
                                              
                                              Securities
      Purchase Agreement dated June 14, 2005 between Global Matrechs and McNab,
      LLC
                                              
                                              
                                              
                                              8-K
                                              
                                              July
      11, 2005
                                              
                                              10.110.8
                                              
                                              Private
      Equity Credit Agreement dated   July 5, 2005 with Brittany
      Capital Management, Limited
                                              
                                              
                                              
                                              8-K
                                              
                                              July
      11, 2005
                                              
                                              10.110.9
                                              
                                              Registration
      Rights Agreement dated      July 5, 2005
      with Brittany Capital Management, Limited
                                              
                                              
                                              
                                              8-K
                                              
                                              June
      30, 2005
                                              
                                              10.210.10
                                              
                                              Employment
      Agreement between Global Matrechs and Mark Allen dated January 31,
      2005
                                              
                                              
                                              
                                              10-QSB
                                              
                                              August
      22, 2005
                                              
                                              10.1310.11
                                              
                                              Security
      Agreement between True To Form, Limited, Mark Allen and Global Matrechs,
      Inc. dated December 31, 2004
                                              
                                              
                                              
                                              8-K
                                              
                                              January
      6, 2005
                                              
                                              10.210.12
                                              
                                              Collateral
      Pledge Agreement dated as of December 31, 2004 is made by Global Matrechs,
      Inc. in favor of Mark Allen
                                              
                                              
                                              
                                              8-K
                                              
                                              January
      6, 2005
                                              
                                              10.4




50





Filed with
                                                  
                                                  Incorporated by
ReferenceExhibit
                                                    No.
                                                  
                                                  Description
                                                  
                                                  this Form
                                                    10-K
                                                  
                                                  Form
                                                  
                                                  Filing Date
                                                  
                                                  Exhibit No.10.13
                                                  
                                                  Second
      Securities Purchase Agreement dated January 31, 2005 between Global
      Matrechs, Inc. and Southridge Partners, LP
                                                  
                                                  
                                                  
                                                  8-K
                                                  
                                                  February,
      2005
                                                  
                                                  10.110.14
                                                  
                                                  Exchange
      Agreement between Global Matrechs and Woodward, LLC dated January 31,
      2005
                                                  
                                                  
                                                  
                                                  8-K
                                                  
                                                  February
      4, 2005
                                                  
                                                  10.310.15
                                                  
                                                  Securities
      Purchase Agreement dated August 1, 2005 between Global Matrechs, Inc. and
      McNab, LLC
                                                  
                                                  
                                                  
                                                  8-K
                                                  
                                                  August
      1, 2005
                                                  
                                                  10.110.16
                                                  
                                                  Securities
      Purchase Agreement dated September 14, 2005 between Global Matrechs, Inc.
      and McNab, LLC
                                                  
                                                  
                                                  
                                                  8-K
                                                  
                                                  September
      14, 2005
                                                  
                                                  10.110.17
                                                  
                                                  Securities
      Purchase Agreement dated October 3, 2005 between Global Matrechs, Inc. and
      McNab, LLC
                                                  
                                                  
                                                  
                                                  8-K
                                                  
                                                  October
      3, 2005
                                                  
                                                  10.110.18
                                                  
                                                  Stock
      Purchase Agreement dated December 29, 2005 between Global Matrechs, Inc.,
      Mark Allen, and True to Form Limited, Inc.
                                                  
                                                  
                                                  
                                                  8-K
                                                  
                                                  January
      6, 2006
                                                  
                                                  10.110.19
                                                  
                                                  Promissory
      Note issued to Global Matrechs, Inc. by True to Form Limited,
      Inc.
                                                  
                                                  
                                                  
                                                  8-K
                                                  
                                                  January
      6, 2006
                                                  
                                                  10.210.20
                                                  
                                                  Private
      Equity Credit Agreement dated January 10, 2006 with Brittany Capital
      Management, Limited
                                                  
                                                  
                                                  
                                                  8-K
                                                  
                                                  January
      13, 2006
                                                  
                                                  10.121.1
                                                  
                                                  List
      of Subsidiaries.
                                                  
                                                  
                                                  
                                                  S-1/A
                                                  
                                                  January
      29, 1998
                                                  
                                                  21.123.1
                                                  
                                                  Consent
      of prior certifying accountant to incorporate
    opinion
                                                  
                                                  X31.1
                                                  
                                                  Certification
      by CEO of Periodic Report Pursuant to Rule 13a-14(a) or Rule
      15d-14(a)
                                                  
                                                  X31.2
                                                  
                                                  Certification
      by CFO of Periodic Report Pursuant to Rule 13a-14(a) or Rule
      15d-14(a)
                                                  
                                                  X32.1
                                                  
                                                  Certification
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
                                                  
                                                  X




51




SIGNATURES





In
accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.





GLOBAL
      MATRECHS, INC.Date:
      January 15, 2009
                  By:
                  /s/ Michael
      SheppardMichael
      Sheppard
                    Title:
      President, Chief Executive Officer,
                    Chief
      Operating Officer and acting Chief
                    Financial
      Officer





Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.





Date:
      January 15, 2009
                By:
                /s/ Michael
      SheppardMichael
      Sheppard
                  Title:
      President, Chief Executive Officer,
                  Chief
      Operating Officer and acting Chief
                  Financial
      Officer (principal executive
                  officer;
      principal financial and accounting
officer)





Date:
      Janaury 15, 2009
                By:
                /s/ Thomas
      L. FolsomThomas
      L. Folsom
                  Title:  Director




52