**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**


____________________





**FORM
      10-KSB**


____________________





(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, 2005








[_]
            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.
                Employer Identification No.)incorporation
                of organization)





**90
      Grove Street, Suite 201, Ridgefield, Connecticut 06877**


(Address
      of principal executive offices)





Issuer’s
      telephone number:   **(203)
      431-6665**





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








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





**Common
      Stock, par value $0.0001 per share**


(Title
      of
      class)





Indicate
      by check mark whether the issuer (1) filed all reports required to be filed
      by
      Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
      shorter period that the registrant was required to file such reports), and
      (2)
      has been subject to such filing requirements for the past 90
      days. oYes xNo





Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will 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-KSB or any
      amendment to this Form 10-KSB.  o





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





State
      issuer’s revenues for its most recent fiscal year. $125





The
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates of the issuer, based upon the average of the closing price for
      the Common Stock on March 27, 2006 as reported on the OTC Bulletin Board, was
      approximately $1,382,393. Determining whether or not any of our stockholders
      (other than directors and officers of the Company) are affiliates would require
      unreasonable effort and expense. We have therefore assumed that other than
      directors and officers of the Company, none of our stockholders is an
      affiliate.





As
      of
      March 30, 2006, the issuer had outstanding 280,451,437 shares of common
      stock.













TABLE
      OF CONTENTS







PART
                IItem
                1.
            BUSINESS
            2Item
                2.
            PROPERTIES
            6Item
                3.
            LEGAL
                PROCEEDINGS
            6Item
                4.
            SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY HOLDERS
            7PART
                IIItem
                5.
            MARKET
                FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCK MATTERS
            8Item
                6.
            MANAGEMENT’S
                DISCUSSION AND ANALYSIS OF FINANCIAL RESULTS OF
            8CONDITION
                AND OPERATIONSItem
                7.
            FINANCIAL
                STATEMENTS
            27Item
                8.
            CHANGES
                IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL
                DISCLOSURE
            51Item
                8a.
            CONTROLS
                AND PROCEDURES
            51Item
                8b.
            OTHER
                INFORMATION
            52PART
                IIIItem
                9.
            DIRECTORS
                AND EXECUTIVE OFFICERS OF THE REGISTRANT
            53Item
                10.
            EXECUTIVE
                COMPENSATION
            54Item
                11.
            SECURITY
                OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
            57Item
                12.
            CERTAIN
                RELATIONSHIPS AND RELATED TRANSACTIONS
            57Item
                13.
            EXHIBITS
            59Item
                14.
            PRINCIPAL
                ACCOUNTING FEES AND SERVICES
            63





1


**PART
      I**





**ITEM
      1.   BUSINESS**





**History**




HomeCom
      Communications, Inc. (“HomeCom”), now Global Matrechs, Inc. (“Global Matrechs”),
      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 evolved into a Web design, financial applications and solutions
      provider to the financial services market, including banking, insurance,
      securities brokerage firms and other financially oriented web portals.




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(TM) (now called NuCap(TM)),
      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. In February,
      the
      Company received a commercial order from the Hanford nuclear waste facility
      in
      Richland, Washington via the contractor Battelle and for HNIPU from Denbar
      paints in Israel.




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.




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, are officers, directors and founding
      shareholders of Tulix. 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 Purchase
      Agreement, we have completely exited from all Internet-related enterprises.
      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.




**Products
      and Services**




***NUCAP(TM)***




*Description.* NuCap(TM),
      formerly called EKOR(TM), 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(TM) was the brand name
      for
      a family of materials designed for long-term isolation of hazardous and
      radioactive materials. As a silicon-based elastomer, NuCap(TM)’s adhesive
      properties allow it to stick to a wide variety of wet or dry surfaces and
      materials. When applied, NuCap(TM) 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(TM) 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(TM) comes in multiple product forms and
      can
      be applied using specified methods for waste-coating and encapsulation. We
      believe that this allows NuCap(TM) to be used as a solution for a broad spectrum
      of nuclear and hazardous waste management problems.




The
      NuCap(TM) 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(TM):




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




2




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
      intend
      to market NuCap(TM) 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 are seeking and have been in negotiations regarding affiliations
      and joint venture agreements with large primary contractors in the nuclear
      industry on a project by project basis. While we see opportunities for NuCap(TM)
      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 of 2006, we received our first
      commercial order on HNIPU from a paint manufacturer in Israel. We are completing
      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 intend to seek
      to
      license HNIPU to large industrial polymer and chemical manufacturers who can
      sell the various HNIPU binders to international industrial manufacturers. The
      focus will be to transfer the existing binder product technologies under
      licensing agreements from the laboratory to the manufacturer. We intend to
      follow up on existing agreements, current evaluations, and active discussion
      for
      HNIPU binder production.




***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 Global Matrechs.




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(TM) 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(TM), 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(TM).




3




***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(TM)
      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. Biodegradable polymers are traditionally 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.




We
      believe that there is a large number of 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.




***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.




4




***Firesil(TM)***




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




**Competition**




The
      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 the
      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 the licensed technologies. For example, NuCap(TM)
      is a composite material based on a silicone polymer that is different from
      other
      silicones produced by manufacturers such as GE Silicones and Dow Corning, but
      the products produced by those manufacturers compete with NuCap(TM). 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.




**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 which
      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 expenditures to pursue
      intellectual property rights by us could negatively affect us.




***NuCap
      (TM) Intellectual Property Rights***




The
      Euro-Asian Physical Society (EAPS) has patented EKOR(TM) 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(TM) compound variants. Pursuant to 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(TM). We are a licensee of Eurotech and have renamed
      the
      product NuCap(TM). We do not know if additional proprietary technology that
      we
      have developed relating to NuCap(TM) 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 NuCapTM 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




5




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 Global Matrechs.




***LEM
      Intellectual Property Rights***




Eurotech
      has acquired the intellectual property rights associated with U.S. Patent
      #6303683 (issued October 16, 2001) for Liquid Ebonite mixtures and coatings,
      and
      concretes formed therefrom 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.




***Firesil(TM)
      Intellectual Property Rights***




Eurotech
      acquired the formula for Firesil(TM) 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 NuCap(TM) 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(TM)
      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(TM) and it is also possible that
      the
      standards, if adopted or applied, may materially increase the cost to us of
      using NuCap(TM) 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(TM) based materials.




The
      manufacture of HNIPU and operation of EMR/AC(TM) 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(TM)
      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.




**Employees**




Global
      Matrechs currently employs 2 individuals and 3 part time sales and marketing
      consultants and 1 part time CFO.






**ITEM
      2.  PROPERTIES**





As
      of
      December 31, 2004, we occupied approximately 550 square feet in one office
      building in Ridgefield, Connecticut on a lease that goes through September
      2006.
      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 Global Matrechs, Inc, 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




6




suit
      also
      sought the enforcement of the notes issued by Eurotech to Woodward, LLC which
      were assumed by Global Matrechs in the exchange agreement between Global
      Matrechs and Woodward on January 31, 2005. The complaint sought damages totaling
      $672,677 plus interest and attorney’s fees which are yet to be determined. 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 Global Matrechs 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 Series H
      Preferred Stock and selling 7 million shares of our common stock. Eurotech,
      Ltd.
      is seeking 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 which are
      yet to be determined.





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 the Company in full settlement of claims
      relating to its failure to fulfill obligations under the license agreement,
      and
      Eurotech’s obligations to Woodward, which were assumed by the Company 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. The Company
      also
      believes that the provisions of SFAS No. 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, the Company
      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 is 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.





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 2005.


7


**PART
      II**








**ITEM
      5.  MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCK
      MATTERS**





Our
      Common Stock has been quoted on the OTC Bulleting Board under the symbol GMTH
      (f/k/a HCOM) since December 8, 2000. Prior to that date it was quoted on the
      NASDAQ SmallCap Market. The following table shows for the periods indicated
      the
      range of high and low bid prices as quoted on the OTC Bulletin Board. The
      quotations reflect inter-dealer prices, without retail mark-up, mark-down,
      or
      commission and may not represent actual transactions.





**Low**
            
            **High****2004:**First
                quarter
            
            $
            0.040
            
            $
            0.140Second
                quarter
            
            
            0.060
            
            
            0.150Third
                quarter
            
            
            0.040
            
            
            0.140Fourth
                quarter
            
            
            0.030
            
            
            0.080**2005:**First
                Quarter
            
            $
            0.043
            
            $
            0.108Second
                Quarter
            
            $
            0.032
            
            $
            0.108Third
                Quarter
            
            $
            0.023
            
            $
            0.044Fourth
                Quarter
            
            $
            0.025
            
            $
            0.005





**Holders
      of Record**





We
      had
      approximately 128 holders of record of our Common Stock as of March 27,
      2006.





**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.





**Recent
      Sales of Unregistered Securities**





From
      time
      to time between December 1, 2005 and March 27, 2006, we issued and sold an
      aggregate 93,974,467 shares pursuant to private equity line credit
      agreements. We received gross cash proceeds of $568,355 in consideration
      for the sold shares. The sold shares constitute greater than 5% of our issued
      and outstanding common stock. The shares were sold to the purchaser at a
      discount of 8% to the market price 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 a registration statements on Form SB-2 (File nos.
      333-126526 and 333-131106). We have used or intend to use the proceeds from
      these issuances for general corporate purposes.





**ITEM
              6.**
            **MANAGEMENT’S
                DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                OPERATIONS**





**SPECIAL
      NOTE REGARDING FORWARD-LOOKING STATEMENTS**




Except
      for historical facts, the statements in this 10-KSB are forward-looking
      statements. Forward-looking statements are merely our current predictions of
      future events. These statements are inherently uncertain, and actual events
      could differ materially from our predictions. Important factors that could
      cause
      actual events to vary from our predictions include those discussed under the
      headings “Factors Affecting Future Performance”, “Management’s Discussion and
      Analysis or Plan of Operation” and “Business.” We assume no obligation to update
      our forward-looking statements to reflect new information or developments or
      any
      other reason, or reflect any events or circumstances after the date of this
      10-KSB or the date of any applicable 10-KSB supplement. We urge readers to
      review carefully the risk factors described in this 10-KSB and the other
      documents that we file with the Securities and Exchange Commission. These
      documents can be read at *www.sec.gov* .





8





We
      have
      organized this discussion of our financial condition and results of operations
      as follows:




· *Overview* . **** This
      section provides a general description of us, as well as recent developments
      and
      events that have occurred since December 31, 2005, the date of the most recent
      interim financials we have included with this 10-KSB and discuss in this
      section, that we believe are of particular importance in assessing our company
      and anticipating future trends.




· *Matters
      Relating to Historical Financial Statements* .
      We have
      included discussion and supplemental financial data relating to the restatement
      of certain financial information contained in the financial statements
      accompanying this 10-KSB. This information should be carefully reviewed in
      conjunction with our financial statements.




· *Results
      of Operations* .
      This
      section provides an analysis of our results of operations for the fiscal years
      ended December 31, 2005 and 2004.




· *Liquidity
      and Capital Resources* .
      This
      section provides an analysis of our cash flows for the December 31, 2005 and
      2004 fiscal years, as well as a discussion of current financing
      arrangements.




· *Critical
      Accounting Policies.* ****** ** This
      section discusses certain critical accounting policies that we consider
      important to our financial condition and results of operations, and that
      required significant judgment and estimates on the part of management in
      application. Our significant accounting policies, including the critical
      accounting policies discussed in this section, are summarized in the notes
      to
      the accompanying financial statements.




· *Impact
      of Recently Issued Accounting Standards* .
      This
      section discusses how certain recently adopted accounting standards have
      affected the substance of our financial disclosure.





· *Factors
      Affecting Future Performance* .
      This
      section discusses the risks associated with our business.





**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. We have kept a 15% interest in the surviving
      entity. 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:




· **NUCAP(TM)** ,
      formerly called EKOR(TM), 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.




We
      have,
      to date, derived no significant revenue from the technologies we license from
      Eurotech. The development and commercialization of these NuCap(TM), HNIPU and
      the other technologies we license will depend largely on the success of our
      marketing efforts and our ability to




9




identify
      manufacturing partners, and 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, Mark Allen
      continued as the President of True To Form and served as an Executive Vice
      President of Global Matrechs. 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 Global
      Matrechs held by Mr. Allen. The 10,000,000 shares of common stock have a fair
      value of $71,000.




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.




***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 the Company in full settlement of claims
      relating to its failure to fulfill obligations under the license agreement,
      and
      Eurotech’s obligations to Woodward, which were assumed by the Company 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. The Company
      also
      believes that the provisions of SFAS No. 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, the Company
      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 is 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.








Private
      Equity Credit Agreement




**Summary.** On
      January 10, 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 $15 million from time to time, at our discretion,
      in exchange for shares of our common stock, subject to conditions outside of
      the
      control of Brittany further described below.




**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




10




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 are to take place from time to
      time, at our discretion, over the course of a commitment period extending 36
      months after the effective date of our registration statement.




We
      are
      required to draw down a minimum of one million dollars. If we draw a lesser
      amount, we must pay Brittany an amount equal to nine 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 million dollar
      minimum.




**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 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 $0.016 on January 10, 2006, we would have
      to
      issue to Brittany 1,020,408,163 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 106,584,844 shares we may issue
      under the agreement pursuant to a Registration Statement on Form SB-2 (File
      #
      333-131106) which was declared effective by the Securities & Exchange
      Commission on February 2, 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 March 22, 2006, we had issued
      101,131,136 **** shares
      under is agreement.




**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 40% 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.




· The
      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 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




11




of
      shares
      outstanding), or both. At the market price of our common stock as of January
      10,
      it would require 1,020,408,163 shares to draw down the full $15,000,000
      available under the agreement, and we have only 19,548,563 shares of common
      stock available for issuance as of March 30, 2006. **** We
      have
      called a special meeting of our stockholders, scheduled for April 25, 2006,
      in
      which we will seek stockholder approval to effect a reverse stock split and/or
      an increase in the number of shares of common stock we are authorized to
      issue.




Global
        Matrechs, Inc.
 Selected
        Quarterly Financial Data (Unaudited)


2005March
                31,
            
            June
                30,
            
            September
                30,as
                restatedSelected
                Balance Sheet Data:Total
                assets
            
            
            2,818,912
            
            
            2,706,383
            
            
            2,638,216Accounts
                payable and accrued expenses
            
            
            601,822
            
            
            620,120
            
            
            704,861Loans
                payable
            
            
            124,631
            
            
            184,631
            
            
            184,631Due
                to officer
            
            
            89,650
            
            
            89,106
            
            
            73,848Current
                maturities of long term debt
            
            
            120,684
            
            
            100,000
            
            
            100,000Convertible
                loans payable - net of discount
            
            
            2,427,261
            
            
            3,389,778
            
            
            4,060,195Derivative
                conversion feature - convertible preferred stock
            
            
            842,992
            
            
            766,678
            
            
            680,374Total
                current liabilities
            
            
            4,207,040
            
            
            5,150,313
            
            
            5,803,909Warrant
                liability
            
            
            1,928,159
            
            
            1,842,805
            
            
            1,502,117Note
                payable
            
            
            250,000
            
            
            250,000
            
            
            250,000Long
                term debt
            
            
            400,000
            
            
            400,000
            
            
            400,000Total
                liabilities
            
            
            6,785,199
            
            
            7,643,118
            
            
            7,956,026Temporary
                equity
            
            
            5,392,783
            
            
            5,035,075
            
            
            4,628,211Common
                and preferred stock
            
            
            6,722
            
            
            8,048
            
            
            10,134Treasury
                stock
            
            
            (327,484
            )
            
            (327,484
            )
            
            (327,484
            )Additional
                paid in capital
            
            
            23,640,094
            
            
            24,072,790
            
            
            24,609,582Accumulated
                deficit
            
            
            (32,678,402
            )
            
            (33,725,164
            )
            
            (34,238,253
            )Total
                stockholders’ deficit
            
            
            (9,359,070
            )
            
            (9,971,810
            )
            
            (9,946,021
            )Total
                liabilities and stockholders’ deficit
            
            
            2,818,912
            
            
            2,706,383
            
            
            2,638,216Revenues
            
            
            369,681
            
            
            267,833
            
            
            229,647Loss
                from continuing operations
            
            
            (442,401
            )
            
            (540,030
            )
            
            (699,935
            )Interest
                expense
            
            
            1,810,560
            
            
            1,274,294
            
            
            938,838Other
                income (expense)
            
            
            1,225
            
            
            3,225
            
            
            70Change
                in fair value of derivative instruments
            
            
            (64,918
            )
            
            764,337
            
            
            1,125,614Net
                loss
            
            
            (2,316,654
            )
            
            (1,046,762
            )
            
            (513,089
            )Net
                loss applicable to common shareholders
            
            
            (2,316,654
            )
            
            (1,046,762
            )
            
            (513,089
            )Basic
                and diluted earnings per share
            
            
            (0.04
            )
            
            (0.01
            )
            
            (0.01
            )Weighted
                number of shares outstanding-basic
            
            
            57,918,004
            
            
            74,771,056
            
            
            91,934,343





12




Global
          Matrechs, Inc.
 Selected
          Quarterly Financial Data (Unaudited)
 2004March
                  31,
              
              June
                  30,
              
              September
                  30,as
                  restated


Selected
                Balance Sheet Data:Total
                assets
            
            
            1,220,218
            
            
            941,694
            
            
            888,136Accounts
                payable and accrued expenses
            
            
            529,455
            
            
            393,316
            
            
            376,941Notes
                payable, current
            
            
            364,000
            
            
            —
            
            
            380,851Convertible
                preferred stock
            
            
            5,596,453
            
            
            5,670,865
            
            
            —Derivative
                conversion feature - convertible preferred stock
            
            
            1,142,323
            
            
            1,107,450
            
            
            1,159,869Total
                current liabilities
            
            
            7,632,231
            
            
            7,171,631
            
            
            1,917,661Notes
                payable
            
            
            —
            
            
            477,500
            
            
            —Convertible
                preferred stock
            
            
            —
            
            
            —
            
            
            —Total
                liabilities
            
            
            7,632,231
            
            
            7,649,131
            
            
            1,917,661Temporary
                equity
            
            
            1,069,000
            
            
            1,069,000
            
            
            6,802,698Common
                and preferred stock
            
            
            1,635
            
            
            1,635
            
            
            1,243Treasury
                stock
            
            
            (8,659
            )
            
            (8,659
            )
            
            (327,484
            )Additional
                paid in capital
            
            
            19,183,057
            
            
            19,243,209
            
            
            19,882,586Accumulated
                deficit
            
            
            (26,618,595
            )
            
            (26,960,712
            )
            
            (27,371,379
            )Total
                stockholders’ deficit
            
            
            (7,442,562
            )
            
            (7,724,527
            )
            
            (7,815,034
            )Total
                liabilities and stockholders’ deficit
            
            
            1,258,669
            
            
            993,604
            
            
            905,325Revenues
            
            
            620
            
            
            —
            
            
            —Income
                (loss) from operations
            
            
            (311,815
            )
            
            (231,996
            )
            
            (203,176
            )Other
                income (expense)
            
            
            (82,212
            )
            
            (85,091
            )
            
            (117,620
            )Change
                in fair value of derivative conversion feature
            
            
            (13,460
            )
            
            34,873
            
            
            (54,847
            )Income
                (loss) on disposal or discontinued operations
            
            
            43,189
            
            
            (73,211
            )
            
            —Net
                income (loss)
            
            
            (364,298
            )
            
            (355,425
            )
            
            (375,643
            )Basic
                and diluted earnings per share
            
            
            (0.02
            )
            
            (0.02
            )
            
            (0.03
            )Weighted
                number of shares outstanding
            
            
            14,999,157
            
            
            14,999,157
            
            
            14,999,157




13




Global
      Matrechs, Inc.


Selected
      Financial Data (Unaudited)


Year
                ended December 31,2001
            
            2002
            
            2003
            
            2004
            
            2005restated
            
            restated
            
            restated
            
            restatedStatement
                of Operations Data:Revenues
            
            
            —
            
            
            —
            
            
            8,246
            
            
            620
            
            
            125Cost
                of Revenues
            
            
            —
            
            
            —
            
            
            8,731
            
            
            558
            
            
            30Gross
                Profit (loss)
            
            
            —
            
            
            —
            
            
            (485
            )
            
            62
            
            
            95Operating
                expenses:Bad
                debt expense
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            250,000General
                and administrative
            
            
            286,949
            
            
            187,449
            
            
            325,281
            
            
            1,273,929
            
            
            1,621,909Depreciation
                and amortization
            
            
            —
            
            
            —
            
            
            115,059
            
            
            197,244
            
            
            147,933Settlement
                expense
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            175,000Asset
                impairment
            
            
            493,905
            
            
            52,584
            
            
            —
            
            
            —
            
            
            525,986Total
                operating expenses
            
            
            780,851
            
            
            240,033
            
            
            440,340
            
            
            1,471,173
            
            
            2,720,828Operating
                loss
            
            
            (
                780,851
            )
            
            (240,033
            )
            
            (440,825
            )
            
            (1,471,111
            )
            
            (2,720,733
            )Other
                expenses (income):Interest
                expense, net of income
            
            
            —
            
            
            —
            
            
            160,099
            
            
            1,621,520
            
            
            5,529,463Change
                in fair value of derivative instruments
            
            
            (125,980
            )
            
            92,674
            
            
            98,678
            
            
            87,171
            
            
            (2,928,808
            )Other
                expense (income), net
            
            
            (146,362
            )
            
            (26,146
            )
            
            (91,826
            )
            
            (211,395
            )
            
            —Loss
                from continuing operations before income taxes
            
            
            (508,509
            )
            
            (306,561
            )
            
            (607,776
            )
            
            (2,968,407
            )
            
            (5,300,426
            )Income
                tax provision (benefit)
            
            
            —
            
            
            —
            
            
            —
            
            
            —Loss
                from continuing operations
            
            
            (508,509
            )
            
            (306,561
            )
            
            (607,776
            )
            
            (2,968,407
            )
            
            (5,487,926
            )Gain
                (loss) from discontinued operations
            
            
            181,938
            
            
            118,001
            
            
            50,978
            
            
            (30,022
            )
            
            (809,380
            )Net
                loss
            
            
            (326,571
            )
            
            (188,560
            )
            
            (556,798
            )
            
            (2,998,429
            )
            
            (6,109,806
            )Deemed
                preferred stock dividend
            
            
            (2,150,368
            )
            
            (1,004,681
            )
            
            (248,759
            )
            
            —
            
            
            —Recovery
                of deemed preferred stock dividend
            
            
            —
            
            
            —
            
            
            1,527,171
            
            
            —
            
            
            —Net
                loss applicable to common shareholders
            
            
            (2,476,939
            )
            
            (1,193,241
            )
            
            721,614
            
            
            (2,998,429
            )
            
            (6,109,806
            )Comprehensive
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (119,927
            )Total
                comprehensive loss
            
            
            2,476,939
            
            
            1,193,241
            
            
            721,614
            
            
            (2,998,429
            )
            
            (6,229,733
            )Net
                loss per common share - basic and dilutedContinuing
                operations
            
            
            (0.27
            )
            
            (0.01
            )
            
            0.02
            
            
            (0.18
            )
            
            (0.06
            )Discontinued
                operations
            
            
            0.02
            
            
            0.01
            
            
            0.00
            
            
            (0.00
            )
            
            (0.01
            )Total
            
            
            (0.25
            )
            
            (0.01
            )
            
            0.02
            
            
            (0.18
            )
            
            (0.07
            )Weighted
                average common shares outstanding
            
            
            9,869,074
            
            
            214,687,508
            
            
            31,820,137
            
            
            16,790,165
            
            
            85,927,332




14




Balance
                Sheet Data:Working
                capital (deficit)
            
            
            (968,336
            )
            
            (1,714,241
            )
            
            (7,060,705
            )
            
            (2,780,402
            )
            
            (7,033,387
            )Total
                assets
            
            
            665,391
            
            
            507,554
            
            
            1,350,281
            
            
            2,834,876
            
            
            577,243Long-term
                liabilities
            
            
            940,847
            
            
            1,057,106
            
            
            —
            
            
            1,157,750
            
            
            —Total
                liabilities
            
            
            2,482,153
            
            
            3,174,848
            
            
            7,434,198
            
            
            4,547,047
            
            
            7,308,681Convertible
                preferred stock
            
            
            4,840,932
            
            
            5,207,224
            
            
            5,522,041
            
            
            6,128,223
            
            
            4,211,062Stockholders’
                equity (deficit)
            
            
            (6,657,696
            )
            
            (7,874,518
            )
            
            (7,152,917
            )
            
            (7,840,394
            )
            
            (10,942,500
            )







15




GLOBAL
        MATRECHS, INC.
 STATEMENT
        OF CHANGES IN STOCKHOLDERS’
        DEFICIT
 FOR
        THE TWO YEARS ENDED DECEMBER 31, 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
            
            
            14,999,157
            
            $
            1,500
            
            $
            (8,659
            )
            $
            20,217,426
            
            $
            (27,363,319
            )
            $
            —
            
            $
            (7,152,917
            )Issuance
                of Series I preferred stock
            
            
            490
            
            
            5
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            5Receipt
                of Treasury stock
            
            
            
            
            
            
            
            
            (4,905,000
            )
            
            (490
            )
            
            (318,825
            )
            
            319,312
            
            
            
            
            
            
            
            
            (3
            )Issuance
                of Common Stock
            
            
            
            
            
            
            
            
            2,151,081
            
            
            215
            
            
            
            
            
            104,850
            
            
            
            
            
            
            
            
            105,065Beneficial
                conversion feature on promissory notes, net of expenses
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            526,459
            
            
            
            
            
            
            
            
            526,459Issuance
                of warrants for services rendered
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            258,942
            
            
            
            
            
            
            
            
            258,942Conversion
                of Series H preferred stock to common stock
            
            
            (150
            )
            
            (2
            )
            
            1,500,000
            
            
            150
            
            
            
            
            
            (148
            )
            
            
            
            
            
            
            
            —Conversion
                of temporary equity to common stock
            
            
            
            
            
            
            
            
            22,150,193
            
            
            2,215
            
            
            
            
            
            818,269
            
            
            
            
            
            
            
            
            820,484Acquisition
                of True To Form Ltd.
            
            
            
            
            
            
            
            
            10,000,000
            
            
            1,000
            
            
            
            
            
            599,000
            
            
            
            
            
            
            
            
            600,000Net
                loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (2,998,429
            )
            
            
            
            
            (2,998,429
            )Balance,
                December 31, 2004
            
            
            13,840
            
            
            138
            
            
            45,895,431
            
            
            4,590
            
            
            (327,484
            )
            
            22,844,110
            
            
            (30,361,748
            )
            
            —
            
            
            (7,840,394
            )Retirement
                of treasury stock
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            327,484
            
            
            (327,484
            )
            
            
            
            
            
            
            
            —Conversion
                of temporary equity to common stock
            
            
            
            
            
            
            
            
            46,129,230
            
            
            4,613
            
            
            
            
            
            2,296,912
            
            
            
            
            
            
            
            
            2,301,525Conversion
                of Series H preferred stock to common stock
            
            
            (908
            )
            
            (9
            )
            
            9,080,000
            
            
            908
            
            
            
            
            
            (899
            )
            
            
            
            
            
            
            
            —Conversion
                of promissory notes to common shares
            
            
            
            
            
            
            
            
            5,927,854
            
            
            593
            
            
            
            
            
            234,913
            
            
            
            
            
            
            
            
            235,506Beneficial
                conversion feature on promissory notes
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            250,000
            
            
            
            
            
            
            
            
            250,000Equity
                line advances
            
            
            
            
            
            
            
            
            47,376,816
            
            
            4,737
            
            
            
            
            
            480,393
            
            
            
            
            
            
            
            
            485,130Issuance
                of common stock for services
            
            
            
            
            
            
            
            
            2,282,961
            
            
            228
            
            
            
            
            
            138,032
            
            
            
            
            
            
            
            
            138,260Issuance
                of stock options for services
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            15,799
            
            
            
            
            
            
            
            
            15,799Cancellation
                of stock warrants
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (227,593
            )
            
            
            
            
            
            
            
            (227,593
            )Cancellation
                of shares - discontinued operations
            
            
            
            
            
            
            
            
            (10,000,000
            )
            
            (1,000
            )
            
            
            
            
            (70,000
            )
            
            
            
            
            
            
            
            (71,000
            )Net
                loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (6,109,806
            )
            
            
            
            
            (6,109,806
            )Accumulated
                other comprehensice loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (119,927
            )
            
            (119,927
            )Balance,
                December 31, 2005
            
            
            12,932
            
            $
            129
            
            
            146,692,292
            
            $
            14,669
            
            $
            —
            
            $
            25,634,183
            
            $
            (36,471,554
            )
            $
            (119,927
            )
            $
            (10,942,500
            )






16




**RESULTS
      OF OPERATIONS FOR FISCAL YEARS ENDED**


**DECEMBER
      31, 2005 AND DECEMBER 31, 2004**




*Revenues* .
      Revenues were $125 and $620 for the years ended December 31, 2005 and December
      31, 2004, respectively. These consisted of the sale of samples of EKOR(TM)
      and
      HNIPU and were recognized upon shipment of the materials.





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





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





*Sales
      and Marketing* .
      There
      were no such expenditures in 2005 or 2004.





*Product
      Development* .
      There
      were no such 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.





*General
      and Administrative* .
      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
      and Amortization* .
      Amortization was $147,933 in the year ended December 31, 2005 and $197,244
      in
      the year ended December 31, 2004. The 25% decrease **** is
      due to
      a 100% impairment charge in connection with the value of the licensed
      technologies.





*Interest
      Expense* .
      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* .
      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.





*Fair
      value of derivative instruments.* 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.





*Discontinued
      Operations* .
      The
      company recorded a loss from discontinued operations of $809,380 and $30,022
      in
      the years ended December 31, 2005 and 2004, respectively, for its discontinued
      operation of TTF in 2005 and internet services in 2004.




17





**Liquidity
      and Capital Resources**




Cash
      and
      cash equivalents at December 31, 2005 were $67,993.




Our
      sources of capital are extremely limited. We have incurred operating losses
      since inception and as of December 31, 2005, we had an accumulated deficit
      of
      $36,471,554.





***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, 2005 was $1,920,000, compared to
      $597,950 for the year ended December 31, 2004.




*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 is convertible, at the option of the
      holder, into shares of our common stock at a conversion price of $0.02 per
      share. Southridge may 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 default under the terms of the note, the
      entire outstanding principal (and any outstanding interest accrued thereon)
      shall become immediately due and payable, and the interest rate will rise to
      18%
      per annum.





Under
      the
      terms of the purchase agreement, Southridge had the option, and at any time
      prior to July 1, 2005, 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. All of these transactions were exempt
      from registration pursuant to the provisions of Section 4(2) of the Securities
      Act, as amended. On July 8, 2005, we and Southridge Partners LP 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 of
      1933,
      as amended, 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 the note and warrant on the registration statement
      filed
      in connection with such registration (and assume any expenses associated
      therewith). The warrant has an expiration date of January 31, 2010. It contains
      a cashless exercise provision whereby the holder 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
      in the principal amount of $250,000. Under the terms of the Exchange Agreement,
      in the event we propose to register securities under the Securities Act of
      1933,
      as amended, 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.





*Private
      Placements with McNab LLC*





On
      June
      14, July 13, August 1, September 14, 2005, and October 3, 2005, we entered
      into
      Securities Purchase Agreements with McNab 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 common stock purchase
      warrants to purchase up to 23,800,000 shares of our common stock, $.0001 par
      value per share, 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.





*Debt
      Issuance to Southridge Partners LP.*




On
      December 7, 2005, we issued a promissory note in the original principal amount
      of $200,000 to Southridge Partners LP. The note matured on February 10,
      2006.  It accrues interest on the unpaid principal balance at a rate
      of 8% per year. On March 29, 2006, the maturity date was extended to July 20,
      2006. In the event of a default, the annual interest rate will increase to
      18%
      and Southridge may, at its option, demand immediate payment of all amounts
      due
      under the promissory note.




18





**Going
      Concern and Financing Requirements**





The
      report of our independent registered public accounting firm dated March 27,
      2006
      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 $36,471,554 as of December 31, 2005. 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
      consolidated audited interim financial statements included with this Annual
      Report on Form 10-KSB have been prepared assuming that we will continue as
      a
      going concern. As shown in the accompanying financial statements, we had
      negative working capital of approximately $7,033,387.




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 significant 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.




**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 2005 and 2004 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***




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 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.





The
      connection with the disposition of True To Form, we disposed of $1,469,108
      of
      goodwill that was recorded as part of the acquisition.





The
      Company accounts for long-lived assets in accordance with the provisions of
      Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for
      the Impairment or Disposal of Long-Lived Assets.” 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.





During
      the year
      ended December 31, 200 5,
      the
      Company recognized and charged to operations an impairment charge of $525,986
      in
      connection with non-recoverable license technology. There were no impairment
      charges recognized during the year ended December 31, 2004.





***Revenue
      Recognition***




The
      Company follows the guidance of the Securities and Exchange Commission’s Staff
      Accounting Bulletin No. 104 for revenue recognition.  In general, the
      Company records revenue when persuasive evidence of an arrangement exists,
      services have been rendered or product




19




delivery
      has occurred, the sales price to the customer is fixed or determinable, and
      collectability is reasonably assured.  The Company generated revenues only
      through its wholly-owned subsidiary. These revenues were included as a component
      of discontinued operations.




***Income
      Taxes***




The
      Company accounts for income taxes under the Financial Accounting Standards
      No.
      109 “Accounting for Income Taxes” (“Statement 109”). Under Statement 109,
      deferred tax assets and liabilities are recognized for the future tax
      consequences attributable to differences between the financial statement
      carrying amounts of existing assets and liabilities and their respective tax
      bases. Deferred tax assets and liabilities are measured using enacted tax rates
      expected to apply to taxable income in the years in which those temporary
      differences are expected to be recovered or settled. Under Statement 109, the
      effect on deferred tax assets and liabilities of a change in tax rates is
      recognized in income in the period, which includes the enactment date.




***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 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, 2005 and 2004, the Company had
      approximately 974,000,000 and 307,000,000 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, 2005 and 2004,
      respectively. Accordingly, the basic and diluted EPS are the same.




***Stock
      Based Compensation***




The
      Company accounts for stock options issued to employees in accordance with the
      provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting
      for Stock Issued to Employees,” and related interpretations.  As such,
      compensation cost is measured on the date of grant as the excess of the current
      market price of the underlying stock over the exercise price.  Such
      compensation amounts, if any, are amortized over the respective vesting periods
      of the option grant.  The Company adopted the disclosure provisions of SFAS
      No. 123, “Accounting for Stock-Based Compensation” and SFAS 148, “Accounting for
      Stock-Based Compensation -Transition and Disclosure”, which permits entities to
      provide pro forma net income (loss) and pro forma earnings (loss) per share
      disclosures for employee stock option grants as if the fair-valued based method
      defined in SFAS No. 123 had been applied.  The Company accounts for stock
      options and stock issued to non-employees for goods or services in accordance
      with the fair value method of SFAS No. 123.





There
      were no related grants or issuances in 2005 and 2004, respectively.





**Impact
      Of Recently Issued Accounting Standards**




In
      December 2004, the FASB issued SFAS No. 123(R), “Share-Based
      Payment,”
      which replaces SFAS No. 123 and supersedes APB Opinion No. 25. Under SFAS No.
      123(R), companies are required to measure the compensation costs of share-based
      compensation arrangements based on the grant-date fair value and recognize
      the
      costs in the financial statements over the period during which employees are
      required to provide services. Share-based compensation arrangements include
      stock options, restricted share plans, performance-based awards, share
      appreciation rights and employee share purchase plans. In March 2005 the SEC
      issued Staff Accounting Bulletin No. 107, or “SAB 107”. SAB 107 expresses views
      of the staff regarding the interaction between SFAS No. 123(R) and certain
      SEC
      rules and regulations and provides the staff’s views
      regarding
      the valuation of share-based payment arrangements for public companies. SFAS
      No.
      123(R) permits public companies to adopt its requirements using one of two
      methods. On April 14, 2005, the U.S. Securities and Exchange Commission
      adopted a new rule amending the compliance dates for SFAS 123R. Companies may
      elect to apply this statement either prospectively, or on a modified version
      of
      retrospective application under which financial statements for prior periods
      are
      adjusted on a basis consistent with the pro forma disclosures required for
      those
      periods under SFAS No. 123. The Company is currently evaluating which
      transitional provision and fair value methodology it will follow. The Company
      expects that any expense associated with the adoption of the provisions of
      SFAS
      No. 123R will have a material impact on our results of operations. We are
      evaluating the requirements of SFAS No. 123(R) and SAB 107 to assess what impact
      its adoption will have on our financial position, results of operations and
      cash
      flows. Effective January 1, 2006, we have adopted SFAS No. 123(R).





In
      May
      2005, the Financial Accounting Standard Board (“FASB”) issued
      Statement
      No. 154, “Accounting Changes and Error Corrections, a replacement of APB Opinion
      No. 20, Accounting Changes, and Statement No. 3, Reporting Accounting Changes
      in
      Interim Financial Statements” (SFAS
      154). SFAS
      154 changes the requirements for the accounting for, and reporting of, a change
      in accounting principle. Previously, most voluntary changes in accounting
      principles were required to be recognized by way of a cumulative effect
      adjustment within net income during the period of the change. SFAS 154 requires
      retrospective application to prior periods’ financial statements, unless it is
      impracticable to determine either the period-specific effects or the cumulative
      effect of the change. SFAS 154 is effective for accounting changes made in
      fiscal years beginning after December 15, 2005; however, the Statement does
      not
      change the transition provisions of any existing accounting pronouncements.
      We
      do not believe adoption of SFAS 154 will have a material effect on our financial
      position, results of operations or cash flows.





In
      June
      2005, the Emerging Issues Task Force (“EITF”) issued
      EITF
      05-2, “The Meaning of Conventional Convertible Debt Instrument in Issue No.
      00-19”. EITF
      05-2 retained the definition of a conventional convertible debt instrument
      as
      set forth in EITF 00-19, and which is used in




20




determining
      certain exemptions to the accounting treatments prescribed under SFAS 133,
      “Accounting for Derivative Instruments and Hedging Activities”. EITF
      05-2 also
      clarified that certain contingencies related to the exercise of a conversion
      option would not be outside the definition of “conventional” and determined
      that convertible preferred stock with a mandatory redemption date would also
      qualify for similar exemptions if the economic characteristics of the preferred
      stock are more akin to debt than equity. EITF 05-2 is effective for new
      instruments entered into and instruments modified in periods beginning after
      June 29, 2005. We adopted the provisions of EITF 05-2 on July 1, 2005, which
      had
      a material effect on our financial position, results of operations and cash
      flows.





In
      July
      2005, the FASB issued FASB Staff Position (“FSP”) 150-5,
      “Accounting Under SFAS 150 for Freestanding Warrants and Other Similar
      Instruments on Redeemable Shares”. FSP 150-5
      clarifies that warrants on shares that are redeemable or puttable immediately
      upon exercise and warrants on shares that are redeemable or puttable in the
      future qualify as liabilities under SFAS 150, regardless of the redemption
      feature or redemption price. The FSP is effective for the first reporting period
      beginning after June 30, 2005, with resulting changes to prior period statements
      reported as the cumulative effect of an accounting change in accordance with
      the
      transition provisions of SFAS 150. We adopted the provisions of FSP 150-5 on
      July 1, 2005, which did not have a material effect on our financial position,
      results of operations and cash flows.





**Risks
      Related to Our Business**





***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.***





We
      have a
      history of operating losses. During the fiscal years ended December 31, 2005,
      and December 31, 2004, we recorded net losses available to common
      stockholders of $6,109,806 and $2,998,429, respectively. As of December 31,
      2005, we had an accumulated deficit of $36,471,554. 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, 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, 2005, which may make capital raising difficult and may require us to scale
      back or cease operations.***




The
      report of our independent registered public accounting firm dated March 27,
      2006
      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. 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.




***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 accounting 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.***




21





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 January 10, 2006 with Brittany Capital Management. We have
      registered the resale of 100,000,000 shares of common stock we may issue under
      this agreement pursuant to our current registration statement.





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
      100,000,000 registered shares to Brittany. In the event we have additional
      financing needs after we have exhausted the shares being registered under the
      registration statement, 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 January 10, 2006, it would require
      1,020,408,163 shares to draw down the full $15,000,000 available under the
      agreement, and we had only 19,548,563 shares of common stock available for
      issuance as of March 30, 2006.  We believe it will 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.




***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;




· 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.




***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.***





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




22




***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 NuCap(TM). 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 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.




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
      RELATED TO OUR COMMON STOCK**





**We
      believe that Brittany and other stockholders intend to sell their shares of
      common stock in the market, which sales may cause our stock price to decline.**




Brittany
      may sell in the public market up to 100,000,000 shares of common stock. Such
      sales may cause our stock price to decline. Specifically,




· Existing
      stockholders will experience substantial dilution if we draw down the maximum
      amount of shares of common stock registered (approximately 30% of our
      outstanding shares after giving effect to the issuance, based on the shares
      outstanding as of March 15, 2006). The risk associated with the possible sale
      of
      a large number of shares issued under the equity line could cause some of our
      stockholders to sell their stock, thus causing the price of our stock to
      decline.




· Because
      Brittany is purchasing our shares at a discount, it will have an incentive
      to
      sell immediately so that it can realize a gain on the difference. If our common
      stock market price does decline, this could further accelerate sales of our
      common stock.




· To
      the
      extent Brittany sells its common stock, the common stock price may decrease
      due
      to the additional shares in the market. This could allow Brittany to sell
      greater amounts of common stock, the sales of which would further depress the
      stock price.




· Actual
      or
      anticipated downward pressure on our stock price due to actual or anticipated
      sales of stock under the Private Equity Credit Agreement could cause some
      institutions or individuals to engage in short sales of our common stock, which
      may itself cause the price of our stock to decline.




***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




23




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.




***If
      the price of our stock continues to decline and we cannot prepay 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 cannot prepay 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.
      Accordingly, $718,000 is included in accounts payable and accrued expenses
      as a
      contingent liability in the event that the note holders assert this prepayment
      penalty. As of March 24, 2006, only one of the note holders has made the
      assertion, and in accordance with the assertion, during March 2006, the Company
      paid $10,000, representing 40% of the note, to the note holder.




***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 or
      the
      NASDAQ Capital Market. It is quoted on the less recognized OTC Bulletin Board.
      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.




***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 $0.0051 on March 27, 2006, 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.




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.




24




***The
      market price of our common stock may be volatile.***




Our
      stock
      price has been volatile. From January 1, 2005 to March 27, 2006, the trading
      price of our common stock ranged from $0.005 to $0.108. Many factors may cause
      the market price of our common stock to fluctuate, including:




· variations
      in our quarterly results of operations;




· 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 often 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
      can
      provide no assurance that the financing sources described above, or any other
      financing that we may obtain in the future (if we are able to obtain financing
      from any other sources, and we can provide no assurances that we will be able
      to
      obtain any such financing), will enable us to sustain our operations. The
      aforementioned factors raise substantial doubt about our ability to continue
      as
      a going concern. The financial statements included herein have been prepared
      assuming we are a going concern and do not include any adjustments that might
      result should we be unable to continue as a going concern.





***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.





***The
      sale of material amounts of common stock under our registration statement could
      encourage short sales by third parties and further depress the price of our
      common stock.***




The
      significant downward pressure on our stock price caused by the sale of a
      significant number of shares under the Private Equity Credit Agreement could
      cause our stock price to decline, thus allowing short sellers of our stock
      an
      opportunity to take advantage of any decrease in the value of our stock. The
      presence of short sellers in our common stock may further depress the price
      of
      our common 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




25




· advance
      notice requirements for stockholder proposals and director
      nominations.




**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
      exchanges and the Nasdaq National Market 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 OTC Bulletin Board, which does not have
      comparable requirements. As a result, our business and the price of our stock
      may be adversely affected.




For
      instance, we are not required to have any independent directors and we do not
      have independent directors. Therefore management has significant influence
      over
      decisions made by the Board on behalf of the stockholders.




In
      some
      circumstances, management may not have the same interests as the shareholders
      and conflicts of interest may arise. We do not have a policy to resolve
      conflicts of interest and we are not required to have one. Notwithstanding
      the
      exercise of their fiduciary duties as directors and executive officers and
      any
      other duties that they may have to us or our other stockholders in general,
      these persons may have interests different than our shareholders.




***Our
      administrative costs and expenses resulting from new regulations have increased,
      adversely affecting our financial condition and results of operations.***




We
      face
      new corporate governance requirements under the Sarbanes-Oxley Act of 2002
      and
      SEC rules adopted thereunder. These regulations increased our legal and
      financial compliance and made some activities more difficult, time-consuming
      and
      costly. Our expenses will continue to increase as we continue to implement
      these
      new regulations.




***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 our assessment of our internal control over financial
      reporting in our annual report for fiscal year ending December 31, 2007. 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.




26


**ITEM
      7.   FINANCIAL STATEMENTS**





INDEX
      TO
      CONSOLIDATED FINANCIAL STATEMENTS








PageReport
                of Independent Registered Public Accounting Firm
            28Consolidated
                Balance Sheet as of December 31, 2005
            29Consolidated
                Statements of Operations for the yearsended
                December 31, 2005 and December 31, 2004
            30Consolidated
                Statements of Changes in Stockholders’ Equity (Deficit)for the years
                ended December 31, 2005 and December 31, 2004
            31Consolidated
                Statements of Cash Flows for the yearsended
                December 31, 2005 and December 31, 2004
            32Notes
                to Consolidated Financial Statements
            33


27





REPORT
      OF
      INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To
      the
      Board of Directors and Shareholders


Global
      Matrechs, Inc.








We
      have
      audited the accompanying balance sheet of Global Matrechs, Inc. as of
      December 31, 2005 and the related statements of operations, changes in
      stockholders’ deficit and cash flows for the years ended December 31, 2005 and
      2004, respectively. 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 audits 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. 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 audits provide 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, 2005 and the results of their operations and their cash flows
      for the years ended December 31, 2005 and 2004, respectively, in conformity
      with
      accounting principles generally accepted in the United States of
      America.





The
      accompanying financial statements have been prepared assuming that the Company
      will continue as a going concern. As discussed in Note 2 to the financial
      statements, the Company has suffered recurring losses from operations, has
      net
      cash used in operations, a net working capital deficit, a stockholders’ deficit
      and an accumulated deficit that raises substantial doubt about its ability
      to
      continue as a going
      concern. Management’s plan in regard to these matters is also described in Note
      2. The financial statements do not include any adjustments that might result
      from the outcome of this uncertainty.








SHERB
      & CO., LLP


Certified
      Public Accountants





Boca
      Raton, Florida


March
      27,
      2006





28


**GLOBAL
      MATRECHS, INC.**


**BALANCE
      SHEET**


**DECEMBER
      31, 2005**


**ASSETS****CURRENT
                  ASSETS**Cash
                  and cash equivalents
              
              $
              67,993Investment
                  in available for sale marketable securities
              
              
              108,666Note
                  receivable
              
              
              50,000Inventory
              
              
              28,590Prepaid
                  expenses
              
              
              20,045**TOTAL
                  CURRENT ASSETS**
              
              
              275,294**OTHER
                  ASSETS**Investment,
                  at cost
              
              
              51,949Note
                  receivable
              
              
              250,000**TOTAL
                  ASSETS**
              
              $
              577,243**LIABILITIES
                  AND STOCKHOLDERS’
                  DEFICIT****CURRENT
                  LIABILITIES**Accounts
                  payable and accrued expenses
              
              $
              1,405,352Note
                  payable
              
              
              200,000Convertible
                  notes payable - net of debt discount
              
              
              4,590,456Derivative
                  liability
              
              
              1,112,873**TOTAL
                  CURRENT LIABILITIES**
              
              
              7,308,681Convertible
                  preferred stock
              
              
              4,211,062STOCKHOLDERS’
                  DEFICIT:Preferred
                  stock, Series H, $.01 par value, 13,500 shares authorized,
                  12,442shares
                  issued and outstanding, convertible, participating, $12,442,000
                  liquidation value
              
              
              124Preferred
                  stock, Series I, $.01 par value, 490.5 shares authorized, 490.5
                  sharesissued
                  and outstanding, convertible participating, $49,050 liquidation
                  value
              
              
              5Common
                  Stock, $.0001 par value, 300,000,000 shares authorized 146,692,292
                  shares
              
              
              14,669issued
                  and outstandingAdditional
                  paid-in capital
              
              
              25,634,183Accumulated
                  deficit
              
              
              (36,471,554
              )Accumulated
                  other comprehensive loss
              
              
              (119,927
              )TOTAL
                  STOCKHOLDERS’ DEFICIT
              
              
              (10,942,500
              )TOTAL
                  LIABILITIES AND STOCKHOLDERS’ DEFICIT
              
              $
              577,243




29





**GLOBAL
      MATRECHS, INC.**


**STATEMENTS
      OF OPERATIONS**


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




2005
            
            2004**Revenues**
            
            $
            125
            
            $
            620**Cost
                of Revenues**
            
            
            30
            
            
            558**Gross
                Profit**
            
            
            95
            
            
            62**Operating
                expenses**Bad
                debt expense (recovery)
            
            
            250,000
            
            
            (47,232
            )Depreciation
                and amortization
            
            
            147,933
            
            
            197,244Loss
                on impairment
            
            
            525,986
            
            
            —Settlement
                expense
            
            
            175,000
            
            
            —General
                and administrative
            
            
            1,621,909
            
            
            1,321,161**Total
                operating expenses**
            
            
            2,720,828
            
            
            1,471,173**Loss
                from continuing operations**
            
            
            (2,720,733
            )
            
            (1,471,111
            )**Other
                income (expense):**Interest
                expense
            
            
            (5,529,463
            )
            
            (1,621,520
            )Change
                in fair value of derivative instruments
            
            
            2,928,808
            
            
            (87,171
            )Other
                income, net of expense
            
            
            —
            
            
            211,395Interest
                income
            
            
            20,962
            
            
            —**Total
                other expense, net**
            
            
            (2,579,693
            )
            
            (1,497,296
            )**Net
                loss from continuing operations**
            
            
            (5,300,426
            )
            
            (2,968,407
            )**Discontinued
                operations**Loss
                from discontinued operations (including loss on disposal of $383,524
                and
                loss on disposal of $124,385 in 2005 and 2004,
                respectively)
            
            
            (809,380
            )
            
            (30,022
            )**Loss
                on discontinued operations**
            
            
            (809,380
            )
            
            (30,022
            )Net
                loss applicable to common shareholders
            
            
            (6,109,806
            )
            
            (2,998,429
            )Comprehensive
                lossUnrealized
                loss on available for sale marketable securities
            
            
            (119,927
            )
            
            —Total
                comprehensive loss
            
            $
            (6,229,733
            )
            
            (2,998,429
            )Net
                loss per share -- basic and dilutedNet
                loss from continuing operations
            
            $
            (0.06
            )
            $
            (0.18
            )Net
                loss from discontinued operations
            
            
            (0.01
            )
            
            (0.00
            )Net
                loss per share -- basic and diluted
            
            $
            (0.07
            )
            $
            (0.18
            )Weighted
                average number of shares outstanding during the year -- basic and
                diluted
            
            
            85,743,341
            
            
            16,790,165








30


GLOBAL
          MATRECHS, INC.
 STATEMENT
          OF CHANGES IN STOCKHOLDERS’
          DEFICIT
 FOR
          THE YEARS ENDED DECEMBER 31, 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
              
              
              14,999,157
              
              $
              1,500
              
              $
              (8,659
              )
              $
              20,217,426
              
              $
              (27,363,319
              )
              $
              —
              
              $
              (7,152,917
              )Issuance
                  of Series I preferred stock
              
              
              490
              
              
              5
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              5Receipt
                  of Treasury stock
              
              
              
              
              
              
              
              
              (4,905,000
              )
              
              (490
              )
              
              (318,825
              )
              
              319,312
              
              
              
              
              
              
              
              
              (3
              )Issuance
                  of Common Stock
              
              
              
              
              
              
              
              
              2,151,081
              
              
              215
              
              
              
              
              
              104,850
              
              
              
              
              
              
              
              
              105,065Beneficial
                  conversion feature on promissory notes, net of expenses
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              526,459
              
              
              
              
              
              
              
              
              526,459Issuance
                  of warrants for services rendered
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              258,942
              
              
              
              
              
              
              
              
              258,942Conversion
                  of Series H preferred stock to common stock
              
              
              (150
              )
              
              (2
              )
              
              1,500,000
              
              
              150
              
              
              
              
              
              (148
              )
              
              
              
              
              
              
              
              —Conversion
                  of temporary equity to common stock
              
              
              
              
              
              
              
              
              22,150,193
              
              
              2,215
              
              
              
              
              
              818,269
              
              
              
              
              
              
              
              
              820,484Acquisition
                  of True To Form Ltd.
              
              
              
              
              
              
              
              
              10,000,000
              
              
              1,000
              
              
              
              
              
              599,000
              
              
              
              
              
              
              
              
              600,000Net
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (2,998,429
              )
              
              
              
              
              (2,998,429
              )Balance,
                  December 31, 2004
              
              
              13,840
              
              
              138
              
              
              45,895,431
              
              
              4,590
              
              
              (327,484
              )
              
              22,844,110
              
              
              (30,361,748
              )
              
              —
              
              
              (7,840,394
              )Retirement
                  of treasury stock
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              327,484
              
              
              (327,484
              )
              
              
              
              
              
              
              
              —Conversion
                  of temporary equity to common stock
              
              
              
              
              
              
              
              
              46,129,230
              
              
              4,613
              
              
              
              
              
              2,296,912
              
              
              
              
              
              
              
              
              2,301,525Conversion
                  of Series H preferred stock to common stock
              
              
              (908
              )
              
              (9
              )
              
              9,080,000
              
              
              908
              
              
              
              
              
              (899
              )
              
              
              
              
              
              
              
              —Conversion
                  of promissory notes to common shares
              
              
              
              
              
              
              
              
              5,927,854
              
              
              593
              
              
              
              
              
              234,913
              
              
              
              
              
              
              
              
              235,506Beneficial
                  conversion feature on promissory notes
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              250,000
              
              
              
              
              
              
              
              
              250,000Equity
                  line advances
              
              
              
              
              
              
              
              
              47,376,816
              
              
              4,737
              
              
              
              
              
              480,393
              
              
              
              
              
              
              
              
              485,130Issuance
                  of common stock for services
              
              
              
              
              
              
              
              
              2,282,961
              
              
              228
              
              
              
              
              
              138,032
              
              
              
              
              
              
              
              
              138,260Issuance
                  of stock options for services
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              15,799
              
              
              
              
              
              
              
              
              15,799Cancellation
                  of stock warrants
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (227,593
              )
              
              
              
              
              
              
              
              (227,593
              )Cancellation
                  of shares - discontinued operations
              
              
              
              
              
              
              
              
              (10,000,000
              )
              
              (1,000
              )
              
              
              
              
              (70,000
              )
              
              
              
              
              
              
              
              (71,000
              )Net
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (6,109,806
              )
              
              
              
              
              (6,109,806
              )Accumulated
                  other comprehensice loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (119,927
              )
              
              (119,927
              )Balance,
                  December 31, 2005
              
              
              12,932
              
              $
              129
              
              
              146,692,292
              
              $
              14,669
              
              $
              —
              
              $
              25,634,183
              
              $
              (36,471,554
              )
              $
              (119,927
              )
              $
              (10,942,500
              )
  31




**GLOBAL
        MATRECHS, INC.**
 **STATEMENTS
        OF CASH FLOWS**
 **FOR
        THE YEARS ENDED DECEMBER 31, 2005 AND 2004**
  2005
              
              2004CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  loss
              
              $
              (6,109,806
              )
              $
              (2,998,429
              )Adjustments
                  to reconcile net loss to cash used inoperating
                  activities:Amortization
                  of intangibles
              
              
              147,933
              
              
              197,244Recovery
                  of bad debts
              
              
              —
              
              
              (47,232
              )Asset
                  impairment charge
              
              
              525,986
              
              
              —Change
                  in fair value of warrants
              
              
              (2,928,808
              )
              
              57,639Change
                  in fair value of conversion feature-preferred stock
              
              
              —
              
              
              29,534Stock,
                  warrants and options granted in exchange for services
                  rendered
              
              
              300,734
              
              
              —Amortization
                  of beneficial conversion feature
              
              
              4,469,525
              
              
              1,920,245Loss
                  from discontinued operations
              
              
              809,380
              
              
              124,385Change
                  in operating assets and liabilites:Accounts
                  receivable
              
              
              —
              
              
              321,650Inventory
              
              
              (28,590
              )
              
              —Prepaid
                  expenses
              
              
              (5,528
              )
              
              65,344Accounts
                  payable
              
              
              1,041,432
              
              
              (137,453
              )Net
                  cash used in operating activities
              
              
              (1,777,742
              )
              
              (467,073
              )CASH
                  FLOWS FROM INVESTING ACTIVITIESRepayment
                  of Tulix loan
              
              
              72,858
              
              
              —Loan
                  to Tulix
              
              
              —
              
              
              (71,225
              )Issuance
                  of note receivable
              
              
              (50,000
              )
              
              —Purchase
                  of investments
              
              
              (228,593
              )
              
              —Net
                  cash used in investing activities
              
              
              (205,735
              )
              
              (71,225
              )CASH
                  FLOWS FROM FINANCING ACTIVITIESProceeds
                  from issuance of loan payable
              
              
              200,000
              
              
              —Proceeds
                  from issuance of convertible loans payable
              
              
              1,270,000
              
              
              597,950Proceeds
                  from equity line
              
              
              450,000
              
              
              —Net
                  cash provided by financing activities
              
              
              1,920,000
              
              
              597,950NET
                  INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
              
              
              (63,477
              )
              
              59,652CASH
                  AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
              
              
              131,470
              
              
              71,818CASH
                  AND CASH EQUIVALENTS AT END OF PERIOD
              
              $
              67,993
              
              $
              131,470Supplemental
                  disclosure of non-cash investing and financing activities:Conversion
                  of preferred shares into 55,209,230 and 46,129,230 shares of common
                  stock
                  in 2005 and 2004, respectively
              
              $
              2,301,525
              
              $
              820,484Conversion
                  of notes payable into 5,927,854 shares of common stock
              
              $
              235,506
              
              $
              —
 32


**Note
      1 - Organization and Basis of Presentation**








**(A)**
            **Organization**





Global
      Matrechs, Inc. f/k/a Homecom Communications, Inc. (“The Company”) markets and
      sells technologies licensed from Eurotech to manufacturers and other
      parties.





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. We have kept a 15% interest in the surviving entity.
      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, Ltd. (“True To
      Form”, (“TTF”)), a maker of specialized lighting products for a range of
      markets. As a result of this transaction, TTF became our wholly owned
      subsidiary. The sole shareholder of TTF was, prior to the acquisition, a member
      of our Board of Directors. Following the acquisition, this individual continued
      as the President of TTF and served as Executive Vice President of the Company.
      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, we completed the sale of TTF back to its original owner.
      Our
      primary source of operating revenue had been, prior to this sale, the specialty
      lighting group. However, during 2005, TTF was unprofitable. As a result of
      this
      sale, we no longer hold any equity interest in TTF. During 2005, the
      accompanying financial statements account for the disposal of TTF as a component
      of discontinued operations. See note 15.





**(B)**
            **Basis
                of Presentation**





The
      accompanying financial statements are prepared in accordance with accounting
      principles generally accepted in the United States of America (“GAAP”). The
      preparation of financial statements in conformity with GAAP requires management
      to (i) make estimates and assumptions that affect the reported amounts of assets
      and liabilities, (ii) disclose contingent assets and liabilities at the date
      of
      the financial statements, (iii) prepare the financial statements as a going
      concern and (iv) report amounts of revenues and expenses during the reporting
      period. Actual results could differ from those estimates.








**Note
      2 - Going Concern**





As
      reflected in the accompanying financial statements, the Company has a net loss
      of $6,109,806 and net cash used in operations of $1,777,742 for the year ended
      December 31, 2005 and a working capital deficiency of $7,033,387 accumulated
      deficit of $36,471,554 and a stockholders’ deficit of $10,942,500 at December
      31, 2005.





The
      Company’s financial statements are prepared using generally accepted accounting
      principles applicable to a going concern, which contemplate the realization
      of
      assets and liquidation of liabilities in the normal course of business. The
      Company continues to experience negative cash flows from operations and is
      dependent on continued financing from investors to sustain its activities.
      During 2005, the Company sold its formally wholly-owned subsidiary TTF, this
      represented all significant revenues generated by the Company in 2005. These
      factors raise substantial doubt about the Company’s ability to continue as a
      going concern. Management is planning 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.




33





**Note
      3 - Significant Accounting Policies**





**(A)
      Use of Estimates**





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 2005 and 2004 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.




**(B)
      Principles of Consolidation**




The
      Company sold its wholly-owned subsidiary on December 29, 2005. There are no
      intercompany eliminations at December 31, 2005.





**(C)
      Cash and Cash Equivalents**





For
      the
      purpose of the cash flow statements, the Company considers all highly liquid
      investments with original maturities of three months or less at the time of
      purchase to be cash equivalents.




**(D)
      Marketable Securities**





We
      classify our investments as “available-for-sale” in accordance with the
      provisions of Statement of Financial Accounting Standards No. 115. “Accounting
      for Certain Investments in Debt and Equity Securities” (SFAS 115). We do not
      have any investments classified as “trading”. Investments that we intend to hold
      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, we use the market price
      of
      similar types of securities that are traded in the market to estimate fair
      value.





At
      December 31, 2005, we maintained a portfolio consisting of 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 were
      no
      impairment losses charged to operations during the years ended December 31,
      2005
      and 2004.





**(E)
      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 APB No. 18, *“The
      Equity Method of Accounting for Investments in Common Stock”* (“APB
      18”). The Company is currently carrying this investment as a non-current asset
      due to the likelihood and expectation of not liquidating the investment within
      the next twelve months.





The
      Company periodically reviews its investments in non-marketable securities and
      impairs any securities whose value is considered non-recoverable. There were
      no
      impairment losses charged to operations during the years ended December 31,
      2005
      and 2004.





34




**(F)
      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 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.





There
      were no impairment charges taken during the years ended December 31, 2005 or
      2004, respectively.





The
      Company accounts for long-lived assets in accordance with the provisions of
      Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for
      the Impairment or Disposal of Long-Lived Assets.” 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.





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 were no impairment charges recognized during the
      year
      ended December 31, 2004.





In
      connection with the disposition of TTF, the Company disposed of $1,469,108
      of
      goodwill that was recorded as part of the acquisition. See note 15.





**(G)
      Derivative Liabilities**





As
      described further in Note 8, during the year ended December 31, 2005, the
      Company sold $1,270,000 of convertible debt along with 54,042,423 freestanding
      warrants. In connection with the debt funding in 2005, the Company recorded
      an
      aggregate derivative liability of $2,486,059 for the warrants and a
      corresponding debt discount of $1,268,032. The net derivative liability for
      these warrants upon remeasurement at December 31, 2005 was $425,215. The net
      amount included amortization of a related debt discount to interest expense
      totaling $399,986. At December 31, 2005, the Company remeasured its convertible
      preferred stock conversion option at fair value which aggregated
      $666,499.








In
      order
      to determine whether the Company had a derivative liability the Company reviewed
      Emerging Issues Task Force (“EITF’) - EITF 05-02, “The Meaning of Convertible
      Debt Instrument in Issue No. 00-19”.





Pursuant
      to the terms of the convertible debt and the detachable warrants issued,
      management determined that the warrants do not qualify as equity instruments
      under the provisions of EITF No. 00-19, Accounting for Derivative Financial
      Instruments Index to, and Potentially Settled in, a Company’s Own Stock, and,
      therefore, should also be accounted for as derivatives under the provisions
      of
      SFAS No. 133. In addition, as a result of the previously issued convertible
      preferred stock and under the provisions of EITF No. 00-19, the Company was
      no
      longer able to conclude that it has sufficient authorized and unissued shares
      available to settle its previously issued non-employee options and warrants
      after considering the commitment to potentially issue common stock under terms
      of the convertible preferred stock if there should ever be an event of default
      or upon actual conversion.





As
      such,
      effective with the issuance of the convertible preferred stock, the fair value
      of all non-employee options and warrants are accounted for as derivative
      liabilities under the provisions of SFAS No. 133. Changes in the fair value
      of




35




the
      non-employee options and warrants will be recorded through earnings at each
      subsequent reporting period, so long as they continue to not qualify for equity
      classification. Non-employee options and warrants that are ultimately settled
      in
      common stock will be remeasured prior to settlement then reclassified to
      stockholders’ equity; however, any gains or losses previously recognized on
      those instruments will remain in earnings during the periods in which they
      were
      recognized.





At
      December 31, 2005, the Company had various convertible redeemable preferred
      stock and warrants that were accounted for pursuant to the provisions of SFAS
      No. 133, EITF No. 00-19 and EITF No. 05-2.




**(H)
      Revenue Recognition**





The
      Company follows the guidance of the Securities and Exchange Commission’s Staff
      Accounting Bulletin No. 104 for revenue recognition.  In general, the
      Company records 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.  The Company generated revenues only through its wholly-owned
      subsidiary. These revenues were included as a component of discontinued
      operations.





**(I)
      Stock Based Compensation**





The
      Company accounts for stock options issued to employees in accordance with the
      provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting
      for Stock Issued to Employees,” and related interpretations.  As such,
      compensation cost is measured on the date of grant as the excess of the current
      market price of the underlying stock over the exercise price.  Such
      compensation amounts, if any, are amortized over the respective vesting periods
      of the option grant.  The Company adopted the disclosure provisions of SFAS
      No. 123, “Accounting for Stock-Based Compensation” and SFAS 148, “Accounting for
      Stock-Based Compensation -Transition and Disclosure”, which permits entities to
      provide pro forma net income (loss) and pro forma earnings (loss) per share
      disclosures for employee stock option grants as if the fair-valued based method
      defined in SFAS No. 123 had been applied.  The Company accounts for stock
      options and stock issued to non-employees for goods or services in accordance
      with the fair value method of SFAS No. 123. See note 8.





**(J)
      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, 2005 and 2004 were $600 and $0,
      respectively.





**(K)
      Income Taxes**




The
      Company accounts for income taxes under the Financial Accounting Standards
      No.
      109 “Accounting for Income Taxes” (“Statement 109”). Under Statement 109,
      deferred tax assets and liabilities are recognized for the future tax
      consequences attributable to differences between the financial statement
      carrying amounts of existing assets and liabilities and their respective tax
      bases. Deferred tax assets and liabilities are measured using enacted tax rates
      expected to apply to taxable income in the years in which those temporary
      differences are expected to be recovered or settled. Under Statement 109, the
      effect on deferred tax assets and liabilities of a change in tax rates is
      recognized in income in the period, which includes the enactment date.





**(L)
      Earnings 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 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, 2005 and 2004, the Company had 974,000,000 and 307,000,000 potential common
      share equivalents. The Company has excluded these common share equivalents
      from




36




its
      computation of earnings per share due to their antidilutive effect as the
      Company has reflected a net loss at December 31, 2005 and 2004, respectively.
      Accordingly, the basic and diluted EPS are the same.





**(M)
      Comprehensive Income (Loss)**





The
      Company computes comprehensive income (loss) in accordance with SFAS No. 130,
      “Reporting Comprehensive Income”. Comprehensive income arises out of the
      Company’s accounting policy for available-for-sale securities. For the year
      ended December 31, 2005, the Company reported a Comprehensive loss of $119,927
      which was attributed to an unrealized loss on available for sale marketable
      securities.





**(N)
      Fair Value of Financial Instruments**




Statement
      of Financial Accounting Standards No. 107, “Disclosures about Fair Value of
      Financial Instruments,” 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.





**(O)
      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 is not required.





**(P)
      Recent Accounting Pronouncements**




In
      December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment,” which
      replaces
      SFAS No. 123 and supersedes APB Opinion No. 25. Under SFAS No. 123(R), companies
      are required to measure the compensation costs of share-based compensation
      arrangements based on the grant-date fair value and recognize the costs in
      the
      financial statements over the period during which employees are required to
      provide services. Share-based compensation arrangements include stock options,
      restricted share plans, performance-based awards, share appreciation rights
      and
      employee share purchase plans. In March 2005 the SEC issued Staff Accounting
      Bulletin No. 107, or “SAB 107”. SAB 107 expresses views of the staff regarding
      the interaction between SFAS No. 123(R) and certain SEC rules and regulations
      and provides the staff’s views regarding the valuation of share-based payment
      arrangements for public companies. SFAS No. 123(R) permits public companies
      to
      adopt its requirements using one of two methods. On April 14, 2005, the
      U.S. Securities and Exchange Commission adopted a new rule amending the
      compliance dates for SFAS 123R. Companies may elect to apply this statement
      either prospectively, or on a modified version of retrospective application
      under which financial statements for prior periods are adjusted on a basis
      consistent with the pro forma disclosures required for those periods under
      SFAS
      No. 123. The Company is currently evaluating which transitional provision and
      fair value methodology it will follow. The Company expects that any expense
      associated with the adoption of the provisions of SFAS No. 123R will have a
      material impact on our results of operations. We are evaluating the requirements
      of SFAS No. 123(R) and SAB 107 to assess what impact its adoption will have
      on
      our financial position, results of operations and cash flows. Effective January
      1, 2006, we have adopted SFAS No. 123(R).





In
      May
      2005, the Financial Accounting Standard Board (“FASB”) issued
      Statement
      No. 154, “Accounting Changes and Error Corrections, a replacement of APB Opinion
      No. 20, Accounting Changes, and Statement No. 3, Reporting Accounting Changes
      in
      Interim Financial Statements” (SFAS
      154). SFAS
      154 changes the requirements for the accounting for, and reporting of, a change
      in accounting principle. Previously, most voluntary changes in accounting
      principles were required to be recognized by way of a cumulative effect
      adjustment within net income during the period of the change. SFAS 154 requires
      retrospective application to prior periods’ financial statements, unless it is
      impracticable to determine either the period-specific effects or the cumulative
      effect of the change. SFAS 154 is effective for accounting changes made in
      fiscal years beginning after December 15, 2005; however, the Statement does




37




not
      change the transition provisions of any existing accounting pronouncements.
      We
      do not believe adoption of SFAS 154 will have a material effect on our financial
      position, results of operations or cash flows.





In
      June
      2005, the Emerging Issues Task Force (“EITF”) issued
      EITF
      05-2, “The Meaning of Conventional Convertible Debt Instrument in Issue No.
      00-19”. EITF
      05-2 retained the definition of a conventional convertible debt instrument
      as
      set forth in EITF 00-19, and which is used in determining certain exemptions
      to
      the accounting treatments prescribed under SFAS 133, “Accounting for Derivative
      Instruments and Hedging Activities”. EITF
      05-2 also
      clarified that certain contingencies related to the exercise of a conversion
      option would not be outside the definition of “conventional” and determined
      that convertible preferred stock with a mandatory redemption date would also
      qualify for similar exemptions if the economic characteristics of the preferred
      stock are more akin to debt than equity. EITF 05-2 is effective for new
      instruments entered into and instruments modified in periods beginning after
      June 29, 2005. We adopted the provisions of EITF 05-2 on July 1, 2005, which
      had
      a material effect on our financial position, results of operations and cash
      flows.





In
      July
      2005, the FASB issued FASB Staff Position (“FSP”) 150-5,
      “Accounting Under SFAS 150 for Freestanding Warrants and Other Similar
      Instruments on Redeemable Shares”. FSP 150-5
      clarifies that warrants on shares that are redeemable or puttable immediately
      upon exercise and warrants on shares that are redeemable or puttable in the
      future qualify as liabilities under SFAS 150, regardless of the redemption
      feature or redemption price. The FSP is effective for the first reporting period
      beginning after June 30, 2005, with resulting changes to prior period statements
      reported as the cumulative effect of an accounting change in accordance with
      the
      transition provisions of SFAS 150. We adopted the provisions of FSP 150-5 on
      July 1, 2005, which did not have a material effect on our financial position,
      results of operations and cash flows.





**(Q)
      Reclassifications**





Certain
      amounts in the year 2004 financial statements have been reclassified to conform
      to the year 2005 presentation. The results of these reclassifications did not
      materially affect financial position, results of operations or cash
      flows.





**Note
      4 -** **Investment
      - Marketable and Non-Marketable Securities**





(A)
      Marketable Securities





The
      composition of marketable securities at December 31, 2005 is as
      follows:





Cost
            
            Fair
                Value
            
            Unrealized
                LossCommon
                stock
            
            $
            228,593
            
            $
            108,666
            
            $
            119,927





There
      was
      minimal investment income for the year ended December 31, 2005. There were
      no
      such investments in 2004.





(B)
      Non-Marketable Securities





Prior
      to
      2005, the Company obtained an interest in a private company in exchange for
      $51,949. The value of this investment at December 31, 2005 and 2004 was
      $51,949.





**Note
      5 - Inventory**





Inventory
      consists of finished goods of NuCap products and is stated at the lower of
      cost
      or market utilizing the first-in, first-out method. At December 31, 2005, the
      Company had $28,590 of finished goods. During 2005 and 2004, there were no
      write-downs or obsolescence charges recorded.





**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 January
      20, 2006. At January 20, 2006, the note was in default. The Company negotiated
      an extension through April




38




20,
      2006.
      At December 31, 2005, the Company reflects a current asset of $50,000 for note
      receivable. At December 31, 2005, the remaining $12,500 for interest receivable
      had not been recorded since it was not due until the note’s maturity
      date.





On
      December 29, 2005, in connection with the sale of TTF, the Company as partial
      consideration recorded a note receivable totaling $250,000. See note
      15.





**Note
      7 - Notes Payable**





On
      December 7, 2005, the Company borrowed $200,000 from Southridge, maturing on
      February 10, 2006, bearing interest at an annual rate of 8%.  On March 29,
      2006, the maturity date was extended to July 20, 2006.





**Note
      8 - Derivative Liabilities and Convertible Notes
      Payable**





**(A)**
            **Convertible
                Promissory Notes Payable with
                Warrants**





On
      various dates during 2005, the Company borrowed an aggregate $1,270,000 from
      two
      unrelated third parties pursuant to the terms of a convertible promissory note.
      Under the terms of these agreements, the convertible notes bore interest of
      2%,
      were unsecured and due twenty four months from their issuance.





These
      convertible promissory notes were issued with warrants having expiration dates
      ranging from two to five-years. The investors were granted an aggregate
      50,800,000 warrants to purchase shares of the Company’s common stock at an
      exercise price of $0.025 per share.





Pursuant
      to EITF No. 00-19 and EITF No. 05-2, on the issuance date, the Company recorded
      a derivative liability for the fair value of the warrants issued. The initial
      value of these warrants was $2,486,059. At December 31, 2005, upon
      remeasurement, these warrants were recorded as a derivative liability totaling
      $425,215 with the resulting change of $2,154,738 recorded as a change in fair
      value of derivative instruments. The Company followed the provisions of APB
      No.
      14 in connection with the valuation of the embedded conversion option. As a
      result, the Company recorded a debit to interest expense and credit to notes
      payable for $1,218,027. The entire amount was charged to interest expense since
      the fair value of the warrants exceeded the face amount of the gross proceeds
      raised. Additionally, the convertible promissory notes were not subject to
      fair
      value remeasurement pursuant to EITF No. 05-2.





The
      following weighted average assumptions were used on the issuance dates of the
      convertible debt instruments for purposes of determining the fair value of
      the
      freestanding warrants during 2005:


Exercise
                  price
              $0.025Expected
                  dividend yield
              0%Expected
                  volatility
              200%
                  - 214%Risk
                  free interest rate
              4.25%Expected
                  life of warrant
              5
                  years




Additionally,
      the Company determined that the fair value of the warrants granted in 2005
      was
      $146,675. At December 31, 2005, upon measurement, these warrants were recorded
      as a derivative liability of $21,159, with the resulting change of $125,516
      recorded as a change in fair value of derivative instruments. See Note
      9(B)(iv).





The
      following weighted average assumptions were used on the grant dates for purposes
      of determining the fair value of the 3,242,423 warrants granted in
      2005:


Exercise
                    price
                $0.025Expected
                    dividend yield
                0%Expected
                    volatility
                200%Risk
                    free interest rate
                4.25%Expected
                    life of warrant
                5
                    years
  39


At
      December 31, 2005, the Company remeasured all 69,042,423 of its outstanding
      warrants classified as derivative liabilities using the following weighted
      average assumptions:


Exercise
                  price
              $0.025Expected
                  dividend yield
              0%Expected
                  volatility
              190%
                  - 214%Risk
                  free interest rate
              4.25%Expected
                  life of warrant
              5
                  years




The
      fair
      value of the derivative liability was $446,374 at December 31,
      2005.





In
      connection with the above convertible debt issuances, the convertible debt
      and
      freestanding warrants issued were 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 $1,520,000 in convertible debt financing. The allocation was
      based on the allocable proceeds of the debt financings between the fair value
      of
      the beneficial conversion option of the related convertible debt instruments
      and
      detachable freestanding warrants. The
      Company began amortizing all debt discount to interest expense over
      the related term of the convertible debt. Upon full conversion of the
      convertible debt in November 2005, all remaining unamortized debt discount
      was
      charged to the statement of operations for the year ended December 31, 2005.
      The
      Company recorded the effect of the conversion by debiting interest expense
      and
      crediting additional paid in capital.




The
      terms
      of all of the 2% secured convertible promissory notes issued to McNab,
      Southridge, DeNuccio, Colonial and Deer Creek during 2004 and 2005, each in
      substantially the same form, are convertible into shares of our common stock
      at
      a conversion price of $0.02 and each of the warrants are exercisable for $0.025
      per share of our common stock. The promissory notes mature in two years and
      the
      warrants expire in five years.





Should
      our 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 our common
      stock As of December 31, 2005, the stock price was below $0.03 where it has
      remained since October 2005. Accordingly, $618,000 is included in accounts
      payable and accrued expenses as a contingent liability in the event that the
      note holders assert this prepayment penalty. As of March 24, 2006, only one
      of
      the note holders has made the assertion, and in accordance with the assertion,
      during March 2006, the Company paid $10,000, representing 40% of the note,
      to
      the note holder.




On
        January 31, 2005, the Company entered into an Exchange Agreement with Woodward
        LLC pursuant to which we acquired convertible 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 in the principal amount of $250,000. 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 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 our 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 our 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.


The
      warrants contain a cashless warrant provision. The holder 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, the Company would receive no proceeds upon such
      exercise. In the aggregate, the promissory notes contain common stock purchase
      warrants to purchase up to 68,300,000 shares of our common stock.




40




**(i)**
            **Brittany**





On
      June
      1, 2004, as part of the agreement to Issue Preferred Series I (see Note
      8(a)),  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 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 McNab LLC.





**(ii)**
            **McNab**





During
      September 2004, the Company restructured its borrowings from McNab 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. 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.





**(iii)**
            **Southridge**





On
      October 19, 2004, we entered into a securities purchase agreement with
      Southridge Partners LP. Southridge purchased a nonnegotiable 2% secured
      convertible promissory note in the principal amount of $250,000 and we issued
      it
      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 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 (see section E below for further discussion of
      the
      terms and conditions).





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 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. All of these transactions were exempt
      from registration pursuant to the provisions of Section 4(2) of the Securities
      Act, as amended. On July 8, 2005, we and Southridge Partners LP terminated
      its
      option to purchase additional notes.




41





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.





**(iv)**
            **DeNuccio,
                Colonial and Deer Creek**





On
      October 21, 2004, we 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 we issued to Mr. DeNuccio
      a warrant to purchase 1,000,000 shares of our common stock (see section E below
      for further discussion of the terms and conditions).





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





On
      December 3, 2004, the Company and Deer Creek Fund, LLC entered into a securities
      purchase agreement relating to the private placement of a 2% secured convertible
      promissory notes in the aggregate principal amount of $50,000 and a warrant
      to
      purchase 2,000,000 shares of its common (see section v 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.





**(v)**
            **Woodward
                LLC**




(B)
            Convertible
                Promissory Note




During
      2004, we 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. 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.





(C)
            Convertible
                Preferred Stock





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





The
      following table summarizes the derivative liabilities and convertible notes
      payable as of December 31, 2005:




42





Footnote
              reference
            
            Description
            
            Convertible
              Note
                Payable
            
            Less:
                Debt
              discount
            
            Convertible
              notes
              payable,
                net
              of
                debt
              discount
            
            Derivative
              liability8A(i)
            
            
            Brittany
            
            $
            62,500
            
            $
            —
            
            $
            62,500
            
            $
            —8A(ii)
            
            
            McNab
            
            
            2,051,036
            
            
            468,833
            
            
            1,582,203
            
            
            153,8348A(iii)
            
            
            Southridge
            
            
            3,252,500
            
            
            498,528
            
            
            2,753,972
            
            
            239,9348A(iv)
            
            
            DeNuccio,
                Colonial and Deer Creek
            
            
            87,500
            
            
            10,103
            
            
            77,397
            
            
            31,4478A(v)
            
            
            Woodward
            
            
            250,000
            
            
            135,616
            
            
            114,384
            
            
            —8(B)/12(B)
            
            
            Series
                C Preferred Stock
            
            
            —
            
            
            —
            
            
            —
            
            
            58,8138(B)/12(C)
            
            
            Series
                E Preferred Stock
            
            
            —
            
            
            —
            
            
            —
            
            
            607,6869(B)(iv)
            
            
            Warrants
                issued for services
            
            
            —
            
            
            —
            
            
            —
            
            
            21,159$
            5,703,536
            
            $
            1,113,080
            
            $
            4,590,456
            
            $
            1,112,873




**Note
      9 - Stockholders’ Deficit**





**(A)** **Preferred
      Stock Conversions**





For
      the
      period January 1, 2005 through December 31, 2005, 12.4525 shares of Series
      B
      preferred stock, and 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.








**(B)** **COMMON
      STOCK, WARRANTS AND OPTIONS ISSUED FOR SERVICES**





(i)
            Since
                January 1, 2005, we have issued 2,286,961 shares of common stock
                in
                exchange for $138,260 of services rendered to unrelated consultants.
                These
                services were valued at the share price at
                issuance.





(ii)
            During
                January 2005 we have issued options to purchase 2,974,775 shares
                of common
                stock to consultants. Pursuant to fair-value accounting, we used
                the
                Black-Scholes option pricing model, the fair value of these options
                have
                been computed at $15,799.





(iii)
            During
                January 2005, the Company canceled its consulting agreement, dated
                December 16, 2004, with Trilogy Capital Partners. Upon termination,
                the
                Company canceled 5,750,000 of warrants issued to Trilogy having a
                fair
                value at original issuance of
                 $227,593.





43




(C)
      Common Stock Issued Under Equity Line of Credit




During
      2005, in connection with our agreement with Brittany, we issued 47,376,816
      shares of common stock for $485,130. This amount included $4,000 as a direct
      offering cost charged directly against additional paid-in-capital.




**(D)
      Treasury Stock**




During
      2005, the Company formally cancelled and retired treasury stock aggregating
      $327,484.




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





**(A)** **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 cash plus 25,000 warrants to purchase common stock
      at
      $5.70 per share, 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.




**(B)** **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. As of December 31, 2005, 10.99 shares of Series C
      Preferred Stock remain outstanding.





**(C)** **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, 2005, all 106.35 shares
      remain outstanding.





**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




44




$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.
        As of December 31, 2005, all 1,069 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 10,000 shares of common stock and has a stated value of $1,000
      per share; 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 2005,
      908
      shares of Series H Preferred Stock were converted into 9,080,000 shares of
      common stock. As of December 31, 2005, 12,442 shares remain
      outstanding.




See
      Note 14(a) for additional matters.





**Note
      12 - Issuance of Series I Preferred Stock**





In
      June,
      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, 2005, the Company had borrowed $75,000. See note 6.





**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
      and in 2005 to 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.





The
      options granted to purchase shares under the Stock Option Plan. The options
      vest
      25% per year 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.





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.




45





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 31,2005
            
            2004WEIGHTED-AVERAGE
            
            
            
            WEIGHTED-AVERAGEEXERCISE
            
            
            
            EXERCISESHARES
            
            PRICE
            
            SHARES
            
            PRICEOutstanding
                at beginning of year
            
            
            1,287,419
            
            
            .33
            
            
            387,419
            
            
            2.32Granted
            
            
            1,600,000
            
            
            .05
            
            
            900,000
            
            
            .03ExercisedForfeited
            
            
            (900,000
            )
            
            .04Outstanding
                at end of year
            
            
            1,987,419
            
            
            .33
            
            
            1,287,419
            
            
            .33Options
                exercisable at year end
            
            
            1,987,419
            
            
            .33
            
            
            1,287,419Shares
                available for future grant
            
            
            15,012,581
            
            
            
            
            
            712,581Weighted-average
                fair value of
            
            
            0.04
            
            
            
            
            
            0.03options
                granted during this year at the shares’ fair value





The
      following table summarizes information about fixed options outstanding at
      December 31, 2005.


EXERCISE
                  PRICE
              
              SHARES
              
              WEIGHTED
                  AVERAGE
                REMAINING
                CONTRACTUAL
                  LIFE$0.03
                  - $0.05
              
              
              1,600,000
              
              
              9$0.59
                  - $0.75
              
              
              231,095
              
              
              4.2$2.18
                  - $4.55
              
              
              95,687
              
              
              2.5$6.00
                  - $6.13
              
              
              60,637
              
              
              2.11,987,419
              
              
              5.3








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 YEARSENDED
                DECEMBER 31,2005
            
            2004Loss
                applicable to common shareholders:As
                reported
            
            $
            (6,109,806
            )
            $
            (2,998,429
            )Pro
                forma
            
            
            (6,153,306
            )
            
            (3,013,329
            )Basic
                and diluted income (loss) per share:As
                reported
            
            $
            (0.07
            )
            $
            (0.18
            )Pro
                forma
            
            $
            (0.07
            )
            $
            (0.18
            )





46





**Note
      14 - Commitments and Contingencies**





**(A)
      Legal Settlement and Related Loss Contingency Accruals**





On
      February 9, 2005 Global Matrechs, Inc, 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 seeks the enforcement of the notes issued by
      Eurotech to Woodward, LLC which were assumed by Global Matrechs in the exchange
      agreement between Global Matrechs and Woodward on January 31, 2005. The
      complaint sought damages totaling $672,677 plus interest and attorney’s fees
      which are yet to be determined.





On
      April
      13, 2005 Carey Naddell, CEO of Eurotech, Ltd., filed suit against the Company
      for damages based upon an alleged breach of a written service agreement.





On
      March
      15, 2006, a settlement was reached on both of the aforementioned
      matters.





In
      connection with the Eurotech matter, Eurotech will return 2,500 shares of Series
      H, convertible Preferred Stock to the Company in full settlement of claims
      relating to its failure to fulfill obligations under the license agreement,
      and
      Eurotech’s obligations to Woodward, which were assumed by the Company 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. The Company
      also
      believes that the provisions of SFAS No. 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, the Company
      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 is 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.





**(B)
      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
      May
      31, 2004, the Company completed the sale of its remaining Internet business
      to
      Tulix Systems, Inc. (“Tulix”), a company in which Gia Bokuchava, Nino
      Doijashvili and Timothy R. Robinson, who were officers and directors of the
      Company, are officers, directors and founding shareholders. The Company 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 Purchase Agreement Global Matrechs has completely exited
      from all Internet related enterprises. The Company has removed the results
      of
      this discontinued operation from the continuing operations of the Company for
      all periods presented.





On
      December 31, 2004 we 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 has been 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




47




note
      is
      due in two payments with $100,000 due in 2005 and $400,000 due in 2010. The
      note
      accrues an interest rate of 8% per annum. The following table summarizes the
      estimated fair values of the assets acquired and liabilities assumed at the
      date
      of the acquisition of True To Form:





Accounts
                receivable
            
            $
            94,551Inventories
            
            
            67,906Property
                and Equipment
            
            
            28,430Other
                assets
            
            
            2,575Goodwill
            
            
            1,469,108Current
                liabilities
            
            
            (399,959
            )Long-term
                liabilities
            
            
            (162,611
            )$
            1,100,000








During
      the first three quarters of 2005, True To Form was unprofitable. On December
      29,
      2005 we 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 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;




· 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. 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, 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.





During
      the year ended December 31, 2005, we 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.




The
      following is a summary of 2005 activities of True To Form:




Revenues
              $
              1,016,078Cost
                  of revenues
              
              585,602Gross
                  profit
              
              430,476Operating
                  expensesGeneral
                  and administrative
              
              848,899Operating
                  loss
              
              (418,423
              )Other
                  income (expense)Interest
                  expense, net
              
              (7,433
              )Net
                  loss from discontinued operations
              $
              (425,856
              )


**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:





December
                31,2005
            
            2004Temporary
                differences:Capital
                losses
            
            $
            —
            
            $
            167,000Unrealized
              loss on marketable securities
            
            
            48,000
            
            
            —Options
              and warrants issued for services
            
            
            65,000
            
            
            —Net
                operating loss carryforward
            
            
            9,302,000
            
            
            8,125,000Deferred
                tax asset
            
            
            9,415,000
            
            
            8,292,000Valuation
                allowance
            
            
            (9,415,000
            )
            
            (8,292,000
            )Net
                deferred tax asset
            
            $
            —
            
            $
            —




48




At
      December 31, 2005, the Company had net operating loss carryforwards for income
      tax purposes of approximately $6.0 million which expire at various
      times through 2025. Realization of these assets is contingent on having
      future taxable earnings. In addition, certain stock transactions from 1997
      through 2005 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 carryforwards 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 31,2005
            
            2004Expected
                income tax (benefit) at statutory
            
            $
            (2,181,000
            )
            $
            (921,000
            )Federal
                rate of 35%State
                tax (benefit), net of Federal effect
            
            
            (312,000
            )
            
            (132,000
            )Adjustment
              to prior year’s
              valuation
              allowance
            
            
            (263,000
            )
            
            —Permanent
                differences
            
            
            1,633,000
            
            
            844,000Increase
                in valuation allowance
            
            $
            1,123,000
            
            $
            209,000—
            
            
            —




**Note
      17 - Subsequent Events**





**Investing
      and Financing Transactions**





For
      the
      period January 1, 2006 through March 30, 2006, the Company converted .99 of
      Series C preferred stock into 3,202,374 shares of common stock, converted 106.40
      shares of Series E preferred stock into 15,582,175 shares of common stock,
      converted 150 shares of Series G preferred stock into 26,566,415 shares of
      common stock, converted 2,280 shares of Series H preferred stock into
      22,800,000, converted $9,000 of promissory notes into 1,884,902 shares of common
      stock and issued 63,148,279 shares of common stock to Brittany under the terms
      of the January 2006 Private Equity Credit Agreement.





**Private
      Equity Credit Agreement**




**Summary.** On
      January 10, 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 $15 million from time to time, at our discretion,
      in exchange for shares of our common stock, subject to conditions outside of
      the
      control of Brittany further described below.




**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 are to take place from time to time, at our discretion,
      over the course of a commitment period extending 36 months after the effective
      date of our registration statement.




We
      are
      required to draw down a minimum of one million dollars. If we draw a lesser
      amount, we must pay Brittany an amount equal to nine 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 million dollar
      minimum.




49




**Blackout
      Shares.** If
      we
      suspend sales of common stock pursuant to this registration statement 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 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.




**Litigation
      settlement**





On
      March
      15, 2006, a settlement was reached in connection with the Eurotech and Nadell
      litigations.





In
      connection with the Eurotech matter, Eurotech will return 2,500 shares of Series
      H Preferred Stock to the Company in full settlement of claims relating to its
      failure to fulfill obligations under the license agreement, and Eurotech’s
      obligations to Woodward, which were assumed by the Company 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. As a result,
      the
      Company relied on AU Section 560 and believed that this is a Type 1 subsequent
      event requiring accounting recognition and valuation at December 31, 2005.
      The
      Company also believes that the provisions of SFAS No. 5 as it pertains to
      contingencies are relevant literature for purposes of accruing a contingent
      loss.




Other




On
      January 10, 2006, the Company granted 6,584,844 in warrants.





50


**ITEM
                8.**
            **CHANGES
                IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                DISCLOSURE**





None.




**ITEM
              8A.**
            **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:




**•**
            We
                have restated certain financial information contained in our quarterly
                report on Form 10-QSB for the quarter ended March 31,
                2005.





**
            **•**
            Due
                to the significant commitment of Company time and resources required
                in
                connection with the review of our financial statements and the auditing
                of
                our 2004 financial statements, we did not timely file our annual
                report on
                Form 10-KSB for the fiscal year ended December 31, 2004 or our quarterly
                reports on Form 10-QSB for the quarters ended March 31, 2005, June
                30,
                2005 and September 30, 2005.




Management
      concluded that the problems set forth above did not necessitate a conclusion
      that our disclosure controls and procedures were ineffective as of December
      31,
      2005. First, 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
      addressed by retaining an outside consultant to assist with some of the highly
      technical issues relating to the company’s capital structure. Second, we were
      able to timely file both our quarterly report on Form 10-QSB for the quarter
      ended September 30, 2005 and this annual report on Form 10-KSB, indicating
      that
      the issues relating to the timeliness of our reporting have been successfully
      addressed.





Management
      believes that additional progress in strengthening our disclosure controls
      and
      procedures will continue throughout fiscal year 2006. 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, 2005 that have materially affected, or are
      reasonably likely to materially affect, our internal control over financial
      reporting.





51




**ITEM
              8B.**
            **OTHER
                INFORMATION**





From
      time
      to time between December 1, 2005 and March 27, 2006, we issued and sold an
      aggregate 93,974,467 shares pursuant to private equity line credit agreements.
      We received gross cash proceeds of $568,355 in consideration for the sold
      shares. The sold shares constitute greater than 5% of our issued and outstanding
      common stock. The shares were sold to the purchaser at a discount of 8% to
      the
      market price 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 a registration statements on Form SB-2 (File nos. 333-126526 and
      333-131106). We have used or intend to use the proceeds from these issuances
      for
      general corporate purposes.





52


PART
      III





**ITEM
              9.**
            **DIRECTORS
                AND EXECUTIVE OFFICERS OF THE
                REGISTRANT**





**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, K. Ivan F. Gothner is a Class II 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 and Mr. Gothner
      were appointed to fill vacancies 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 June 29,
      2000, our three 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 2006 annual meeting, the term of our Class I director would
      next expire at our 2007 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 2009 annual meeting
      of
      stockholders.




**Executive
      Directors and Officers.** Our
      directors and executive officer are as follows:




**Name**
            
            **Age**
            
            **Position**Michael
                Sheppard
            
            56
            
            Chief
                Executive Officer, President, Acting Chief Financial Officer, Chief
                Operating Officer, and Chairman of the BoardThomas
                L. Folsom
            
            53
            
            DirectorK.
                Ivan F. Gothner
            
            47
            
            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. Folsom** has
      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.




**K.
      Ivan F. Gothner** has
      served on our Board of Directors since January 11, 2006. Prior to serving on
      the
      Board of Directors Mr. Gothner served as a consultant and acting Secretary
      to
      the Company from July 1, 2005. He is currently a managing director and founder
      of Adirondack Partners, LLC, a private merchant banking firm with a focus on
      small and mid-size growth companies. Prior to founding Adirondack Partners
      in
      1992, Mr. Gothner worked at Barclays Bank as a Senior Vice President of an
      investment banking unit catering to small and mid-size companies. Mr. Gothner
      serves on the Boards of Directors of Minds Island, LLC and Petals Decorative
      Accents, LLC. He holds a Bachelor of Arts from Columbia College and a Masters
      in
      International Affairs from Columbia University’s School of International
      Affairs.





**Recent
      Events - Resignations of Randolph A. Graves and Mark Allen**




On
      May
      16, 2005, Randolph A. Graves, Jr., resigned from his positions as Vice President
      and Director of the Company. 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.




53




On
      December 29, 2005, in connection with our sale of True To Form Limited, formerly
      our wholly-owned subsidiary, to Mark Allen, Mr. Allen tendered his resignation
      as an Executive Vice President and Director of the Company. 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.





**ITEM
              10.**
            **EXECUTIVE
                COMPENSATION**





The
      following table provides summary information concerning the compensation earned
      by our executive officers for services rendered in all capacities for, 2003,
      2004 and 2005. Other annual compensation in the form of perquisites and other
      personal benefits has been omitted as the aggregate amount of those perquisites
      and other personal benefits was less than $50,000 and constituted less than
      ten
      percent of the executive officers’ respective total annual salary and bonus.




**Summary
      Compensation Table**




**Annual
                Compensation**
            
            **Long-Term
                Compensation****Name
                and Position (1)**
            
            **Year**
            
            **Salary
                ($)**
            
            **Bonus
                ($) (1)**
            
            **Securities
                Underlying Options**Michael
                Sheppard (2)
              President,
                Chief Executive
              Officer
                and Chief Operations Officer
            
            
            2005
              2004
              2003
            
            $
              $
              $
            163,750
              158,000
              119,000
            
            
            —
              —
              —
            
            
            1,900,000
              300,000
              —Mark
                J. Allen (3)
              Executive
                Vice President
            
            
            2005
              2004
              2003
            
            $
                $
                $
            100,000
              50,000
              —
            
            
            —
              —
              —
            
            
            600,000
              300,000
              —Nino
                Doijashvili (4)
              Director
                of Technical Services
            
            
            2005
              2004
              2003
            
            $
              $
              $
            —
              108,875
              102,000
            
            
            —
              —
              —
            
            
            —
              —
              —


________________




(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.




(3)
            Mr.
                Allen resigned on December 29, 2005. Mr. Allen’s options were cancelled in
                connection with his resignation.




(4)
            Nino
                Doijashvili, Ph.D. served as our director of technical services until
                May
                2004.





*Option
      Grants in Last Fiscal Year*





**Option
      Grants in Last Fiscal Year**




**Name**
            
            **Number
                of Securities**
              **Underlying
                Options**
            **Percent
                of Total Options Granted to Employees in Fiscal
                Year**
            
            **Exercise
                Price**
            **Expiration
                Date**Michael
                Sheppard
            
            600,000
            
            $    
                0.05
            
            $   
                 0.05
            
            January
                29, 2015Michael
                Sheppard
            
            300,000
            
            $     0.04
            
            $    
                0.04
            
            August
                18, 2015Michael
                Sheppard
            
            1,000,000
            
            $ 0.0090
            
            $
                0.0090
            
            February
                8, 2015Mark
                J. Allen
            
            600,000
            
            $    
                0.05
            
            $    
                0.05
            
            January
                29, 2015




54




*Aggregate
      Option Exercises and Fiscal Year-End Option Values*





The
      following table provides information concerning stock options held at December
      31, 2005 by the executive officers named in the summary compensation table.




**Option
      Exercises in Last Fiscal Year and Year-End Option Values**




**Number
                of Securities**
              **Underlying
                Unexercised**
              **Options
                at FY-End (#)**
            
            **Value
                of Unexercised In-**
              **The-Money
                Options at**
              **FY-End
                ($)****Name**
            
            **Exercisable**
            
            **Unexercisable**
            
            **Exercisable**
            
            **Unexercisable**Michael
                Sheppard
            
            2,200,000
            
            0
            
            N/A
            
            N/A





**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),
      were 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
      of Directors**




Directors
      who are not employees of the Company are eligible to receive $1,000 per Board
      meeting attended, although we have never made any payments to our directors
      for
      attending meetings, 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 2003 and 2004.




55




**EQUITY
      COMPENSATION PLAN DISCLOSURE**




The
      following table provides information as of December 31, 2005 regarding shares
      authorized for issuance under our equity compensation plans, including
      individual compensation arrangements.




The
      equity compensation plans approved by our stockholders are our employee stock
      option plan and non-employee directors’ stock option plan. The equity
      compensation plans not approved by our stockholders are in the form of
      individual arrangements. ******




**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
                plans**Equity
                Compensation Plans Approved
              by
                Security Holders
            
            
            387,419
            
            
            $2.32
            
            
            1,612,581Equity
                Compensation Plans Not Approved
              by
                Security Holders
            
            
            1,600,000
            
            
            $0.039
            
            
            13,400,000**Total**
            
            
            1,987,419
            
            
            $0.33
            
            
            15,012,581










**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, 2004, 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.






**ITEM
              11.**
            **SECURITY
                OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                MANAGEMENT**





At
      the
      close of business on March 30, 2006, there were issued and outstanding
      280,451,437 shares of our common stock. The following table provides information
      regarding beneficial ownership of our common stock as of March 15, 2006
      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.




56




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 March
      27,
      2006.




**Shares
                Beneficially Owned****Name
                and Address of Beneficial Owner**
            
            
            **Outstanding**
            
            
            **Right
                to**
              **Acquire**
            
            
            **Total**
            
            
            **Percent**Randolph
                Graves (1)
            
            
            0
            
            
            300,000
            
            
            300,000
            
            
            *****George
                Bokuchava, Ph.D. (2)
            
            
            40,059
            
            
            25,000
            
            
            64,559
            
            
            *****Nino
                Doijashvili (3)
            
            
            5,444
            
            
            46,428
            
            
            51,372
            
            
            *****Timothy
                Robinson (4)
            
            
            0
            
            
            150,000
            
            
            150,000
            
            
            *Mark
                Allen
            
            
            0
            
            
            0
            
            
            0
            
            
            *Michael
                Sheppard
            
            
            0
            
            
            2,200,000
            
            
            2,200,000
            
            
            *Thomas
                L. Folsom
            
            
            0
            
            
            100,000
            
            
            100,000
            
            
            *K.
                Ivan F. Gothner
            
            
            0
            
            
            350,000
            
            
            350,000
            
            
            *All
                current directors and executive officers as a
              group
                (3 persons)
            
            
            0
            
            
            2,650,000
            
            
            2,650,000
            
            
            *


______________________


*  Represents
      beneficial ownership of less than 1.0%.





(1)
            Mr.
                Graves resigned from our company on May 16,
                2005.





(2)
            Mr.
                Bokuchava resigned from our company on May 31,
                2004.





(3)
            Mr.
                Doijashvili resigned from our company on May 31,
                2004.





(4)
            Mr.
                Robinson resigned from our company as an officer on May 31, 2004
                and as a
                director on July 1, 2004.





(5)
            Mr.
                Allen resigned from our company as an officer and director on December
                29,
                2005.




**ITEM
      12.   CERTAIN RELATIONSHIPS AND RELATED
      TRANSACTIONS**





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.




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, 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.
      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.




57




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 From, a private company wholly and controlled by
      one of our directors Mark Allen. In accordance with the terms of the Merger
      Agreement, on December 31, 2004.




· 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.




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.





58





**ITEM
              13.**
            **EXHIBITS.**




**Incorporated
                by Reference****Exhibit
                No.**
            **Description**
            **Filed
              with this Form 10-KSB**
            **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
            3.93.13
            Certificate
                of Designations, Preferences and Rights of Series H Convertible Preferred
                Stock
            
            10-Q
            October
                29, 2003
            3.1




59




**Incorporated
                by Reference****Exhibit
                No.**
            **Description**
            **Filed
              with this Form 10-KSB**
            **Form**
            **Filing
                Date**
            **Exhibit
                No.**


3.14
            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


4.13
            Non-negotiable
                2% Secured Convertible Promissory Note issued McNab LLC on October
                3, 2005
            
            8-K
            October
                3, 2005
            4.2




60




**Incorporated
                by Reference****Exhibit
                No.**
            **Description**
            **Filed
              with this Form 10-KSB**
            **Form**
            **Filing
                Date**
            **Exhibit
                No.**


10.1
            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
            10.410.13
            Second
                Securities Purchase Agreement dated January 31, 2005 between Global
                Matrechs, Inc. and Southridge Partners LP
            
            8-K
            February,
                2005
            10.1




61




**Incorporated
                by Reference****Exhibit
                No.**
            **Description**
            **Filed
              with this Form 10-KSB**
            **Form**
            **Filing
                Date**
            **Exhibit
                No.**


10.14
            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
            21.131.1
            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





62


**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, 2005 and December 31, 2004 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
                31,2005
            
            2004(i)
                Audit Fees
            
            $
            38,000
            
            $
            40,000(ii)
                Audit Related Fees
            
            $
            0
            
            $
            0(iii)
                Tax Fees
            
            $
            4,000
            
            $
            4,000(iv)
                All Other Fees
            
            $
            0
            
            $
            0





AUDIT
      FEES. Consists of fees billed for professional services rendered for the audit
      of Homecom Communications, Inc.’s financial statements and review of the interim
      consolidated 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-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
      2005 or 2004.





PRE-APPROVAL
      POLICIES AND PROCEDURES. The Company does not have an audit committee. The
      Board
      of Directors has approved Sherb & Company, LLP to serve as the Company’s
      outside accounting firm. It is the policy of the Company that all services
      provided by Sherb & Company, LLP shall be pre-approved by the Board of
      Directors. Sherb & Company, LLP 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 Sherb & Company, LLPC. 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 Sherb & Company, LLP 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.








63





**SIGNATURES**





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





**GLOBAL
                MATRECHS, INC.**Date:
                March 31, 2005
            By:
            /s/ Michael
                SheppardMichael SheppardTitle:
                  President, Chief Executive Officer,
                Chief
                  Operating Officer and acting Chief
                Financial
                  Officer





In
      accordance with the Exchange Act, 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:
                March 31, 2006
            By:
            /s/ Michael
                SheppardMichael SheppardTitle:
                  President, Chief Executive Officer,
                Chief
                  Operating Officer and acting Chief
                Financial
                  Officer (principal executive
                officer;
                  principal financial and accounting officer)





Date:
                March 31, 2006
            By:
            /s/ K.I.F.
                GothnerK.I.F. GothnerTitle:
                  Director





Date:
                March 31, 2006
            By:
            /s/ Thomas
                L. FolsomThomas L. FolsomTitle:
                  Director








64