**U.S.
      SECURITIES AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**


________________





**FORM
      10-KSB**


ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d)


OF
      THE
      SECURITIES EXCHANGE ACT OF 1934


________________





For
                the fiscal year ended June 30, 2006
            Commission
                file number 000-27545





**QUICK-MED
      TECHNOLOGIES, INC** **.**


----------------------------------------------


(Name
      of
      registrant as specified in its charter)





**Nevada**
            **98-0204736**(State
                or Other Jurisdiction of organization)
            (IRS
                Employer Identification Number)





**3427
      SW 42nd Way**


**Gainesville,
      Florida 32608**


**(352)
      379-0611**


(Address,
      including zip code, and telephone number,


including
      area code, of registrant’s principal executive offices)





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


None





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


Common
      Stock, $0.0001 par value





Check
      whether the registrant (1) filed all reports required to be filed by Section
      13
      or 15(d) of the Securities Exchange Act of 1934 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.
      Yes
      [X] No [ ]





Check
      if
      there is no disclosure of delinquent filers pursuant to Item 405 of Regulation
      S-B is not 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 further
      amendment to this Form 10-KSB. [ ]





The
      registrant’s revenues for its most recent fiscal year were $1,230,441.





The
      aggregate market value of the registrant’s voting stock held by non-affiliates
      of the registrant as of September 27, 2006 (based upon the closing price of
      $1.14 per share on September 25, 2006) was $6,214,701.





As
      at
      September 27, 2006 there were 30,221,215 shares of the registrant’s common stock
      issued and outstanding.




**DOCUMENTS
      INCORPORATED BY REFERENCE**


None











**QUICK-MED
      TECHNOLOGIES, INC.**





**ANNUAL
      REPORT**


**ON
      FORM 10-KSB**


**For
      the Year Ended June 30, 2006**





**INDEX**





Page


**PART
      I**





Item
                1.
            Description
                of Business
            1Item
                1A.
            Risk
                Factors
            12Item
                2.
            Description
                of Property
            16Item
                3.
            Legal
                Proceedings
            16Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            16





**PART
      II**





Item
                5.
            Market
                for Common Equity and Related Stockholder Matters
            17Item
                6.
            Management’s
                Discussion & Analysis of Financial
                Condition and Results of Operations
            20Item
                7.
            Financial
                Statements
            27Item
                8.
            Changes
                in and Disagreements with Accountants on Accounting
                & Financial Disclosure
            27





**PART
      III**





Item
                9.
            Directors,
                Executive Officers, Promoters and Control
                Persons;
              Compliance
                with Section 16(a) of the Exchange Act
            28Item
                10.
            Executive
                Compensation
            32Item
                11.
            Security
                Ownership of Certain Beneficial Owners and
                Management
            35Item
                12.
            Certain
                Relationships and Related Transactions
            36Item
                13.
            Exhibits
            37Item
                14.
            Principal
                Accountant Fees and Services
            38








Signatures
            
            39















**PART
      I**


**ITEM
                1.**
            **DESCRIPTION
                OF BUSINESS**







***This
      Form 10-KSB contains forward-looking statements based on our current
      expectations, assumptions and estimates and that involve risks and
      uncertainties. Any statements contained in this Form 10-KSB (including, without
      limitation, statements to the effect that we “estimate,” “expect,” “anticipate,”
“plan,” believe,” “may” or “will” or statements concerning potential or
      opportunity or variations thereof or comparable terminology or the negative
      thereof) that are not statements of historical fact should be construed as
      forward-looking statements. Actual results could differ materially and adversely
      from those projected or anticipated in the forward-looking statements as a
      result of a number of risks and uncertainties pertaining to our business,
      including, without limitation, those risks and uncertainties described in the
      section entitled “Risk Factors” in this Form 10-KSB. We undertake no obligation
      to revise or update any such forward-looking
      statements.***




***Unless
      specified otherwise, as used in this Form 10-KSB, the terms “we,” “us,” “our,”
the “Company” or “Quick-Med” refer to Quick-Med Technologies,
      Inc.***










***Corporate
      History***





We
      were
      incorporated in the State of Nevada on April 21, 1997 in the name of Above
      Average Investments, Ltd. to engage in any lawful corporate purpose. Other
      than
      issuing shares to its stockholders, Above Average Investments, Ltd. never
      commenced operations. In September 2000, Above Average Investments, Ltd. became
      a Securities and Exchange Commission Reporting Company 60 days following the
      voluntary filing of its Form 10-SB Registration Statement with the Securities
      and Exchange Commission. In March 2001, we acquired all of Quick-Med Technology,
      Inc.'s issued and outstanding shares of capital stock in exchange for 10,260,000
      shares of our common stock. Upon completion of the merger in February 2002,
      our
      name was changed to Quick-Med Technologies, Inc.





We
      have
      never been the subject of a bankruptcy, receivership or similar proceeding.





Our
      principal executive offices are located at 3427 SW 42 nd Way,
      Gainesville, Florida 32608. Our telephone number is (352) 379-0611.





***Business
      Development***





We
      are a
      life sciences company that develops proprietary technologies in the medical
      and
      consumer healthcare markets. Our two core technologies under development are:





**NIMBUSTM** (“NIMBUS”
      or "NIMBUS technology"), a family of polymers that are bio-engineered to have
      antimicrobial, super-absorbent, and other properties that can be used in a
      wide
      range of applications, such as wound dressings and apparel. We are seeking
      to
      use our NIMBUSTM technology in: (a) advanced wound care products and other
      medical devices; and (b) consumer products, including apparel and personal
      care.
      We believe that the size and growth characteristics of the antimicrobial market
      represent an attractive opportunity for the NIMBUS technology. Additionally,
      we
      believe there are no competing technologies on the market today that offer
      the
      unique combination of safety, efficacy and cost-effectiveness offered by NIMBUS.
      We have developed “proofs-of-principle” in several applications and are seeking
      to move these products to the commercialization stage. On September 18, 2006,
      we
      received a Phase II SBIR grant for continued work on an advanced wound dressing
      using the NIMBUSTM technology.





**MultiStat** **TM** (“MutltiStat”), a family of patented matrix metalloproteinase inhibitors
      (“MMPIs”) that we believe to have significant benefit in the maintenance,
      healing and repair of skin and eyes. Independent laboratories as well as our
      research show that MultiStat is effective in medical (wound care) and consumer
      (cosmetic) applications. MultiStat is currently being sold as a performance
      ingredient to several cosmetics companies via an agreement with Engelhard
      Corporation (recently acquired by BASF). MultiStat is also being evaluated
      as a
      post-injury treatment for mustard gas exposure, with the initial product
      currently being developed under a Cooperative Research and Development Agreement
      (CRADA) with the U.S. Army Medical Research Institute for Chemical
      Defense .





***Business
      Strategy***





Our
      business strategy is to further develop and execute commercialization strategies
      for each of our broad technologies. We will seek to generate revenue through
      four sources:





(1)
            Licenses
                of proprietary technology to industry partners;


(2)
            Contracts
                with government agencies;


(3)
            Sales
                of product (compounds); and,


(4)
            Research
                and development support agreements.





We
      expect
      that the majority of future revenue from NIMBUS will be generated via licenses,
      royalties and profit-sharing agreements. We believe that our intellectual
      property is the value driver and, as such, manufacturing, sales and distribution
      are and will be conducted either through client partners or
      outsourced.


1





***First
      Core Technology: NIMBUSTM***





NIMBUS
      refers to “Novel Intrinsically MicroBonded Utility Substrate” - a family of
      patents, techniques, and other intellectual property in which polymer chemistry
      is used to permanently bond biologically active molecules onto substrates.
      NIMBUS is produced by bonding a selection of polyquaternaries to various
      materials and can take many forms including: microspheres, sprayable
      suspensions, superabsorbent polymers, powders, derivatized mineral particles,
      and others. We seek to use low-cost processes by which typically inexpensive
      chemicals can be permanently bonded to create added value to end
      products.





·
            The
                NIMBUS technology has potential commercial applications spanning
                medical
                and consumer healthcare products. Choices of the substrate, the bonded
                molecules, or the method of bonding generate a range of products
                that can
                be modified to produce varying product attributes. By altering aspects
                of
                the formulation, the product can be made to be super-absorbent, have
                haemostatic properties, or serve as a drug delivery system. For example,
                it is capable of being used to add a second, slowly releasable ingredient
                to a substrate to permit more than one mode of action or property
                (e.g.,
                perfume, protease inhibitor, fungicide, or antibiotic).





·
            The
                raw materials cost of NIMBUS is lower than many other active ingredients
                used in healthcare today. Additionally, in wound care materials and
                other
                roll goods-based substrates, NIMBUS requires no more than standard
                textile
                or paper finishing equipment.





·
            The
                most deeply studied potential commercial application of NIMBUS is
                in
                medical devices where permanent bonding to various substrates can
                be
                performed using broadband microbicides that are highly effective,
                as
                verified by independent laboratories. In certain proto-type wound
                dressings, NIMBUS begins to eradicate bacteria immediately and is
                effective for seven days or more. Tested in a typical potential commercial
                application, NIMBUS killed 99.9999% of the bacteria or other microbes
                present in the environment .





·
            Third
                party and our research show that NIMBUS-treated articles are effective
                against MRSA (Methicillin-Resistant Staphylococcus Aureus)and
                VRE (Vancomycin-Resistant Enterococcus), two antibiotic-resistant
                organisms responsible for a significant and growing number of hospital
                and
                community-related infections. Other high bacterial kill levels have
                been
                demonstrated for contact lenses against Pseudomonas; in food preservation
                against bacteria that cause Listeria monocytogenes and Salmonella
                typhimurium; and in footwear protection against a wide range of other
                germs including Trichophyton mentagrophytes, a fungus that causes
                athlete’s foot.





·
            While
                lethal to most bacteria, studies performed by us and third party
                laboratories show that NIMBUS is not harmful to human cells. Independent
                laboratory tests have shown that NIMBUS is non-toxic, non-sensitizing
                and
                non-irritating to humans, using particular test methodologies.





·
            The
                NIMBUS technology permanently bonds the active agent to the substrate.
                This attribute is a source of differentiation from many competing
                technologies and gives NIMBUS potential advantages, including lower
                cost
                and the possible use in devices such as contact lenses, where leaching
                chemicals into the body may be an unacceptable medical
                risk.





A
      characteristic of NIMBUS medical devices relates to the reduced likelihood
      of
      bacteria to develop resistance to the microbicide employed - a growing concern
      in healthcare facilities. This characteristic results from the combined effect
      of (a) the mechanism by which bacteria are killed - by cell wall disruption
      and
      (b) the bonding of the microbicide to the substrate, which prevents
      concentrations of the active molecule from falling below minimum inhibitory
      levels.


2





Quick-Med
      is seeking to commercialize NIMBUS in key end-markets where we believe the
      technology provides either a solution to a defined market need or an opportunity
      to create attractive new products or product attributes. We have been in
      communication with potential clients or development partners in the following
      markets.





**Substrate**
            **Medical**
            **Consumer
                Healthcare**Cotton
                and cotton blends,
              including
                cotton, cotton-rayon blends, cotton-PET blends, cellulosic
                materials
            Wound
                dressings *
              Hospital
                gowns *
              Hospital
                bedding *
              Antimicrobial
                wipes
            Feminine
                protection
              Adult
                incontinence
              Diapers
              Wipes
              Underwear*Synthetics*
              including
                polyurethane, polypropylene, PE, PET, nylon, polycarbonates,
                silicones
            Wound
                tapes/films *
              Wound
                dressings *
              Sutures
                *
              Catheters
                *
            Contact
                lenses/cases *
              Toothbrushes
              Mattresses*Water/Oil-based
                Formulations*
            Hand
                sanitizer
              Skin
                care products
              Wound
                care gels *
            Hand
                sanitizer
              Contact
                lens solution *
              Skin
                care products





*
      denotes
      a medical device application that may require regulatory approval





We
      are
      initially focusing our NIMBUSTM technology on the following
      industries:




·
            *Wound
                Dressings and other Medical Devices*:
                Potential wound care products under development that use the NIMBUSTM
                technology have undergone proof-of-concept testing to demonstrate
                their
                desired characteristics, such as bacterial resistance or the ability
                to
                control bleeding.


·
            *Apparel*:
                Apparel products being developed that use the NIMBUSTM technology have
                undergone proof-of-concept testing to demonstrate desired characteristics
                such as resistance to odor causing bacteria and
                discoloration.





***Second
      Core Technology: MutilStatTM***





The
      MultiStat product line has been our primary source of revenue to date. MultiStat
      is a family of advanced, patented compounds and methods that have shown benefit
      in promoting the maintenance, healing and repair of skin and eyes. Both third
      party and Quick-Med research shows that MultiStat is effective in certain
      medical (wound care) and consumer (cosmetic) applications.





Matrix
      Metalloproteinases, or “MMPs”, are naturally occurring compounds in skin tissue.
      External or internal stimuli can trigger an overproduction of certain MMPs,
      which can produce chemical reactions within skin cells that induce adverse
      outcomes such as blistering, inflammation or accelerated collagen degradation.
      External triggers include prolonged sun exposure, as well as chemical burns
      from
      warfare agents such as mustard gas. Internal triggers include natural aging
      in
      which declining estrogen levels naturally inhibit MMPs and lead to accelerated
      skin wrinkling.





There
      are
      natural or synthetic compounds that safely inhibit MMP overproduction in the
      skin (MMP-inhibitors, or “MMPIs”). These MMPIs can be topically applied to
      mitigate the affects of triggering mechanisms. The bioscience of MMPI research
      includes the identification of safe compounds that individually or in
      combination yield a specific beneficial outcome. MultiStat represents our
      portfolio of patented compounds and techniques relating to MMP inhibition.
      MultiStat’s array of uses has been documented in a series of clinical findings
      by our scientists, third-party scientific laboratories, and in works published
      by other academic researchers.




3





**Pharmaceutical
      Applications**





Scientific
      studies have shown that MMP activity plays a major role in the deterioration
      of
      human tissue when exposed to chemical agents such as mustard gas. Illomastat,
      a
      member of the MultiStat family of patented compounds and techniques relating
      to
      MMP-inhibition, has been demonstrated to be safe and highly effective in
      treating mustard gas exposures based on efficacy studies conducted in Israel
      and
      the Netherlands by third-party scientific laboratories. We are seeking to
      develop Illomastat as a post-injury agent for mustard gas exposure.





In
      November 2000, we entered into a Cooperative Research and Development Agreement
      (“CRADA”) with the U.S. Army Medical Research Institute for Chemical Defense at
      Edgewood, Maryland, to develop a post-injury agent for mustard gas exposures
      to
      the eye and skin.





Other
      potential pharmaceutical applications for Illomastat include psoriasis, acne
      and
      chronic wounds.





***Cosmetics***





Based
      on
      clinical studies performed by us and by the Engelhard Corporation (now a unit
      of
      BASF), MultiStat has shown success in improving the appearance of fine facial
      lines and wrinkles associated with skin deterioration resulting from natural
      aging or sun damage. Additionally, MultiStat has been shown in the same clinical
      studies to have applications for other conditions, such as skin roughness or
      redness.





In
      September 2002, we announced an exclusive multi-year distribution agreement
      with
      Engelhard Corporation. This agreement provides for Engelhard Corporation to
      undertake product development and subsequent marketing and sales of
      MultiStat-related skin care products. Since 2005, through its agreement with
      Engelhard Corporation, products that have incorporated MultiStatTM technology
      have been commercialized through various skin care and anti-aging products
      sold
      to major cosmetics companies.





On
      August
      2, 2006, we restructured our agreement with Engelhard Long Island, Inc.
      (“Engelhard”), a wholly-owned subsidiary of BASF Catalysts LLC, with a Fourth
      Amendment to that certain Letter of Intent (“LOI”) dated February 1, 2006 and
      effective through April 28, 2006. The Fourth Amendment, effective as of June
      30,
      2006, extended the effective period of the LOI to August 1, 2007. The LOI amends
      certain terms included in the distribution agreement, in which we granted to
      Engelhard an exclusive license to develop and market our Ilomastat product
      (the
“Licensed Product”) for the field of over-the-counter anti-aging cosmetics and a
      nonexclusive license for the field of over-the-counter acne treatments and
      skin
      moisturizers in the cosmetics market. In consideration for this license, as
      amended by the LOI, we will receive monthly royalty payments based on a
      percentage of the net revenue Engelhard receives from sales of the Licensed
      Product but no less than annual minimum royalty payments equal to $1,140,000
      for
      the first two years, assuming the LOI is not terminated during such
      period.  In
      addition, we transferred all right, title and interest to the Engelhard
      intellectual property developed under the agreement held by us back to Engelhard
      in exchange for one lump payment of $166,500.





4





**Competitive
      Business Conditions**





The
      research and development pertaining to our technologies, which underlie our
      MMP-inhibitor (MultiStatTM), microbicide (NIMBUSTM) and potential future products,
      is extremely competitive and is characterized by rapid technological change.
      Many of our competitors have substantially greater financial, scientific, and
      human resources, and greater research and product development capabilities.
      In
      addition, many of our competitors have greater experience in marketing such
      technologies and products and greater potential to develop revenue streams.
      As a
      result, our competitors may be able to develop and expand their competing
      product offerings more rapidly, adapt to new or emerging technologies and
      changes in customer requirements more quickly, devote greater resources to
      marketing and sales of their products and adopt more aggressive pricing policies
      than we can.





Our
      competitors include any company that is involved in the development of active
      ingredients or catalyst molecules focused on our end markets. These may include
      for-profit companies as well as university, government or sponsored research
      organizations.





Specific
      examples of competition to our NIMBUSTM microbicidal technology and potential
      future products using that technology, include products utilizing fibers
      embedded with silver and/or copper ions to induce anti-bacterial and/or
      anti-fungal capabilities, or other microbicidal technologies. Competing
      companies developing or offering such products include:





·
            AgION
                Technologies, Inc.


·
            Microban
                International, Ltd.


·
            Aegis
                Environments





We
      will
      attempt to overcome the competitive advantages of our competitors by entering
      into co-development agreements with industry leaders in the potential markets
      with exclusivity clauses for future license agreements.





**Intellectual
      Property: Patents, and Exclusive License Patents**





Our
      strategy is to research and obtain original patents or, to the extent reasonably
      available, to license exclusive composition and relevant use patents related
      to
      its core technology. We believe that a comparatively strong intellectual
      property position can be a source of differentiation from competing
      products.





NIMBUSTM
      is covered by one issued U.S. patent, four issued foreign patents (Australia,
      China, Russia and Indonesia) and eight pending U.S. patents, as well as a number
      of international patent applications filed under the Patent Cooperation Treaty
      (PCT), a treaty that covers 125 countries and a number of foreign patent
      applications.





MultiStatTM
      is covered by seven issued U.S. patents, four issued foreign patents, two
      pending U.S. patents and two pending international patents.





Several
      of these patent applications are now under examination in the United States
      Patent and Trademark Office. Several additional patent applications are in
      the
      process of being readied for filing in 2006.





***Agreements
      with Employees and Consultants***





With
      the
      exception of Drs. Schultz and Batich discussed below, all of our employees
      and
      scientific consultants have signed agreements that assign to us all intellectual
      property rights to any inventions or other proprietary information in any area
      in which that person is working with us. These agreements do not provide for
      the
      payment of any royalties. Drs.  Schultz and Batich, who are on the
      faculty of University of Florida at Gainesville, are the only consultants who
      currently have any rights in any intellectual property that may be shared with
      us. Under the University of Florida policy, any rights obtained by Drs. Schultz
      and Batich are assigned to the University. Drs. Schultz and Batich may be paid
      a
      royalty by the University out of royalties that may be paid by us to University
      of Florida.





***Issued
      and Pending - U.S. & Foreign Patents***





We
      have
      filed or own joint rights to patent applications for:





**U.S.
      ISSUED PATENTS**





**Number**
            **Issued
                Date**
            **Expiry
                Date**
            **Description**5,183,900
            February
                1993
            November
                21, 2010
            Matrix
                Metalloprotease Inhibitors (MMPIs)5,189,178
            February
                1993
            November
                21, 2010
            Matrix
                Metalloprotease Inhibitors (MMPIs)5,239,078
            August
                1993
            November
                21, 2010
            Matrix
                Metalloprotease Inhibitors (MMPIs)5,270,326
            December
                1993
            November
                21, 2007
              (November
                21, 2010)
            Treatment
                of Tissue Ulceration5,773,438
            June
                1998
            June
                30, 2015
            Synthetic
                Matrix Metalloprotease Inhibitors (MMPIs) and Use
                Thereof5,892,112
            April
                1999
            April
                6, 2016
            Process
                for Preparing Synthetic Matrix Metalloprotease Inhibitors
                (MMPIs)6,713,074
            March
                2004
            June
                29, 2011
            Cosmetic
                Composition and Method7,045,673
                B1
            May
                16, 2006
            December
                8, 2019
            Instrinsically
                Bactericidal Absorbent Dressing and Method of
                Fabrication





The
      above
      table includes patents, which are jointly owned by us and an arm of The
      University of Florida, as well as patents that are licensed to us by Drs.
      Galardy and Grobelny. Maintenance of patent protection through the expiration
      date is contingent upon payment of fees at certain intervals. All are active
      as
      August 16, 2006.








**INTERNATIONAL
      ISSUED PATENTS**





**Number**
            **Country(ies)**
            **Expiry
                Date**(2)EPO
                558681(1)
            Europe
                (Germany, Spain, France, Great Britain, Italy)
            November
                21, 2011EPO
                558648(1)
            Europe
                (Germany, France, Great Britain, Italy)
            November
                21, 20111971367
            Japan
            November
                21, 2011652016
              773532
            Australia
              Australia
            November
                21, 2011
              December
                8, 2019004160
            Russia
            December
                8, 20192096223
              99814229.8
            Canada
              China
            November
                21, 2011
              December
                8, 2019WOO
                2001 01469
            Indonesia
            December
                8, 2019





Notes:


(1)
            Issued
                by the European Patent Office. Registered in Germany, France, Great
                Britain, and Italy.


(2)
            Maintenance
                of patent protection through the expiration date is contingent upon
                payment of yearly fees. All are active as of August 16,
                2006.








**PENDING
      PATENT APPLICATIONS - UNITED STATES**








§
            Absorbent
                Materials CovalentlyBonded, Non-Leachable Polymeric Antimicrobial
                Surfaces
                and Methods for Preparation.





§
            Cosmetic
                Composition and Method





§ Composition  and
      Method for Minimizing or Avoiding The Adverse Effects of Vesicants





§
            Materials
                and Methods for Treating Lumber and
                Wood





§
            Improved
                Antifungal Gypsum Board*





§
            Silicates
                and Other Oxides with Bonded Antimicrobials
                Polymers*





§
            Controlled
                Release of Biologically Active Substances From Select
                Substrates





§
            Method
                of Attaching an Antimicrobial Compound to the Surface of a
                Substrate





§
            Disinfectant
                with Prolonged Activity Based on Alcohol-Soluble Quaternary Ammonium
                Copolymers





§
            Controlled
                Release Wound Dressing Based on a Polyelectrolyte Network using
                Carboxymethyl Cellulose





*
      NOTE:  United
      States filing imputed from designation in International Patent Application
      filed
      under the Patent Cooperation Treaty.


5





**PENDING
      PATENT APPLICATIONS - INTERNATIONAL**





§
            Intrinsically
                Bactericidal Absorbent Dressing and Method of
                Fabrication





§
            Absorbent
                Materials Covalently-Bonded, Non-Leachable Polymeric Antimicrobial
                Surfaces and Methods for
                Preparation.





§
            Cosmetic
                Composition and Method





§
            Composition
                and Method for Minimizing or Avoiding the Adverse Effects of
                Vesicants





§
            Materials
                and Methods for Treating Lumber and
                Wood





§
            Synthetic
                Matrix Metalloprotease Inhibitors and Uses
                Thereof





For
      all
      U.S. patents, the Inventor(s) is/are automatically the Applicant(s). For all
      foreign patents pertinent here, the Assignee(s), if any, is/are automatically
      the Applicant(s). Where both we and the University of Florida are mentioned,
      it
      is because both own the invention jointly as Assignees.





Our
      business and competitive position are dependent upon our ability to protect
      our
      proprietary technologies. Despite our efforts to protect our proprietary rights,
      unauthorized parties may attempt to obtain and use information that we regard
      as
      proprietary. We will rely on patent, trade secret and copyright law and
      nondisclosure and other contractual arrangements to protect such proprietary
      information. We will file patent applications for our proprietary methods and
      devices which we believe are patentable.





There
      can
      be no assurance that others will not independently develop substantially
      equivalent proprietary information and techniques or otherwise gain access
      to
      our proprietary information, that such information will not be disclosed or
      that
      we can effectively protect our rights to unpatented trade secrets or other
      proprietary information.





There
      can
      be no assurance that others will not obtain patents or other legal rights that
      would prevent us from commercializing our technologies in the United States
      or
      other jurisdictions.




There
      can
      be no assurance that our technologies will not be subject to environmental
      or
      other regulation that would impede their adoption and commercialization in
      the
      United States or other jurisdictions.





Our
      strategy is to obtain original patents or, to the extent reasonably available,
      exclusive composition and use licenses to patents relating to core technologies
      and their use in targeted applications.


6





**Patent
      Related Agreements**





***University
      of Florida***




On
      December 3, 2002, we entered into a licensing agreement with University of
      Florida that will give us exclusive worldwide rights for the manufacturing,
      marketing, and distribution of our NIMBUSTM and topical Illomastat technologies.
      The license, which covers both awarded patents and patent applications, builds
      on intellectual property already owned by us, that includes, non-exclusive
      rights to these same technologies or other rights obtained through prior
      agreements. The agreement was amended to extend the date of the
      commercialization of products to the retail customer for the group of licensed
      patents to December 31, 2006, unless the delay is caused by governmental
      regulatory agency, including but not limited to the Food and Drug
      Administration, in which case we shall be afforded the opportunity to toll
      the
      December 31, 2006 date for a period equal to the period during which such
      regulatory review is diligently prosecuted by us.





We
      have
      executed a license agreement with University of Florida at Gainesville, DermaCo,
      Inc., Dr. R. Galardy and Dr. D. Grobelny to practice certain rights under
      patents relating to a family of MMPIs. We are using these rights to develop
      both
      the cosmetic anti-aging products and vesicant skin treatment products. The
      United States of America and foreign patent rights, including but not limited
      to
      Germany, Spain, France, United Kingdom, and Italy have been licensed to us
      for
      these applications.





***University
      of Michigan***




DermaCo,
      Inc.("DermaCo") was a company formed by  University of Michigan to
      commercialize its patent estate in MMPI technology.  In April 2005, 
University of Michigan recovered its patent estate from DermaCo, and we entered
      into a license directly with  University of Michigan allowing us to
      practice the key photo- and natural-aging use patents for
      Ilomastat.




***Other
      Patent Related Agreements***




We
      also
      have an agreement with Engelhard Corporation (now a unit of BASF) that provides
      Engelhard exclusive worldwide right to develop and market certain products
      relating to skin care that employ our MultistatTM family of MMPIs.





***Government
      Regulation***





The
      research and development, manufacture, and marketing of human pharmaceutical
      and
      diagnostic products and devices are subject to regulation, in the United States
      primarily by the Food and Drug Administration (“FDA”), and by comparable
      authorities in other countries. These national agencies and other federal,
      state, and local entities regulate, among other matters, research and
      development and the testing, manufacturing, safety, handling, effectiveness,
      labeling, storage, record keeping, approval, advertising, and promotion of
      the
      products like those which may employ the NIMBUS technology.


7





Failure
      to comply with applicable regulatory requirements can result in the refusal
      by
      regulatory agencies to approve product licensing or the revocation of approvals
      previously granted. Non-compliance can also result in fines, criminal
      prosecution, recall or seizure of products, total or partial suspension of
      production, or refusal to enter into additional contracts.





Any
      regulatory approvals that are received for a product may be subject to
      limitations on approved uses for the product. After obtaining marketing approval
      for any product, the manufacturer and the manufacturing facilities for that
      product will be subject to continual review and periodic inspections by the
      FDA
      and other regulatory authorities. If previously unknown problems with the
      product or with the manufacturer or facility are discovered, restrictions may
      be
      imposed on the product or manufacturer, including an order to withdraw the
      product from the market. If we, our development partners, clients or any
      contract manufacturers we choose to engage, fail to comply with applicable
      regulatory requirements, we may be fined, suspended or subject to withdrawal
      of
      regulatory approvals, product recalls, seizure of products, operating
      restrictions and criminal prosecution.




We
      work
      with a law firm specializing in regulatory affairs with respect to the
      pharmaceutical, cosmetic, and medical device industries. This firm will be
      able
      to assist us with the following regulatory activities when required:





·
            Regulatory
                Strategy and Liaison with the FDA;


·
            Non-clinical
                and clinical program
                assessment/development


·
            Non-clinical
                and clinical protocol review/monitoring of
                studies;


·
            Regulatory
                affairs management/guidance;


·
            Product
                development and launch strategy;


·
            Validation
                of methods/processes;


·
            Product
                development strategies/assessment;


·
            Product
                compliance; and


·
            Label
                and labeling compliance





***Food
      and Drug Administration***





Many
      of
      the end-use products incorporating or applying our technology would be regulated
      in the U.S. as medical devices by the FDA. The Agency’s regulations govern,
      among other things: pre-clinical testing; product design and development;
      pre-market clearance or approval; advertising and promotion; labeling;
      manufacturing; product import/export; storage; record keeping; reporting of
      adverse events; corrective actions and removals; recalls; and
      distribution.





Unless
      an
      exemption applies, each medical device to be commercially distributed in the
      United States required either a prior 510(k) clearance or prior pre-market
      approval (“PMA”) from the FDA. The FDA classifies medical devices into one of
      three classes, depending on the degree of risk associated with the device and
      the extent of controls that are needed to ensure safety and effectiveness.
      Devices deemed to pose the least risk are placed in Class I. Intermediate risk
      devices, or Class II devices, in most instances require the manufacturer to
      submit to the FDA a pre-market notification, requesting authorization for
      commercial distribution, known as 510(k) clearance, and may subject the device
      to special controls, such as performance standards, guidance documents specific
      to the device, or post-market surveillance. Most Class I and some low-risk
      Class
      II devices are exempted from this 510(k) requirement. Devices deemed by the
      FDA
      to pose the greatest risk, such as life-sustaining, life-supporting, or
      implantable devices, or a device deemed to be not substantially equivalent
      to a
      previously cleared 510(k) device, are placed in Class III. In general, a Class
      III device cannot be marketed in the U.S. unless the FDA approves the device
      after submission of a PMA. The FDA can also impose restrictions on the sale,
      distribution, or use of devices at the time of their clearance or approval,
      or
      subsequent to marketing.


8





**510(k)
      Clearance Pathway**





A
      510(k)
      pre-market notification is submitted to the FDA to demonstrate that the new
      device is “substantially equivalent” to a previously cleared 510(k) device or a
      device that was in commercial distribution before May 29, 1976 (or to a pre-1976
      Class II device for which the FDA has not yet called for the submission of
      PMAs). Such devices are deemed to be “predicate devices” for future
      applications. The FDA attempts to respond to a 510(k) within 90 days of
      submission, but the response may be a request for additional information or
      data, sometimes including clinical data. As a practical matter, 510(k) clearance
      can take significantly longer than 90 days, potentially up to a year or more.
      If
      the FDA determines that the device, or its intended use, is not substantially
      equivalent to a previously cleared device or use, the FDA will place the device,
      or the particular use of the device, into Class III.





After
      a
      device receives 510(k) clearance for a specific intended use, any modification
      that could significantly affect its safety or effectiveness, or that would
      constitute a major change in its intended use, design, or manufacture, requires
      a new 510(k) clearance or a PMA. The FDA requires each manufacturer to make
      this
      determination initially, but the FDA can review any such decision and can
      disagree with a manufacturer’s determination. If the FDA disagrees with a
      manufacturer’s determination that a new clearance or approval is not required
      for a particular modification, the FDA can insist that the manufacturer cease
      marketing and/or recall the modified device until 510(k) clearance or pre-market
      approval is obtained.





**Pre-Market
      Approval Pathway**





A
      PMA
      must be submitted if the device cannot be cleared through the 510(k) process.
      The PMA process is much more demanding than the 510(k) pre-market notification
      process. A PMA must be supported by extensive data and information including,
      but not limited to, technical, pre-clinical, clinical, manufacturing and
      labeling to establish the safety and effectiveness of the device to the FDA’s
      satisfaction. A PMA usually also requires a substantial application fee (up
      to
      approximately $280,000 as of October 1, 2006).





After
      the
      FDA determines that a PMA is complete, the agency accepts the application and
      begins an in-depth review of the submitted information. The FDA, by statute
      and
      regulation, has 180 days to review an accepted PMA, although the review
      generally occurs over a significantly longer period of time, and can take up
      to
      several years. During this review period, the FDA may request additional
      information or clarification of information already provided. Also, during
      the
      review period, an advisory panel of experts from outside FDA may be convened
      to
      review and evaluate the application and provide recommendations to the FDA
      as to
      the approvability of the device. In addition, the FDA will conduct a
      pre-approval inspection of the manufacturing facility to ensure compliance
      with
      the Quality System Regulations. New PMA applications or supplemental PMAs are
      required for significant modifications to the manufacturing process, labeling,
      use and design of a device that is approved through the PMA process. PMA
      supplements often require submission of the same type of information as a PMA,
      except that the supplement is limited to information needed to support any
      changes from the device covered by the original PMA and may not require as
      extensive clinical data or the convening of an advisory panel.





***Environmental
      Protection Agency ("EPA")***





The
      EPA
      regulates, among other things, antimicrobial products that are intended to
      destroy, prevent, repel, or mitigate any microorganism declared by EPA to be
      a
“pest” pursuant to its authority under the Federal Insecticide, Fungicide, and
      Rodenticide Act (“FIFRA”). Microorganisms declared to be pests by EPA are “any
      fungus, bacterium, virus, or other microorganisms, except for those on or in
      living man or other living animals and those on or in processed food or
      processed animal feed, beverages, drugs (as defined in sec. 201(g)(1) of the
      Federal Food, Drug, and Cosmetic Act (“FFDCA”)) and cosmetics (as defined in
      FFDCA sec. 201(i)). 40 C.F.R. § 152.5(d). The principal EPA requirement is
      that antimicrobial products subject to EPA’s jurisdiction under FIFRA be
“registered” for the intended use under Section 3 of FIFRA. States also require
      registration of such products under state law. EPA registration requires among
      things the submission of data and information sufficient to allow EPA to make
      a
      determination that the product will perform its function without unreasonable
      adverse effects on health or the environment.


9








A
      number
      of the NIMBUS applications will require FIFRA registration for the specific
      end-use application. The major component of NIMBUS is currently registered
      with
      EPA by a third-party for certain unrelated uses, and we intend, in collaboration
      with strategic corporate partners, to obtain our own EPA and state registrations
      for NIMBUS for antimicrobial use. After the registrations are secured, articles
      treated with the NIMBUS technology will not be required to be registered
      separately with EPA or the states, provided the antimicrobial claims made for
      such articles are limited to the control of odor-causing bacteria or other
      spoilage organisms. The intended use of NIMBUS-treated articles for the control
      of pathogenic organisms will require that the article itself be registered
      with
      EPA in those cases where the treated article falls under EPA jurisdiction.
      There
      are currently no articles treated with any antimicrobial that are registered
      by
      EPA for use against pathogenic organisms.




***Distribution
      of Technologies /Future Products***





Because
      we plan for industry partners in the medical and consumer healthcare markets
      to
      market and distribute co-developed products or products that incorporate our
      technologies, we will not directly distribute such products. Instead, we will
      rely upon our industry partners to utilize their advertising, name recognition,
      and other marketing techniques to promote such products or products that
      incorporate our technologies.





***Customers***




Because
      our technologies are intended to be used in potentially widely used products
      that are used by the general public, such as cosmetic anti-aging products,
      wound
      care products, apparel and personal care, we do not anticipate becoming
      dependent upon a few customers; however, to the extent that we enter into
      agreements with industry partners upon which we will become dependent for the
      marketing and distribution of such products, should any such agreements be
      terminated for any reason, our potential revenues and operations will be
      negatively impacted.


10





**Employees**




We
      have
      eight (8) full time employees consisting of:





·
            Our
                President, who directs our operations and our business development
                projects and executes our business strategy;


·
            Three
                Senior Research Scientists, who are responsible for testing and also
                participates in our product development
                projects;


·
            A
                Director of Research and Business Development in Medical Devices,
                who is
                responsible for business development in the wound care
                industry.


·
            A
                Research Scientist, who is responsible for assisting the senior
                research scientist with testing and product development projects;
                and


·
            A
                Product Development Engineer, who assists the research scientists
                with the
                product development projects.


·
            A
                Microbiologist, who conducts the microbiological testing and assists
                in
                developing the applications of our technologies.





We
      also
      utilize several consulting scientists with PhDs in their fields and several
      part
      time employees to provide the necessary expertise in performing testing and
      participating in certain of our development projects.





Additionally,
      we utilize a full time consulting scientist who holds a doctorate in Physical
      Chemistry, who directs our research and development.





**Cost
      of Compliance with Environmental Laws**




Because
      our potential products will be manufactured and sold by third parties, we are
      not directly subject to environmental laws and do not directly incur costs
      related to compliance.





**Research
      and Development**




During
      our fiscal year ended June 30, 2006, we spent $865,388 on research and
      development. During our 2005 fiscal year, we spent $579,034 on research and
      development. We intend to continue our research and development efforts during
      the current 2007 fiscal year.





**Reports
      to Security Holders**




We
      are
      subject to the informational requirements of the Securities Exchange Act of
      1934. Accordingly, we file annual, quarterly, and other reports and information
      with the Securities and Exchange Commission. Our filings are available to the
      public from commercial document retrieval services and the Internet website
      maintained by the Securities and Exchange Commission at http:// **www.sec.gov** .


11





**ITEM
      1A.**  **RISK
      FACTORS**





An
      investment in the shares of our common stock involves a substantial risk of
      loss. You should carefully read this entire report and should give particular
      attention to the following risk factors. You should recognize that other
      significant risks may arise in the future, which we cannot foresee at this
      time.
      Also, the risks that we now foresee might affect us to a greater or different
      degree than expected. There are a number of important factors that could cause
      our actual results to differ materially from those indicated by any
      forward-looking statements in this document. These factors include, without
      limitation, the risk factors listed below and other factors presented throughout
      this document and any other documents filed by us with the Securities and
      Exchange Commission.





***Our
      independent registered public accounting firm has issued a going concern opinion
      on our audited financial statements for the fiscal years ended June 30, 2006
      and
      2005 because, during those periods, we experienced recurring losses and negative
      cash flows from operations as well as a net capital deficiency at June 30,
      2006
      and 2005. These matters raise substantial doubt about our ability to continue
      as
      a going concern.***





We
      have
      been dependent primarily on private placements of our equity securities and
      stockholder loans to fund our operations, including research and development
      and
      efforts to license our products. Such funding may not be available to us when
      needed, on commercially reasonable terms, or at all. If we are unable to obtain
      additional financing if needed, we will likely be required to curtail our
      operating plans and possibly cease our operations. In addition, any additional
      equity financing may involve substantial dilution to our then-existing
      stockholders.





***We
      have a history of significant losses and we may never achieve or sustain
      profitability. If we are unable to become profitable, our operations will be
      adversely effected.***





We
      have
      incurred annual operating losses since our inception and our operations have
      never been profitable. At June 30, 2006, we had an accumulated deficit of
      ($14,190,005). Our gross revenues for the years ended June 30, 2006 and 2005,
      were $1,230,441 and $181,723 with losses from operations of ($1,636,697) and
      ($1,853,659) and net losses of ($1,701,064) and ($1,927,343) respectively.
      There
      can be no assurance that we will ever become profitable.





***We
      have risks associated with our dependence on third party developers to
      commercialize our technology that could have a material adverse effect on our
      business, financial condition and results of
      operations.***





We
      depend
      upon third parties to develop our products. The inability of a developer to
      make
      our products in a timely manner, including as a result of local financial market
      disruption which could impair the ability of such developers to finance their
      operations, or to meet quality standards, could cause us to miss the delivery
      date requirements of to their customers for those items, which could result
      in
      cancellation of orders, refusal to accept deliveries or a reduction in purchase
      prices, any of which could have a material adverse effect on our financial
      condition and results of operations.


12





For
      instance, Engelhard (a unit of BASF) develops and commercializes our MultiStat
      technology pursuant to a product development and distribution agreement, whereby
      it formulates our proprietary compound to specifications as ordered by cosmetic
      companies. Engelhard makes these formulations (“actives”) in kilograms
      containing our proprietary compound and ships them to cosmetic customers. They,
      in turn, will mix the actives in their formulations and sell the products to
      the
      end users. Any event that materially and adversely affects Engelhard’s ability
      or willingness to develop such technology will affect our revenues.





***Our
      intellectual properties may become obsolete if we are unable to stay abreast
      of
      technological developments.***





The
      biomedical industry is characterized by rapid and continuous scientific and
      technological development. If we are unable to stay abreast of such
      developments, our technologies may become obsolete. We lack the substantial
      research and development resources of some of our competitors. This may limit
      our ability to remain technologically competitive.





Other
      companies could create a technology that competes effectively with our NIMBUS
      and MultiStat technologies, and we may be unable to maintain our existing,
      or
      capture additional, market share in our markets. Based upon our review of the
      industry, we are unaware of any competition that markets a technology that
      is
      similar to our technologies today. Nonetheless, our intended markets generally
      are dominated by very large corporations (or their subsidiaries), which have
      greater access to capital, manpower, technical expertise, distribution channels
      and other elements which would give them a competitive advantage over us were
      they to begin to compete directly against us. It is possible that these and
      other competitors may implement new, advanced technologies before we are able
      to, thus affecting our ability to license our intellectual properties at
      profitable rates.





We
      cannot
      assure investors that we will be able to achieve the technological advances
      to
      remain competitive and profitable, that new intellectual properties will be
      researched, tested and developed, that anticipated markets will exist or develop
      for our technologies, or that any product or services incorporating our
      intellectual properties will not become technologically obsolete.





***We
      are dependent on our patents and other intellectual property right protections.
      The failure to obtain patent protection could have a material adverse effect
      on
      our business, financial condition and results of
      operations.***





We
      have
      employed proprietary technologies to license our intellectual properties. We
      seek to protect our intellectual property rights through a combination of patent
      filings, trademark registrations, confidentiality agreements and inventions
      agreements. However, no assurance can be given that such measures will be
      sufficient to protect our intellectual property rights. If we cannot protect
      our
      rights, we may lose our competitive advantage. Moreover, if it is determined
      that our products infringe on the intellectual property rights of third parties,
      we may be prevented from marketing our intellectual properties.





The
      failure to protect our patents, trademarks and trade names, may have a material
      adverse effect on our business, financial condition and operating results.
      Litigation may be required to enforce our intellectual property rights, protect
      our trade secrets or determine the validity and scope of proprietary rights
      of
      others. Any action we take to protect our intellectual property rights could
      be
      costly and could absorb significant amounts of our management’s time and
      attention. In addition, as a result of any such litigation, we could lose any
      proprietary rights we have. If any of the foregoing occurs, we may be unable
      to
      execute our business plan and you could lose your investment.


13


***Our
        business is dependent upon proprietary intellectual property rights, including
        rights licensed from third parties, over whom we have no control.***
 
 We
        do not
        own some of the patent rights to NIMBUS or MultiStat but rather license these
        patent rights from third parties over whom we have no control. Our license
        rights may be diluted or compromised if they fail to vigorously pursue patent
        infringement actions. Our competitive advantage would be lost if these patents
        were found to be invalid in the jurisdictions in which we license or plan
        to
        license our technologies. In addition, our revenues would be materially
        adversely affected if our licensed intellectual property were found to infringe
        the intellectual property rights of others. No assurance can be given that
        any
        measure we implement will be sufficient to protect our intellectual property
        rights. If we cannot protect our rights, we may lose our competitive advantage.
        There is no assurance that any of these protections can be maintained or
        that
        they will afford us a meaningful competitive advantage. Moreover, if it is
        determined that our licensed technologies infringe on the intellectual property
        rights of third parties, we may be prevented from selling or licensing our
        technologies.





***We
      depend on key personnel in a competitive market for skilled employees, and
      failure to retain and attract qualified personnel could substantially harm
      our
      business.***





We
      believe that our future success will depend in large part on our ability to
      attract and retain highly skilled scientific, technical and management
      personnel. If we are unable to hire the necessary personnel, the development
      of
      our business will likely be delayed or prevented. Competition for these highly
      skilled employees is intense. As a result, we cannot assure you that we will
      be
      successful in retaining our key personnel or in attracting and retaining the
      personnel we require for expansion.




***We
      may be liable for products liability claims for which we have no
      insurance.***





Although
      we do not manufacture our products and the partners that we license our
      technologies to have their own products liability insurance coverage (under
      which we are covered or indemnified against such liabilities), we may be sued
      for products liability if products incorporating our patented technologies
      injure the end user. In the event that we are sued on this basis, liability
      claims could require us to spend significant time and money in litigation and
      pay significant damages that are not covered by insurance. As a result, any
      of
      these claims, whether or not valid or successfully prosecuted, could have a
      material adverse effect on our business and financial results.





***Failure
      to repay our loan obligations may severely impair our business operations,
      assets and your investment in the Company.***





If
      we are
      unable to successfully repay or restructure loans from our Chairman of the
      Board, or our other outstanding liabilities as they become due, we may have
      to
      liquidate our business and undertake any or all the steps outlined below:





·
            Significantly
                reduce, eliminate or curtail our business, operating and research
                and
                development activities so as to reduce operating
                costs;





·
            Sell,
                assign or otherwise dispose of our assets, if any, to raise cash
                or to
                settle claims by creditors, including our Chairman of the
                Board;





·
            Pay
                our liabilities in order of priority, if we have available cash to
                pay
                such liabilities;





·
            If
                any cash remains after we satisfy amounts due to our creditors, distribute
                any remaining cash to our stockholders in an amount equal to the
                net
                market value of our net assets;





·
            File
                a Certificate of Dissolution with the State of Nevada to dissolve
                our
                corporation and close our business;





·
            Make
                the appropriate filings with the Securities and Exchange Commission
                so
                that we will no longer be required to file periodic and other required
                reports with the Securities and Exchange Commission, if, in fact,
                we are a
                reporting company at that time; and





·
            Make
                the appropriate filings with the National Association of Security
                Dealers
                to affect a delisting of our stock.


14





***We
      have not paid cash dividends and it is unlikely that we will pay cash dividends
      in the foreseeable future. Investing in our securities will not provide you
      with
      income.***





We
      plan
      to use all of our earnings, to the extent we have earnings, to fund our
      operations. We do not plan to pay any cash dividends in the foreseeable future.
      We cannot guarantee that we will, at any time, generate sufficient surplus
      cash
      that would be available for distribution as a dividend to the holders of our
      common stock. You should not expect to receive cash dividends on our common
      stock.





***We
      have the ability to issue additional shares of our common stock, without asking
      for stockholder approval, which could cause your investment to be
      diluted.***





Our
      Articles of Incorporation currently authorize the Board of Directors to issue
      up
      to 100,000,000 shares of common stock. The authority of the Board of Directors
      to issue shares of common stock, or warrants or options to purchase shares
      of
      common stock, is generally not subject to stockholder approval. Accordingly,
      any
      additional issuance of our common stock may have the effect of further diluting
      your investment.





***We
      may raise additional capital through a securities offering that could dilute
      your ownership interest.***





We
      require substantial working capital to fund our business. If we raise additional
      funds through the issuance of equity, equity-related or convertible debt
      securities, these securities may have rights, preferences or privileges senior
      to those of the holders of our common stock. The issuance of additional common
      stock by our management will also have the effect of further diluting the
      proportionate equity interest and voting power of holders of our common
      stock.





***The
      market for our common stock is volatile. This affects both the ability of our
      investors to sell their shares, as well as the price at which they are able
      to
      sell their shares.***





The
      market price for our common stock is extremely volatile and is significantly
      affected by factors such as reports written by third parties, over whom we
      have
      no control, about our business and sales of large amounts of our common stock.
      Furthermore, in recent years the stock market has experienced extreme price
      and
      volume fluctuations that are unrelated to the operating performance of the
      affected companies. These volatile conditions may make it difficult for you
      to
      sell our common stock at a price that is acceptable to you.





***There
      is a limited public market for our common stock and our stockholders may be
      unable to liquidate their shares.***





Our
      common stock is listed on the Over-the-Counter Bulletin Board, and there is
      a
      limited volume of sales, thus providing limited liquidity for our shares. As
      a
      result, stockholders may be unable to sell their shares in a timely
      manner.


15





***Our
      executive officers and directors control a large percentage of our common stock,
      which allow them to control matters submitted to stockholders for
      approval.***





Our
      executive officers and directors (and their affiliates), in the aggregate,
      own
      approximately 83% of our outstanding common stock, and a substantial majority
      of
      our outstanding voting stock. Therefore, our officers and directors have the
      ability to decide the outcome of matters submitted to our stockholders for
      approval (including the election and removal of directors and any merger,
      consolidation or sale of all or substantially all of our assets) and to control
      our management and affairs. This concentration of ownership may have the effect
      of entrenching management and delaying, deferring or preventing a change in
      control, impede a merger, consolidation, takeover or other business combination
      or discourage a potential acquirer from making a tender offer or otherwise
      attempting to obtain control, which in turn could have an adverse effect on
      the
      market price of our common stock.





**ITEM
                2.**
            **DESCRIPTION
                OF PROPERTY**





Our
      corporate headquarters is located at 3427 SW 42 nd Way,
      Gainesville, Florida. This 3,800 square foot premises is composed of two offices
      and an equipped laboratory. We pay monthly lease payments of $1,532 and our
      lease expires in March 2007.





In
      accordance with a verbal agreement between our President and us, we lease and
      occupy 500 square feet of office space at the residence of our President in
      Boca
      Raton, Florida, which we use for administrative purposes. This space is provided
      to us at a fixed gross rental rate of $669 per month by our President. This
      lease has a month to month term.





We
      have
      invested from inception to date approximately $20,000 for leasehold improvements
      and equipment for our laboratory. Our offices and laboratory facilities are
      in
      good condition and are sufficient to conduct our operations.





We
      do not
      own real estate at this time and we have no agreements to acquire any
      properties.





**ITEM
                3.**
            **LEGAL
                PROCEEDINGS**




We
      are
      subject to disputes and litigation in the ordinary course of our business.
      None
      of these matters, in the opinion of management, is material or likely to result
      in a material adverse effect on us based upon information available to us at
      this time.





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




Not
      applicable, as no matters were submitted to a vote of our security holders
      during the fourth quarter of the fiscal year 2006.


16





**PART
      II**





**ITEM
                5.**
            **MARKET
                FOR COMMON EQUITY AND RELATED STOCKHOLDER
                MATTERS**





**Market
      Information**


Our
      common stock began trading on September 4, 2002 on the OTC Bulletin Board under
      the symbol “QMDT”. The following table sets forth the range of high and low
      closing sale price per share obtained from www.stockwatch.com as reported by
      the
      OTC Bulletin Board for our common stock for the fiscal quarters indicated.
      The
      OTC Bulletin Board quotations represent quotations between dealers without
      adjustment for retail mark-up, markdowns or commissions and may not represent
      actual transactions.








Year
                Ended 2006**High**
            **Low**Fourth
                Quarter
            $2.35
            $1.15Third
                Quarter
            $2.55
            $0.66Second
                Quarter
            $1.08
            $0.50First
                Quarter
            $1.11
            $0.75








Year
                  Ended 2005**High**
              **Low**Fourth
                  Quarter
              $0.90
              $0.66Third
                  Quarter
              $0.88
              $0.51Second
                  Quarter
              $0.87
              $0.13****First
                  Quarter
              $0.27
              $0.12











**Holders**




As
      of
      June 30, 2006, there were 67 holders of record of our common stock. We have
      one
      class of common stock, $0.0001 par value, outstanding.





**Dividends**




We
      have
      not declared or paid any cash dividends on our common stock since inception.
      We
      intend to retain our future earnings, if any, in order to finance the expansion
      of our business and we do not anticipate that any cash dividends will be paid
      in
      the foreseeable future. Our future dividend policy will depend on our earnings,
      capital requirements, expansion plans, financial condition and other relevant
      factors.





**Penny
      Stock Considerations**




Our
      shares are "penny stocks" which term is generally defined in the Securities
      Exchange Act of 1934 as equity securities with a price of less than $5.00.
      Our
      shares may be subject to rules that impose sales practice and disclosure
      requirements on broker-dealers who engage in certain transactions involving
      a
      penny stock.


17





Under
      the
      penny stock regulations, a broker-dealer selling a penny stock to anyone other
      than an established customer or "accredited investor" must make a special
      suitability determination regarding the purchaser and must receive the
      purchaser's written consent to the transaction prior to the sale, unless the
      broker-dealer is otherwise exempt. Generally, an individual with a net worth
      in
      excess of $1,000,000 or annual income exceeding $200,000 individually or
      $300,000 together with his or her spouse is considered an accredited investor.
      In addition, under the penny stock regulations the broker-dealer is required
      to:





§
            Deliver,
                prior to any transaction involving a penny stock, a disclosure schedule
                prepared by the Securities and Exchange Commission relating to the
                penny
                stock market, unless the broker-dealer or the transaction is otherwise
                exempt;





§
            Disclose
                commissions payable to the broker-dealer and its registered
                representatives and current bid and offer quotations for the
                securities;





§
            Send
                monthly statements disclosing recent price information pertaining
                to the
                penny stock held in a customer's account, the account's value, and
                information regarding the limited market in penny stocks;
                and





§
            Make
                a special written determination that the penny stock is a suitable
                investment for the purchaser and receive the purchaser's written
                agreement
                to the transaction, prior to conducting any penny stock transaction
                in the
                customer's account.





Because
      of these regulations, broker-dealers may encounter difficulties in their attempt
      to sell shares of our common stock, which may affect the ability of selling
      stockholders or other holders to sell their shares in the secondary market
      and
      have the effect of reducing the level of trading activity in the secondary
      market. These additional sales practices and disclosure requirements could
      impede the sale of our securities. In addition, the liquidity for our securities
      may be adversely affected, with a corresponding decrease in the price of our
      securities. Our shares are currently subject to such penny stock rules and
      our
      stockholders will, in all likelihood, find it difficult to sell their
      securities.





**Recent
      Sales of Unregistered Securities**





On April
      30, 2006, we issued 752 shares of our common stock to  Sally MacKay in
      exchange for approximately $1,414, which we owed to Ms. MacKay for services
      rendered to us. The shares granted to Ms. MacKay were valued at price of
      $1.88 per share, for an aggregate price of approximately $1,414. We relied
      upon Section 4(2) of the Securities Act of 1933, as amended (the “Securities
      Act”) for the offer and sale. We believed that Section 4(2) was available
      because the offer and sale did not involve a public offering and there was
      not
      general solicitation or general advertising involved in the offer or sale.
      We
      placed restrictive legends on the stock certificate representing the shares
      issued to Ms. MacKay stating that the securities were not registered under
      the
      Securities Act and are subject to restrictions on their transferability and
      resale.





On May
      31, 2006, we issued 1,391 shares of our common stock to Sally MacKay in
      exchange for approximately $2,031, which we owed to Ms. MacKay for services
      rendered to us. The shares granted to Ms. MacKay were valued at price of $1.46
      per share, for an aggregate price of approximately $2,031.  We relied upon
      Section 4(2) of the Securities Act for the offer and sale. We believed that
      Section 4(2) was available because the offer and sale did not involve a public
      offering and there was not general solicitation or general advertising involved
      in the offer or sale. We placed restrictive legends on the stock certificate
      representing the shares issued to Ms. MacKay stating that the securities were
      not registered under the Securities Act and are subject to restrictions on
      their
      transferability and resale.





On June
      30, 2006, we issued 767 shares of our common stock to Sally MacKay in
      exchange for approximately $1,105, which we owed to Ms. MacKay for services
      rendered to us. The shares granted to Ms. MacKay were valued at price of $1.44
      per share, for an aggregate price of approximately $1,105.  We relied upon
      Section 4(2) of the Securities Act for the offer and sale. We believed that
      Section 4(2) was available because the offer and sale did not involve a public
      offering and there was not general solicitation or general advertising involved
      in the offer or sale. We placed restrictive legends on the stock certificate
      representing the shares issued to Ms. MacKay stating that the securities were
      not registered under the Securities Act and are subject to restrictions on
      their
      transferability and resale.





18




On June
        30, 2006, we issued 4,717 shares of our common stock to  Dennis Everhart in
        exchange for approximately $7,500, which we owed to Mr. Everhart for services
        rendered to us from April to June 2006. The shares granted to Mr. Everhart
        were
        valued at price of $1.59 per share, for an aggregate price of approximately
        $7,500. We relied upon Section 4(2) of the Securities Act for the offer and
        sale. We believed that Section 4(2) was available because the offer and sale
        did
        not involve a public offering and there was not general solicitation or general
        advertising involved in the offer or sale. We placed restrictive legends
        on the
        stock certificate representing the shares issued to
 Mr.
        Everhart stating that the securities were not registered under the Securities
        Act and are subject to restrictions on their transferability and
        resale.


On June
      30, 2006, we issued a warrant to GSP Consulting, Inc. (“GSP”) entitling GSP to
      acquire up to 5,734 shares of common stock at an exercise price ranging from
      $1.44 to $1.88 per share, the then-current market value of our common stock.
      This warrant was issued to GSP as partial payment for services rendered to
      us by
      GSP from April to June 2006. We relied upon Section 4(2) of the
      Securities Act for the offer and sale. We believed that Section 4(2) was
      available because the offer and sale did not involve a public offering and
      there
      was not general solicitation or general advertising involved in the offer or
      sale. We placed restrictive legends on the warrant certificate representing
      the
      warrant issued to GSP stating that the securities were not registered under
      the
      Securities Act and are subject to restrictions on their transferability and
      resale.





**Securities
      Authorized for Issuance Under Equity Incentive Plans**




The
      following table sets forth information regarding awards made through
      compensation plans or arrangements through June 30, 2006, our most recently
      completed fiscal year.





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 (excluding outstanding securities shown
                herein)Equity
                compensation plans approved by security holders
            3,693,802
            $1.25
            1,028,500Equity
                compensation plans not approved by security holders
            913,968
            $0.37
            N/ATotal
            4,607,770
            $0.88
            1,028,500




Our
      2001
      Equity Incentive Plan (The “Plan”) authorizes the issuance of options, right to
      purchase Common Stock and stock bonuses to officers, employees, directors and
      consultants. The Plan was amended and restated to increase the total number
      of
      shares available to grant to 4,000,000 shares. We reserved 4,000,000 shares
      of
      our common stock for awards to be made under the 2001 Plan. The 2001 Plan is
      administered by a committee of two or more members of the Board of Directors
      or,
      if no committee is appointed, then by the Board of Directors. The 2001 Plan
      allows for the issuance of incentive stock options (which can only be granted
      to
      employees), non-qualified stock options, stock awards, or stock bonuses. The
      committee, or the Board of Directors if there is no committee, determines the
      type of award granted, the exercise price, the option term, which may be no
      more
      than ten years, terms and conditions of 2001 and methods of exercise. Options
      must vest within ten years. The Plan description and its activities up to the
      fiscal year ended are disclosed in our financial statements for the fiscal
      year
      ended contained herein. The number of options under the 2001 Plan available
      for
      grant at June 30, 2006 was 1,028,500.





Through
      June 30, 2006, we also issued common stock warrants to the service providers
      including the consultants for their services rendered as part of their service
      agreements. The terms of the warrants are similar to those of the stock options
      in terms of the exercise price, the warrant term, which may be no more than
      ten
      years, terms and conditions of these warrants are determined in the warrant
      agreements filed in our S-8 registration statement and the notes of our audited
      financial statements included herein.


19





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





The
      following discussion should be read in conjunction with our audited financial
      statements and related notes included therein. The terms "the Company," "we,"
      "our" or "us" refer to Quick-Med Technologies, Inc.  This discussion
      contains forward-looking statements based on our current expectations,
      assumptions, and estimates. The words or phrases "believe," "expect," "may,"
      "anticipates," or similar expressions are intended to identify "forward-looking
      statements." Actual results could differ materially from those projected in
      the
      forward-looking statements as a result of a number of risks and uncertainties
      pertaining to our business, including: (a) because we have a limited operating
      history and our technologies are still evolving, we may not be able to
      successfully manage our business or achieve profitability; (b) our technology
      and product development processes, which include substantial regulatory
      approvals, are lengthy and expensive and there is no assurance that we will
      have
      sufficient resources to complete development related to these processes; (c)
      our
      history of losses make it difficult for you to evaluate our current and future
      business and prospects and future financial results; (d) we have negative cash
      flow from operations and an accumulated deficit that raises substantial doubt
      about our ability to continue as a going concern; (e) our future business is
      dependent upon third parties to market, manufacture, and distribute our
      technologies and/or products or jointly developed products; (f) there is no
      assurance that our technologies or products that employ our technologies will
      be
      accepted in the marketplace; (g) we do not currently carry product liability
      insurance and should we be subject to product liability claims, our financial
      condition may be adversely affected; (h) our operations are currently funded
      by
      our revenues and are currently funded by our equity financings in November
      30
      and December 31, 2004, however, there are no assurances that the equity
      financings will be sufficient to ensure our future financial performance; (i)
      we
      have substantial debt obligations due to our Chairman of the Board, who had
      funded our operations, debt obligations of which are secured by our assets
      and
      revenues and which are senior obligations; (k) there is no assurance that we
      will be able to attract and retain highly skilled scientific, technical and
      management personnel, who are critical to our success and (l) other risk factors
      discussed in our periodic filings, which may be accessed at
      http://www.sec.gov.  Statements made herein are as of the date of the
      filing of this Form 10-KSB with the Securities and Exchange Commission and
      should not be relied upon as of any subsequent date. Unless otherwise required
      by applicable law, we do not undertake, and we specifically disclaim any
      obligation, to update any forward-looking statements to reflect occurrences,
      developments, unanticipated events or circumstances after the date of such
      statement.





**Overview**





We
      are a
      life sciences company focused on developing proprietary, broad-based
      technologies in medical and consumer healthcare markets. Our two core
      technologies under development are: (1) MultiStatTM, a family of advanced
      patented methods and compounds shown to be effective in skin therapy
      applications; and (2) Novel Intrinsically MicroBonded Utility Substrate
      (NIMBUSTM), a family of advanced polymers bio-engineered to have antimicrobial,
      super-absorbent, and other properties that can be used in a wide range of
      applications. Currently, MultiStatTM has been developed in a cosmetic product
      line with the anti-aging products under launch. MultiStatTM is also being
      employed in a drug product line as a post-injury treatment for mustard gas
      exposure, with the initial product currently at a developmental state of
      development in partnership with the U.S. Army. Our NIMBUSTM technology has
      initially been targeted at (a) medical device, including advanced wound dressing
      products, and (b) several enhanced consumer products, including order-controlled
      products (e.g. apparel or hygiene), and antibacterial related products. In
      each
      instance, we intend to form joint ventures or joint development partnerships
      with leading firms in the respective industry to co-develop and commercialize
      its products.





We
      specialize in the research and development of biomedical products and devices
      for antimicrobial applications. We conduct research efforts or collaborate
      with
      third parties as necessary to develop products and administer the patent
      process. We do not expect to produce nor directly market its products. Instead,
      we intend to partner with clients for those activities.




Our
      business strategy is to further develop and execute commercialization strategies
      for each of our broad technologies. We will seek to generate revenue through
      four sources:





(1)
            Licenses
                of proprietary technology to industry partners;


(2)
            Contracts
                with government agencies;


(3)
            Sales
                of product (compounds); and,


(4)
            Research
                and development support agreements.





We
      expect
      that the majority of future revenue will be generated via licenses, royalties
      and profit-sharing agreements. We believe that our intellectual property is
      the
      value driver and, as such, manufacturing, sales and distribution are and will
      be
      conducted either through client partners or outsourced.








20







Our
      potential revenues will be derived from government agencies and the following
      types of companies in connection with our NIMBUSTM and MultiStatTM
technologies:





·
            Healthcare
                and medical;


·
            Apparel;


·
            Cosmetic;
                and


·
            Personal
                care companies.





Uncertainties
      and Trends





Our
      revenues are dependent now and in the future upon the following
      factors:




·  Acceptance
      of our products or future products in the marketplace;


·
            Our
                partner’s ability to develop, market and distribute our technologies under
                a strategic partnership agreement;


·
            Demand
                for products or future products that utilize our
                technologies;


·
            Our
                ability to secure license or profit sharing related agreements and
                secure
                government research and development grants;


·
            Our
                ability to market our services to health care, apparel, cosmetic,
                and
                personal care companies;


·
            Our
                ability to successfully conduct laboratory and clinical testing of
                our
                potential products; and


·
            Our
                ability to obtain regulatory approval of our future
                products.





Uncertainties
      or trends that may affect our business also include the possibility that known
      or unknown competitors may develop products with similar applications to our
      proposed products, which may prove to be superior in performance and/or price
      to
      our products.





**Capital
      Expenditures and Requirements**





From
      2000
      to 2006, we have spent approximately $410,000 on the acquisition of patents
      and
      exclusive license agreements. We owe an additional $160,000 to Dr. Richard
      Galardy which is due when certain milestones are met in connection with a
      September 2000 license agreement we have with Dr. Galardy and Dr. Damian
      Grobeiny. This license agreement provides that we compensate Dr. Galardy and
      Dr.
      Grobeny with our common stock and cash for the exclusive license of the
      Ilomastat technology invented by them.





We
      do not
      expect any significant additions to property, plant and equipment.





**Critical
      Accounting Policies and Estimates**





The
      preparation of our financial statements requires us to make estimates and
      assumptions that affect the reported amounts. The estimates and assumptions
      are
      evaluated on an on-going basis and are based on historical experience and on
      various other factors that are believed to be reasonable. Estimates and
      assumptions include, but are not limited to, fixed asset lives, intangible
      assets, income taxes, and contingencies. We base our estimates on historical
      experience and on various other assumptions that are believed to be reasonable
      under the circumstances, the results of which form the basis for making
      judgments about the carrying values of assets and liabilities that are not
      readily apparent from other sources. Actual results may differ from these
      estimates under different assumptions or conditions. We believe the following
      critical accounting policies affect its more significant judgments and estimates
      used in the preparation of the financial statements. Our accounting for stock
      compensation requires us to estimate the value of the  shares
      issued and the value of intangible assets require us to continually assess
      whether such assets are impaired.





21





**Results
      of Operations**





***Comparison
      of Years Ended June 30, 2006 and 2005***





Revenues.  During
      the year ended June 30, 2006 we had revenues of $1,230,441, compared to $181,723
      of revenues for the year ended June 30, 2005, representing a 577% increase
      in
      our revenues. Our
      revenues during the year ended June 30, 2006 consisted of: (a)
      $1,157,942, which represented our royalties from the product sales ($982,942)
      and the license fee for exclusivity ($175,000) by a cosmetic and personal care
      division of Engelhard Corporation (“Engelhard”), in connection with a master
      agreement we have with Engelhard for product development, manufacturing and
      distribution;  (b) $2,500 which represented a pro rata share of the fees
      related to a research agreement unrelated to our core technologies, which was
      completed in July 2005; and (c) $70,000 which represented the revenue earned
      from the small business innovation research program. Our revenues during
      the year ended June 30,


2005
      consisted of: (a) $138,723, which represented our royalties from the product
      sales by a cosmetic and personal care division of Engelhard Corporation; (b)
      $28,000, which represented a pro rata share of the fees related to the research
      agreement with Johnson & Johnson Wound Management, a division of ETHICON
      INC., a subsidiary of Johnson & Johnson (J.NYSE), completed in June 2005;
      and (c) $15,000, which represented a pro rata share of the fees related to
      the
      research agreement unrelated to our core technologies, which was completed
      in
      July 2005.





On
      August
      2, 2006, we and Engelhard Long Island, Inc. (“Engelhard”), a wholly-owned
      subsidiary of BASF Catalysts LLC, finalized a Fourth Amendment to that certain
      Letter of Intent (“LOI”) dated February 1, 2006 and effective through April 28,
      2006. The First Amendment, dated April 26, 2006, the Second Amendment, dated
      May
      26, 2006, and the Third Amendment, dated June 13, 2006, extended the effective
      period of the LOI to May 26, 2006, June 16, 2006 and June 30, 2006,
      respectively. The Fourth Amendment, effective as of June 30, 2006, extended
      the
      effective period of the LOI to August 1, 2007. The LOI amends certain terms
      included in the Master Agreement for Product Development, Manufacturing and
      Distribution (the “Master Agreement”), which was entered into between us and
      Engelhard on August 15, 2002. Pursuant to the Master Agreement, as amended
      by
      the LOI, we granted to Engelhard an exclusive license to develop and market
      the
      Company’s Ilomastat product (the “Licensed Product”) for the field of
      over-the-counter anti-aging cosmetics and a nonexclusive license for the field
      of over-the-counter acne treatments and skin moisturizers in the cosmetics
      market. In consideration for this license, as amended by the LOI, we will
      receive monthly royalty payments based on a percentage of the net revenue
      Engelhard receives from sales of the Licensed Product but no less than annual
      minimum royalty payments equal to $1,140,000 for the first two years, assuming
      the LOI is not terminated during such period. Pursuant to the Fourth Amendment,
      these royalty payments replace any financial and other milestone or windfall
      obligations under the Master Agreement.





In
      addition, the Fourth Amendment amended the Master Agreement to transfer all
      right, title and interest to the Engelhard intellectual property held by us
      back
      to Engelhard in exchange for one  payment of $166,500.





Other
      than the foregoing, the LOI, as amended, is not binding on either party and
      contemplates that the parties may enter into further negotiations on other
      matters related to the agreements between the parties.





Operating
      Losses.  Operating
      losses for the year ended June 30, 2006 decreased by 12% or $216,962
      to ($1,636,697) for the year ended June 30, 2006 from ($1,853,659) for
      the year ended June 30, 2005. The decrease in operating loss was primarily
      due to an increase in revenues of $1,048,718 offsetting an increase in expenses
      of $831,756 for the year ended June 30, 2006. The increase in expenses
      was primarily due to the following: (a) an increase of $286,354 or 49% increase
      in research and development expenses; (b) an increase of $188,001 or 30% in
      general and administrative expenses; (c) an increase of $159,412 or 575% in
      cost
      of revenues; (d) an increase of $80,124 or 33% in licensing and patent expenses
      and (e) an increase of $113,361 or 22% in non-cash stock-based compensation
      for
      those comparable prior periods, as described in more detail
      below.


22








Non-Cash
      Stock-Based Compensation. Non-Cash
      Stock-Based Compensation increased $113,361 or 22% to $629,433 for the year
      ended June 30, 2006, from $516,072 for the year ended June 30,
      2005. This increase in non-cash stock based compensation was attributed to
      several factors. First, we issued 125,000 more options to our employees,
      directors and consultants in fiscal year 2006, 710,000 stock options in 2006
      compared to approximately 585,000 stock options issued in fiscal year 2005.
      Second, the fair market value of the stock options issued in fiscal year
      2006 was higher than the fair market value of those issued in fiscal year
      2005, resulting in the recognition of a higher compensation expense in
      2006. Third, effective July 1, 2005, we adopted Statement of Financial
      Accounting Standards (“SFAS”) 123R, "Share-Based Payment," ("SFAS 123R"), which
      requires companies to recognize as expense the fair value of employee stock
      options and similar awards. Prior to July 1, 2005, the Company elected to
      account for the stock options granted to employees under the Accounting
      Principles Board Opinion (‘APB”) No. 25, “Accounting for Stock Issued to
      Employees,” and related interpretations. Under APB No. 25, no compensation was
      recorded for stock options granted to the employees as long as the exercise
      price of the stock options equals the market value of the common stock at the
      date of grant. Hence, we recognized a higher compensation expense of
      approximately $172,800 in 2006 when compared with the prior period. Fourth,
      in
      both fiscal year 2006 and 2005 we paid our directors for their services with
      our
      restricted common stock. Although the number of shares granted in 2006 was
      fewer
      than 2005, the value of the shares granted was approximately $23,000 higher
      in
      2006 than 2005.  Finally, this increase was offset by a reduction of
      approximately $219,000 in our restricted shares for services to
      consultants in fiscal year 2006 as compared to the amount and the number of
      restricted shares issued to consultants in comparable prior
      period.





Research
      and Development Expense.  Research
      and development expense increased by $286,354 or 49% to $865,388 for
      the year ended June 30, 2006, from $579,034 for the year
      ended June 30, 2005, as a result of increased research projects, additional
      hiring of scientists, consultants and personnel that increased our research
      staff from 7 to 8 persons, and increased usage of scientific consulting
      services.





General
      and Administrative Expense . General
      and administrative expense increased by $188,001 or 30% to $815,178 for
      the year ended June 30, 2006, from $627,177 for the year
      ended June 30, 2005. This increase in our general and administrative
      expenses is primarily attributed to increased business development expenses,
      our
      corporate governance expenses, additional consulting expenses incurred
      in fiscal year 2006, and promotional and sales expenses related to product
      sales under the master agreement for product development, manufacturing and
      distribution as mentioned above.





Licensing
      and Patent Expense .
      Licensing and patent expense increased by $80,124 or 33% to $319,960 for the
      year ended June 30, 2006 from $239,836 for the year ended June 30, 2005. This
      increase was primarily due to increased utilization of the consulting legal
      patent services and legal licensing services including licensing
      negotiation.





Other
      Income. During
      the year ended June 30, 2005, we had $17,478 in other income, which represented
      a gain from a debt settlement of the legal fees we owed to a law firm. This
      law
      firm entered into a bankruptcy proceeding. We reached a settlement agreement
      with the trustee for the estate of the law firm at the amount less than the
      carrying liability. There was no such gain in 2006.





Interest
      Income.   During
      the year ended June 30, 2006, we had $11,638 in interest income, which
      represented interest earned on our certificate of deposits and money market
      account funded by our revenues and the equity financings.  We had
      $9,709 in interest income the comparable 2005 period, which also
      represented interest earned on interest bearing accounts funded by the equity
      financings for a shorter period of time beginning November 2004 to June 30,
      2005.





Interest
      Expense.  Interest
      expense for the year ended June 30, 2006 decreased $24,866 or 25% to
      $76,005 compared to $100,871 the year ended June 30, 2005. This
      decrease was due to a decrease of $800,000 or 38% in the average outstanding
      loan balance due to our Chairman of the Board, to approximately $1,300,000,
      compared to approximately $2,100,000 average outstanding balance for the
      comparable 2005 period.


23








Net
      Loss.  Net
      loss
      for the year ended June 30, 2006 was ($1,701,064) or ($0.06) per share
      compared to ($1,927,343) or ($0.08) per share for the year ended June 30,
      2005. This decrease is primarily attributable to an increase in revenues, offset
      by the increases in cost of revenues, research and development expenses, general
      and administrative expenses, and non-cash stock-based compensation.





**Liquidity
      and Capital Resources**




Our
      auditors have issued a going concern opinion on our audited financial statements
      for the fiscal years ended June 30, 2006 and 2005 as we have experienced
      recurring losses and negative cash flows from operations in these periods.
      In
      addition, we have a net capital deficiency. These matters raise substantial
      doubt about our ability to continue as a going concern.





Total
      cash on hand at June 30, 2006 was $184,142 as compared with $342,842 at March
      31, 2006. On August 31, 2006, we received  a $166,500  payment
      from Engelhard for the transfer of certain intellectual properties held by
      us to
      Engelhard. Further, we received approximately $260,000 from Engelhard related
      to
      the July and August sales under our agreement with Engelhard. In September
      2006,
      we received confirmation of the SBIR Phase II grant totaling $770,000 over
      the
      next two years.





Equity
      Financing and our Cash Requirements




We issue
      our restricted common stock to pay for
      expenses related to services rendered as well as to settle our liabilities.




On
      November 30, 2004, we completed an agreement to sell 5,000,000 shares of our
      restricted common stock to Phronesis Partners, L.P. (“Phronesis”), a Delaware
      limited partnership, for $1,000,000 before commission and expenses (the ”Stock
      Purchase Agreement”). On November 30, 2004, we received $880,000 net of
      commission and expenses of $120,000. In connection with the Stock Purchase
      Agreement, our Chairman of the Board, Mr. Granito, converted $500,000 of the
      convertible debt we owed to him into 1,315,790 shares of our restricted common
      stock at a conversion price applicable to the convertible debt of $0.38 per
      share. In connection with the Stock Purchase Agreement, Phronesis and we
      completed a Warrant Agreement, in which we granted Phronesis certain warrants
      to
      purchase shares of our restricted common stock at an exercise price as defined
      in the Warrant Agreement. The Warrant Agreement expired on February 5, 2005
      and
      provided for a maximum investment of $1,000,000 by Phronesis through the
      exercise of warrants. On December 31, 2004, Phronesis and we agreed to amend
      the
      exercise price for the warrant price to $0.46 per share. All other terms of
      the
      Stock Purchase Agreement and the Warrant Agreement remained the same. On the
      same date, Phronesis exercised its warrant to purchase 2,173,913 shares of
      our
      restricted common stock at a per share price of $0.46, or an aggregate purchase
      price of $1,000,000 before commission of $70,000.





In
      connection with the exercise of the warrant and in accordance with the terms
      of
      the Stock Purchase Agreement, Mr. Granito, our Chairman of the Board,
      immediately converted $826,087 of his convertible debt owed by us into 2,173,913
      shares of our restricted common stock (equal to the number of shares acquired
      by
      Phronesis) at a conversion price applicable to the convertible debt of $0.38
      per
      share.





In
      February 2005, we issued 150,000 shares of restricted common stock for an
      aggregate purchase price of $87,000 in cash.




In
      June
      2005, we issued 16,666 shares of restricted common stock for aggregate exercise
      price of $2,500 in cash from an exercise of an employee stock
      option.




In
      July
      2005, we issued 40,322 shares of restricted common stock for an aggregate
      purchase price of $25,000 in cash.




In
      August
      2005, we issued 13,795 shares of restricted common stock for an aggregate
      purchase price of $8,553 in cash.




In
      August
      2005, we issued 175,000 shares of restricted common stock for an aggregate
      exercise price of $29,750 in cash from an exercise of a stock
      option.


24






In
      February 2006, we issued 80,000 shares of restricted common stock for an
      aggregate purchase price of $80,000 in cash.





Based
      on
      our cash position at June 30, 2006, we cannot continue to satisfy our
      current cash requirements for a period of twelve (12) months through our
      existing capital. We anticipate total estimated patent related legal fees,
      operating and research and development expenditures of approximately $149,000
      per month or an aggregate of approximately $1,788,000 over the next twelve
      (12)
      months, in the following areas:





·
            Research
                and development expenditures of approximately $75,000 per month or
                an
                aggregate $900,000 over the next twelve (12) months, which will consist
                of
                the following estimated monthly expenditures: (a) $50,000 in payroll
                for
                scientists; (b) $10,000 for outside research and development expenditures;
                and (c) $15,000 for chemical supplies, and laboratory operating expenses,
                including rent expense.


·
            Patent
                related legal fees of approximately $20,000 per month or an aggregate
                $240,000 annually; and


·
            Operating
                expenses of approximately $54,000 per month or an aggregate $648,000
                over
                the next twelve (12) months, including officer and director insurance,
                general liability insurance, rent, consulting fees, utilities, legal
                and
                accounting fees, and payroll.





Our
      current cash balance of $184,142 as of June 30, 2006, coupled with
      collection on accounts receivable of $45,000, the receipt of $166,500 one
      lump-sum payment and the collection of July and August 2006 accounts receivable
      of approximately $260,000 will satisfy our cash requirements for more than
      approximately four (4) months assuming no further receipt of revenues.




If
      needed, we intend to raise additional cash by means of equity and or debt
      financing. Additionally, we plan to implement cash conservation strategy by
      extinguishing obligations through share-based payments and reducing our use
      of
      consulting services. There are no assurances that any planned equity offering
      and/or debt financing will be successful or sufficient to meet our cash
      requirements if that our cash conservation strategy will be
      successful.





As
      of
      June 30, 2006, we have a note payable outstanding to our Chairman of the Board
      totaling $132,950 with a 8% interest rate per annum and a maturity date of
      October 1, 2007. In addition, we have notes outstanding to our Chairman of
      the
      Board totaling $1,268,625. During the year ended June 30, 2005, the short-term
      note with our Chairman of the Board was consolidated with the long-term
      convertible note under the same terms. The maturity date was extended to July
      1,
      2006 from July 1, 2004. Subsequently, the maturity date was extended to October
      1, 2007.  On
      November 30 and December 31, 2004, a total of $1,326,087 of the long-term
      convertible note was converted into 3,489,703 shares of our restricted common
      stock. Our President’s note payable is a short-term note with no specific
      repayment terms. During
      the quarter ended December 31, 2005, we paid the accrued interest of $56,932
      on
      our notes outstanding to our Chairman. In January and April 2006, we paid
      the quarterly interest payment of $19,186 and $18,769, respectively, on our
      notes to our Chairman. At June 30, 2006, the accrued interest on the long term
      note to our Chairman was $18,864. On July 1, 2006, we issued a short term note
      to our Chairman for the outstanding accrued interest amount of $18,864 at the
      8%
      interest rate per annum.





If
      we are
      unable to successfully repay or restructure our loan to our Chairman of the
      Board, we may have to liquidate our business and undertake any or all the steps
      outlined below.




·
            Significantly
                reduce, eliminate or curtail our business, operating and research
                and
                development activities so as to reduce operating costs;


·
            Sell,
                assign or otherwise dispose of our assets, if any, to raise cash
                or to
                settle claims by creditors, including our Chairman of the
                Board;


25





·
            Pay
                our liabilities in order of priority, if we have available cash to
                pay
                such liabilities;


·
            If
                any cash remains after we satisfy amounts due to our creditors, distribute
                any remaining cash to our shareholders in an amount equal to the
                net
                market value of our net assets;


·
            File
                a Certificate of Dissolution with the State of Nevada to dissolve
                our
                corporation and close our business;


·
            Make
                the appropriate filings with the Securities and Exchange Commission
                so
                that we will no longer be required to file periodic and other required
                reports with the Securities and Exchange Commission, if, in fact,
                we are a
                reporting company at that time; and


·
            Make
                the appropriate filings with the National Association of Security
                Dealers
                to affect a delisting of our stock.




Based
      upon our cash requirements for our Plan of Operations and our current dividend
      policy of investing any available cash to our operations, however, we do not
      plan to distribute any cash to our stockholders.





If
      we
      have any liabilities that we are unable to satisfy and we qualify for protection
      under the U.S. Bankruptcy Code, we may voluntarily file for reorganization
      under
      Chapter 11 or liquidation under Chapter 7. Our creditors may also file a Chapter
      7 or Chapter 11 bankruptcy action against us. If our creditors or we file for
      Chapter 7 or Chapter 11 bankruptcy, our creditors will take priority over our
      stockholders. If we fail to file for bankruptcy under Chapter 7 or Chapter
      11
      and we have creditors; such creditors may institute proceedings against us
      seeking forfeiture of our assets, if any.





We
      do not
      know and cannot determine which, if any, of these actions we will be forced
      to
      take. If any of these foregoing events occur, you could lose your entire
      investment in our shares.




At June
      30, 2006, we had a negative working capital of $15,512, that primarily consists
      of: (a) cash of $184,142; (b) accounts receivable of $45,001; (c) accrued
      interest on the stockholder loan totaling $18,864 (e) accounts payable of
      $218,949, and (f) the accrued expenses of $6,842.  At June 30, 2006,
      we had a stockholders’ deficit of $1,280,537, a substantial portion of which is
      due to non-cash stock compensation expense and non-cash interest expense from
      the notes payable conversions.




Cash
      used
      in operating activities was $916,420 for the year ended June 30, 2006.
      Net cash used in investing activities was $20,000.   Net cash provided
      by financing activities was $276,253 of which $113,553 was from the sale of
      our
      restricted common stock, $29,750 from the exercise of 175,000 stock options,
      and
      the issuance of a note payable of $132,950 to our Chairman.





To
      date,
      we have funded our activities principally from our revenues, our borrowings
      and
      the issuance of  restricted common stock including: (a) revenues of
      approximately $1,230,000; (b) investments from an institutional investor
      for net proceeds of $1,810,000 and accredited investors for net proceeds of
      $167,000; (c) financings from our Chairman of the Board totaling $850,000;
      (d)
      stockholder loans totaling $2,806,055 including related accrued interest, and
      (e) a $650,000 bridge loan from a merchant banking firm. All of these funds
      have
      been loaned with interest rates ranging from 6% to 8% per annum. The loan from
      the investment-banking firm was converted in November 2002 into restricted
      common stock at $1.00 per share.





During
      the year ended June 30, 2005, we borrowed a total of approximately $460,417
      through: (a) $450,000 from our Chairman under the long-term note as described
      above, and (b) $10,417 from our President, which was subsequently paid in full
      in 2005.




In
      December 2004, approximately $13,267 of accounts payable was settled through
      the
      issuance of 66,335 shares of restricted common stock.





During
      the period from April 1, 2006 to June 30, 2006, approximately $4,550 of accounts
      payable was settled through the issuance of 2,910 shares of restricted common
      stock.


26





**Contractual
      Obligations And Commercial Commitments**





The
      following table summarizes our contractual obligations and commercial
      commitments as of June 30, 2006:





Significant
                Obligations
            Total
            Within
                1 Year
            2-3
                Years
            4-5
                Years
            After
                5 YearsCapital
                Leases
            $0Operating
                Leases
            $13,800
            $13,800
            $0
            $0
            $0





We
      are
      committed under lease for our Gainesville, Florida office and laboratory
      facilities. This lease expires in March 2007. We do not have any capital
      leases.





**ITEM
      7.**  **FINANCIAL
      STATEMENTS**





The
      information required by this item is included in pages F-1 to F-20 attached
      hereto and incorporated herein by reference. The index to our annual financial
      statements for the year ended June 30, 2006 can be found on page
      F-1.








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




None.





**ITEM
      8A.**  **Controls
      and Procedures**





*Evaluation
      of Disclosure Controls and Procedures*


Based
      on
      our management’s evaluation, with the participation of our principal executive
      officer and Chief Financial Officer, of the our disclosure controls and
      procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act
      of
      1934 (the "Exchange Act")), our principal executive officer and our Chief
      Financial Officer have concluded that as of June 30, 2006, the end of the period
      covered by this Annual Report on Form 10-KSB, such disclosure controls and
      procedures are effective to ensure that information required to be disclosed
      by
      us in reports that we file or submit under the Exchange Act is recorded,
      processed, summarized and reported within the time periods specified in
      Securities and Exchange Commission rules and forms.





*Changes
      in Internal Controls over Financial Reporting*


As
      of the
      end of our fiscal year ended June 30, 2006, there was no change in the our
      internal controls over financial reporting that has materially affected, or
      is
      reasonably likely to materially affect, our internal control over financial
      reporting.





**ITEM
      8B.**  **Other
      Information**





None.


27





**PART
      III**





**ITEM
      9.**  **DIRECTORS,
      EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION
      16(a)
      OF THE EXCHANGE ACT**




The
      following table sets forth the names, ages and positions held for our directors,
      executive officers and significant employees.




Our
      executive officers, key employees and directors are as follows:





**Name**
            **Age**
            **Position**Michael
                R. Granito(1)
            54
            Chairman
                of the BoardDavid
                S. Lerner(1)
            53
            Founder,
                President, and DirectorGeorge
                E. Friel(1)
            64
            DirectorPaul
                G. Cerjan(1)
            68
            DirectorGerald
                M. Olderman(1)
            73
            Vice
                President, Research & Development and Commercialization, and
                DirectorGregory
                S. Schultz(1)
            56
            Vice
                President, Laboratory & Clinical Research, and
                DirectorRichard
                F. Caffrey(1)
              Cheryl
                L. Turnbull(1)
            64
              45
            Director
              DirectorNam
                H. Nguyen
            49
            Chief
                Financial OfficerNatasha
                A. Sorobey
            37
            Corporate
                Secretary, and Corporate & Investor
                Relations





NOTE:
      (1)
      Directors with term to expire on the next annual meeting or until his successor
      has been duly elected and qualified.





**Mr.
      Granito** has
      served as our Chairman since July 2000. In September 2003, Mr. Granito joined
      Federated Investors, Inc. as senior vice president and head of capital market
      research.  From July 1979 to December 2002, Mr. Granito was the managing
      director and head of capital market research of J.P. Morgan Fleming Asset
      Investment Management. From 1984 through 1996 he served as an adjunct Professor
      of Finance at Yale University and New York University. Mr. Granito has authored
      a book and 14 papers on finance and foreign exchange topics. In 1973, Mr.
      Granito earned a B.S. and a B.A. in Economics from the University of
      Pennsylvania.


28





**Mr.
      Lerner** has
      served as our President and Director since December 1997 and has been engaged
      in
      the formation and development of our Company since 1995. Mr. Lerner has 20
      years
      experience in international and domestic manufacturing, marketing, sales, and
      business development in Asia, Europe, South America, and Mexico.  Mr.
      Lerner earned his B.A. in 1976 from Queens College, CYNY.





**Major
      General Friel (Ret.)** has
      served as our director from July 2000. MG. Friel served as our vice-president,
      chemical and biological affairs from July 2000 to December 2005, and has been
      self-employed as a consultant to various organizations in the defense industry
      since September 1998. MG. Friel served in the U.S. Army from 1960 to 1998.
      He
      was the commanding general of the U.S. Army Chemical and Biological Defense
      Command, at the Aberdeen Proving Ground in Maryland from August 1992 to August
      1998 and deputy chief of staff for Chemical and Biological Matters of the Army
      Material Command in Virginia, during the same time. MG. Friel was also
      responsible for a $600 million annual budget for the Nuclear, Biological, and
      Chemical Defense Command for six years and directed over 1,100 scientists and
      engineers. MG. Friel has also served as chairman of the boards of the Nuclear,
      Biological, and Chemical Defense Enterprise at the Edgewood Arsenal in Maryland
      and the U.S. Army Material Command, Acquisition and Procurement Enterprise.
      MG.
      Friel earned an M.B.A. from Northwest Missouri State University and a B.S.
      from
      the University of Nebraska. He is a graduate from the U.S. Army Chemical School,
      The Army Command and General Staff College and The Industrial College of the
      Armed Forces. He was a director for Engineer Support Systems, Inc from September
      1998 until January 2006.




**Lieutenant
        General Cerjan**  **(Ret.)** has
        served as our
        director since July 2000.  Lt.G.
        Cerjan is currently president of L-3 Government Services, Inc. (L-3 GSI).
        Prior
        to joining L-3 GSI, Lt.G. Cerjan was vice president, program manager of KBR,
        a
        subsidiary of Halliburton Company, responsible for LOGCAP III Middle
        East/Central Asia. LOGCAP III ME/CA operates in eight countries with
        approximately 53,000 employees and subcontractors and has an annual operating
        budget of approximately $10 billion. From July 2002 until June 2004, Lt.G.
        Cerjan was the president and CEO of the National Defense University Foundation
        and from December 1997 to September 2000, President of Regent University
        in
        Virginia. Prior to 1997, Lt.G. Cerjan served as Director of Intelligent
        Transportation Systems for Lockheed Martin Corporation from August 1994 to
        October 1997. He was in the U.S. Army from 1960 to 1994. Key military
        assignments included servicing as the Deputy Commander in Chief, U.S. Army,
        Europe and Seventh Army; Commander, 21 st Theater
        Army Area Command, U.S. Army, Europe; President of the National Defense
        University and Commandant of the Army War College. Lt.G. Cerjan has an M.S.
        degree in construction management from Oklahoma State University, and a B.S
        in
        engineering from the U.S. Military Academy at West Point. He is a registered
        professional engineer in the state of Virginia. Lt.G. Cerjan is a member
        of the
        board of directors of the Army Engineer Association; a member of the advisory
        board for NATO Political/Military Workshop; a member of the Council on Foreign
        Relations; and a member of the advisory board of JINSA.




**Dr.
        Olderman** has
        served as our vice president, research & development and commercialization
        since July 1997, and as our director since July 2000.  Dr.. Olderman brings
        over 30 years of healthcare and technical management experience to our Company.
        Since November 1996, Dr. Olderman has been a vice president and associate
        of
 R.F. Caffrey & Associates Inc., a management consultant to medical
        device companies and suppliers.  From November 1991 to October 1996, Dr.
        Olderman served as director and head of research and development for C.R.
        Bard,
        Inc.'s Cardiopulmonary Division.  From March 1985 to November 1991, he
        served as vice president for domestic and international research and development
        for Pharmaseal, a division of Baxter International Inc. From June 1978
        to March 1985, Dr. Olderman served as vice president for research and
        developments for the Converts, a division of American Hospital Supply
        Corporation prior to its acquisition by Baxter Healthcare Corporation. From
        June
        1975 to June 1978, Dr. Olderman served as vice president for research and
        development and a director for Surgikos, Inc., a subsidiary of Johnson &
Johnson. Dr. Olderman hold a B.S in chemistry from Rensselaer Polytechnic
        Institute. He also holds an M.S. and a Ph.D. in Physical Chemistry from Seton
        Hall University.






29




**Dr.
        Schultz** has
        served as our vice president, laboratory and clinical research since July
        2000.  From 1999 through 2001, Dr. Schultz served as the president of the
        Wound Healing Society, and has worked as a consultant for 12 major biotechnology
        companies.  Since 1989 to present, Dr. Schultz  has been
        a professor of obstetrics/gynecology and director of the Institute for
        Wound Research in the College of Medicine at University of Florida at
        Gainesville.  He has published over 200 research articles and book chapters
        that have been cited over 4,000 times.  Dr. Schultz earned a doctorate in
        biochemistry from Oklahoma State University and post-doctoral fellowship
        in cell
        biology at Yale University.


**Mr.
      Caffrey** has
      served as our Director since March 2004. Mr. Caffrey has more than twenty years
      of corporate experience, including marketing research, strategic planning,
      business development and management recruiting, in both senior-line and
      senior-staff positions. Mr. Caffrey is currently the president of R.F. Caffrey
      & Associates, Inc. since 1988 to present, a full service marketing
      consulting practice that offers assistance to participants in the healthcare,
      industrial, and consumer related markets. Previously, Mr. Caffrey was vice
      president of John R. Starr, Inc., a management consulting firm; president,
      and
      chief operating officer of CPM Inc., a New England based specialty paper
      company; vice president of sales and marketing of Codman & Shurtleff, Inc.
      (subsidiary of Johnson & Johnson Company), a surgical instruments and
      equipment company; group product director of Surgikos, Inc. (subsidiary of
      Johnson & Johnson Company), a marketer of medical products and supplies;
      vice president, business development of Chicopee (subsidiary of Polymer Group,
      Inc. whose major holdings are controlled by InterTech Group), a non-woven
      fabrics supplier; and marketing research manager of Sealtest Foods. He holds
      both B.S. and M.B.A. degrees in Business Administration from Seton Hall
      University.





**Ms.
      Turnbull** has 20+
      years of experience encompassing private equity investments, mergers and
      acquisitions, corporate finance, and strategic advisory services. Ms. Turnbull
      is a Special Limited Partner at Phronesis Partners LP, a Columbus, Ohio-based
      hedge fund, since January 2005. From 1996 to 2003, Ms. Turnbull was responsible
      for the mezzanine investment functions of various units of Banc One Corporation.
      Prior to that time, Ms. Turnbull was a Managing Director of Aston Limited
      Partners, LP, a financial restructuring firm between 1992 and 1995. Between
      1990
      and 1991, Ms. Turnbull was Vice President of Prudential Bache Interfunding,
      a
      private equity fund and, from 1987 to 1990, an Associate in the Mergers &
Acquisitions department of Prudential Securities. Ms. Turnbull began her career
      as an Analyst in the Corporate Finance Division at Continental Illinois National
      Bank & Trust Co. Ms. Turnbull received her MM from the J.L. Kellogg Graduate
      School of Management at Northwestern University, and is a graduate of Miami
      University.


**Mr.
      Nguyen** has been
      our chief financial ffficer since August 2004. Between January 2003 and August
      2004,  Mr. Nguyen provided accounting services through his professional
      firm. Additionally, between November 2003 and July 2004, Mr. Nguyen served
      as
      acting secretary. Previously, Mr. Nguyen was a manager of Financial Controls
      for
      W.R. Grace & Co., vice president of Financial Reporting for John Alden
      Financial Corporation, and senior manager for PriceWaterhouseCoopers LLP. Mr.
      Nguyen is a Certified Public Accountant and a Certified Internal Auditor. He
      is
      a member of  Licensing Executives Society.  Mr. Nguyen received his BS
      from Messiah College (Grantham, Pennsylvania) in 1979.




**Ms.
        Sorobey** joined
        us in September 2003 to assist with corporate and investor relations. In
        August
        2004, Ms. Sorobey was appointed as corporate secretary. Ms. Sorobey’s
        responsibilities include corporate governance and investor relations. From
        September 1996 to April 2001, Ms. Sorobey was Corporate Secretary and investor
        relations representative for Centrinity Inc., a leading provider of Unified
        Communications and collaborative software solutions. Ms. Sorobey is a member
        of
        the Society of Corporate Secretaries and Governance
        Professionals.




The
      above
      listed officers and directors will serve until the next annual meeting of the
      stockholders or until their death, resignation, retirement, removal, or
      disqualification, or until their successors have been duly elected and
      qualified. Vacancies in the existing board are filled by majority vote of the
      remaining directors. Our officers serve at the will of the board. There are
      no
      family relationships between any of the executive officers and directors.


30





**Family
      Relationships**




None.








**Legal
      Proceedings**


No
      officer, director, or persons nominated for such positions, promoter or
      significant employee has been involved in legal proceedings that would be
      material to an evaluation of our management.


Our
      directors, executive officers and control persons have not been involved in
      any
      of the following events during the past five years:





1.
            any
                bankruptcy petition filed by or against any business of which such
                person
                was a general partner or executive officer either at the time of
                the
                bankruptcy or within two years prior to that
                time;


2.
            any
                conviction in a criminal proceeding or being subject to a pending
                criminal
                proceeding (excluding traffic violations and other minor
                offenses);


3.
            being
                subject to any order, judgment, or decree, not subsequently reversed,
                suspended or vacated, of any court of competent jurisdiction, permanently
                or temporarily enjoining, barring, suspending or otherwise limiting
                his
                involvement in any type of business, securities or banking activities;
                or


4.
            being
                found by a court of competent jurisdiction (in a civil action),the
                Commission or the Commodity Futures Trading Commission to have violated
                a
                federal or state securities or commodities law, and the judgment
                has not
                been reversed, suspended, or
                vacated.





**Committees
      of the Board of Directors**





*Executive
      Committee* .
      Our
      Executive Committee is composed of Michael R. Granito, our Chairman of the
      Board, David S. Lerner, our President, and Directors Paul G. Cerjan and George
      E. Friel. This committee’s chairman is Michael R. Granito. This committee
      acts for our Board of Directors when a meeting of the full board is not
      practical.





*Compensation
      Committee* .
      The
      Compensation Committee is composed of George E. Friel, Gerald M. Olderman,
      and
      Paul G. Cerjan and is chaired by Paul G. Cerjan. This committee approves,
      administers and interprets our compensation and health benefits, including
      our
      executive incentive programs. Additionally, this committee reviews and makes
      recommendations to our Board of Directors to ensure that our compensation and
      benefit policies are consistent with our compensation philosophy and corporate
      governance principles. This committee is also responsible for establishing
      our
      Chief Executive Officer or principal executive officer’s
      compensation.





*Audit
      Committee* .
      The
      Audit Committee is composed of George E. Friel, Michael R. Granito, Cheryl
      L.
      Turnbull and Richard F. Caffrey and is chaired by George E. Friel. This
      committee has general responsibility for the oversight and surveillance of
      our
      accounting, reporting and financial control practices. Among other functions,
      the committee retains our independent public accountants.





*Licensing
      Committee* .
      The
      Licensing Committee is composed of Cheryl L. Turnbull, Michael R. Granito,
      David
      S. Lerner and Richard F. Caffrey and is chaired by Richard F. Caffrey. This
      committee has general responsibility for the review of the licensing terms
      and
      agreements with our business partners and to recommend them to the Board of
      Directors for approval as appropriate.





**Audit
      Committee Financial Expert**




Currently,
      we do not have an Audit Committee “financial expert”.


31





**Code
      of Ethics**




We
      have
      adopted a Code of Ethics for our board members, our principal executive and
      senior financial officers, our other officers and our employees. A copy of
      this
      Code of Ethics is located on our website at www.quickmedtech.com .
      We
      intend to post any waivers of or amendments to our Code of Ethics on our
      website.





**Compliance
      with Section 16(a) of the Securities Exchange Act of 1934**




Under
      United States securities laws, our directors, executive officers and any persons
      holding more than 10% of our issued and outstanding common stock are required
      to
      report their ownership of common stock (or securities convertible into common
      stock) to the Securities and Exchange Commission. Due dates for these reports
      have been set by the Commission and we are required to report any failure to
      file by those deadlines. To our knowledge, based solely on a review of the
      copies of such reports furnished to us by those persons and on representations
      from those persons that no other reports were required, all reports were timely
      filed as required under Section 16(a) of the Securities Exchange Act of 1934
      by
      all such persons during the fiscal year ended June 30, 2006.





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




David
      S.
      Lerner currently receives an annual salary of $125,000 per year. Our other
      officers have agreed to act without cash compensation, except those with
      consulting agreements, until authorized by our Board of Directors, which is
      not
      expected to occur until we have generated sufficient revenues from operations
      or
      we have obtained sufficient financing. The officers or directors are not
      otherwise accruing any compensation under any agreement with us. The officers
      and directors have been granted stock options for past services, as set forth
      below.


**Summary
      Compensation Table**





Annual
                Compensation
            Long
                Term Compensation******Name
                / Title**
            **Year**
            **Salary**
            **Restricted**
              **Stock**
              **Awards**
              ($)
            **Securities**
              **Underlying**
              **Options/SARs**
              (#
                Shares)David
                S. Lerner, President
            2006
            $
                134,591(1)
            $21,000
            150,0002005
            $
                138,064(1)
            $14,000
            175,0002004
            $
                136,197(1)
            $15,950
            113,000





NOTES:
      (1) Includes $0, $0, and $3,469, for health insurance and $9,591, $13,064,
      and
      $7,728 for reimbursements of automobile expenses in 2006, 2005 and 2004,
      respectively.





32





No
      retirement, pension or insurance programs or other similar programs have been
      adopted for our employees or consultants. A stock option plan has been approved
      by our board. On December 13, 2004, our shareholders approved our amended and
      restated 2001 equity incentive plan to increase the total number of shares
      of
      common stock to 4,000,000 from 3,000,000. Options to purchase 1,140,000 shares
      of common stock have been granted to officers, directors, employees and
      consultants under the plan in 2002. All 2002 stock options have an exercise
      price equal to 75% of the closing bid price for the first 30 days of trading
      in
      the common stock, which commenced September 6, 2002, with the exception of
      Peter
      Barton Hutt, whose stock options are at 25% of such price. Options to purchase
      a
      total of 840,000 shares of common stock were issued in 1999, 2000 and 2001
      to
      officers, directors, employees and consultants. On August 16, 2005, all 840,000
      options were expired. In July 2003, the Board of Directors have authorized
      the
      issuance of options to acquire up to approximately 1,300,000 shares of common
      stock and the grant of 250,000 shares of restricted common stock to officers,
      directors, employees and consultants. In July 2004, the Board of Directors
      approved the issuance up to 500,000 shares of restricted common stock and
      options to acquire approximately 600,000 shares of common stock to be granted
      to
      officers, directors, employees and consultants. In September 2005, the Board
      of
      Directors approved the issuance of 130,000 shares of restricted common stock
      and
      options and warrants to acquire approximately 885,000 to employees, directors,
      officers and consultants.





**Compensation
      of Directors**




We
      do not
      pay any cash compensation to our directors. As described below we have
      compensated them with restricted common stock and stock options.





During
      the period ended June 30, 2006, the following restricted common stock and stock
      options were granted to directors:





On
      September 9, 2005, we granted 20,000 shares of common stock to Mr. Michael
      R.
      Granito for his services as a member of the board of directors, and member
      of
      various board committees. In addition, we granted to Mr. Granito an option
      to
      acquire up to 100,000 shares of restricted common stock. These stock options
      were issued to Mr. Granito for his services as Chairman of the Board.





On
      September 9, 2005, we granted 17,500 shares of common stock to Mr. David S.
      Lerner for his services as a member of the board of directors, and member of
      the
      executive committee. In addition, we granted to Mr. Lerner an option entitling
      him to acquire up to 150,000 shares of restricted common stock. These stock
      options were issued to Mr. Lerner as a performance bonus in his capacity as
      our
      President.





On
      September 9, 2005, we granted 22,500 shares of common stock to Mr. George E.
      Friel for his services as a member of the board of directors and member of
      the
      executive, audit, compensation, and research & development
      committees.




On
      September 9, 2005, we issued 20,000 shares of common stock to Mr. Paul G. Cerjan
      for his services as a member of the board of directors, and member of the
      executive, compensation committees.





On
      September 9, 2005, we granted 17,500 shares of common stock to Mr. Gerald M.
      Olderman for his services as a member of the board of directors, and member
      of
      the research & development committee. In addition, we granted to Mr.
      Olderman an option to acquire up to 150,000 shares of restricted common stock.
      These stock options were issued to Mr. Olderman as a performance bonus in his
      capacity as our Vice President, Research and Development and Commercialization.





On
      September 9, 2005, we issued 15,000 shares of common stock to Mr. Gregory S.
      Schultz for his services as a member of the board of directors. In addition,
      we
      granted to Mr. Schultz an option to acquire up to 100,000 shares of restricted
      common stock. These stock options were issued to Mr. Schultz for his services
      as
      our Vice President, Laboratory and Clinical Research.





On
      September 9, 2005, we granted 17,500 shares of common stock to Mr. Richard
      Caffrey for his services as a member of the board of directors and member of
      the
      audit committee.


33





The
      exercise price of all stock options granted to directors as set forth above
      was
      $0.80 per share, which was the closing trading price of our common stock at
      the
      date of grant.





**Option/SAR
      Grants in Last Fiscal Year**





Name
            Number
                of Securities
              Underlying
                Options/SARs
              Granted
                (#)
            Percent
                of
              Total
                Options/
              SARs
                Granted to
              Employees
                in Fiscal Year
            Exercise
                or Base
              Price
                ($/Share)
            Expiration
                DateDavid
                S. Lerner
            150,000
            17.0%
            $0.80
                per share
            September
                9, 2010











**Aggregated
      Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR
      Values**





Name
            Shares
              Acquired
                on
              Exercise
                (#)
            Value
              Realized
              ($)
            Number
                of Securities Underlying
              Unexercised
                Options/SARs at Fiscal Year-End (#)
              Exercisable
                / Unexercisable
            Value
                of Unexercised
              In-The-Money
                Options/SARs
              at
                Fiscal Year-End ($)
              Exercisable
                / UnexercisableDavid
                S. Lerner
            0
            0
            513,000
                /50,000
            $538,650
                / $52,500








**Employment
      Contracts and Termination of Employment and Change in Control
      Arrangements**




We
      continue our current consulting arrangement with Gerald M. Olderman, PhD.,
      to serve as our Vice President of Research and Development and
      Commercialization. Mr. Olderman has served this capacity since July 2000.
      Effective July 1 st ,
      2005,
      his compensation increased to $10,000 a month while we are negotiating with
      Mr.
      Olderman on his compensation agreement.





In
      January 2004, we entered into a formal consulting agreement with Nam H. Nguyen
      to serve as a consulting accounting advisor. In August 2004, Mr. Nguyen was
      appointed as our Chief Financial Officer under the same agreement. Beginning
      in
      July 2004, his compensation is set at $8,000 monthly base compensation with
      a
      monthly $2,500 minimum cash payment and the remainder may be paid in shares
      of
      restricted common stock. In addition, he has also received 400,000 shares of
      common stock plus warrants to acquire 300,000 shares of common stock at $0.20
      per share in accordance with a vesting schedule. Effective July 1, 2005, his
      compensation increased to $10,000 monthly base compensation as approved by
      the
      Compensation Committee and the Board of Directors.





In
      September 2003, we entered into a consulting agreement with Natasha A. Sorobey
      to provide investor relations services, In August 2004, Ms. Sorobey assumed
      the
      position of Corporate Secretary, while continuing her corporate and investor
      relations responsibilities. Her contract provides her with base compensation
      of
      $60,000 per annum. In addition, she has also received 400,000 shares of common
      stock plus warrants to acquire 200,000 shares of common stock at $0.18 per
      share
      in accordance with a vesting schedule with one-third vested immediately,
      one-third vested on the anniversary date and the remaining one-third vested
      on
      the subsequent 12 months.


34








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




The
      following table sets forth, as of September 20, 2006, certain information with
      respect to the beneficial ownership of our common stock by each stockholder
      known by us to be the beneficial owner of more than 5% of our common stock
      and
      by each of our current directors and executive officers. Each person has sole
      voting and investment power with respect to the shares of common stock, except
      as otherwise indicated. Information relating to beneficial ownership of common
      stock by our principal stockholders and management is based upon information
      furnished by each person using "beneficial ownership" concepts under the rules
      of the Securities and Exchange Commission. Under these rules, a person is deemed
      to be a beneficial owner of a security if that person has or shares voting
      power, which includes the power to vote or direct the voting of the security,
      or
      investment power, which includes the power to vote or direct the voting of
      the
      security. The person is also deemed to be a beneficial owner of any security
      of
      which that person has a right to acquire beneficial ownership within 60 days.
      Under the Securities and Exchange Commission rules, more than one person may
      be
      deemed to be a beneficial owner of the same securities, and a person may be
      deemed to be a beneficial owner of securities as to which he or she may not
      have
      any pecuniary beneficial interest. We are unaware of any contract or
      arrangement, which could result in a change in our control.





The
      following table assumes, based on our stock records, that there are 30,223,284
      shares issued and outstanding as of September 20, 2006.





The
      following table sets forth the ownership of our common stock by:





§
            Each
                stockholder known by us to own beneficially more than 5% of our common
                stock;


§
            Each
                executive officer;


§
            Each
                director or nominee to become a director;
                and


§
            All
                directors and executive officers as a
                group.








**Name
                and Address of Beneficial Owner**(A)
            **Shares
                Beneficially Owned****Number**
            **Percent**Michael
                R. Granito, Chairman and Director
            10,226,870(1)
            30.9%Phronesis
                Partners, L.P.
              David
                S. Lerner, President and Director
            7,187,708(2)
              4,588,589(3)
            22.0%
              13.9%Paul
                G. Cerjan, Director
            968,500(4)
            2.9%George
                E. Friel, Director
            634,000(5)
            1.9%Gerald
                M. Olderman, Director and Vice President
            903,000(6)
            2.7%Gregory
                S. Schultz, Director and Vice President
            1,171,167(7)
            3.5%Richard
                F. Caffrey, Director
            106,322(8)
            0.3%Cheryl
                L. Turnbull, Director
            0(9)
            0.0%Natasha
                A. Sorobey, Corporate Secretary
            756,214(10)
            2.3%Nam
                H. Nguyen, Chief Financial Officer
            1,080,923(11)
            3.3%All
                Quick-Med Directors and Officers as a Group
              (9
                persons)
            27,623,293
            83.7%




35





NOTES:
            (A)
                Unless otherwise stated, the address for each of the above is c/o
                Quick-Med Technologies, Inc., 3427 SW 42ndWay, Gainesville, Florida 32608.(1)
                Includes 525,667 shares issuable upon the exercise of options exercisable
                within 60 days.Does
                not include convertible debt..
            (2)
                Phronesis Partners, L. P., Delaware Limited Partnership, is a hedge
                fund
                and has sole voting and sole dispositive power over 7,187,708 shares.
                The
                address for Phronesis Partners, L.P. is 180 East Broad Street, Suite
                1704,
                Columbus, OH 43215(3)
                Includes 513,000 shares issuable upon the exercise of options exercisable
                within 60 days.(4)
                Includes 157,000 shares issuable upon the exercise of options exercisable
                within 60 days.(5)
                Includes 187,500 shares issuable upon the exercise of options exercisable
                within 60 days.(6)
                Includes 449,000 shares issuable upon the exercise of options exercisable
                within 60 days.(7)
                Includes 392,667 shares issuable upon the exercise of options exercisable
                within 60 days.(8)
                Includes 10,000 shares issuable upon the exercise of options exercisable
                within 60 days.(9)
                Ms. Turnbull is a special limited partner of Phronesis Partners and
                joined
                us as a director in January 2006.
              
              (10)
                Includes 216,667 shares issuable upon the exercise of warrants exercisable
                within 60 days.(11)
                Includes 400,000 shares issuable upon the exercise of warrants exercisable
                within 60 days.








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




For
      the year ended June 30, 2006 and 2005, we received $132,950 and
      $450,000 respectively, from our Chairman. The $132,950 received in June 2006
      was
      a long term note payable issued by us with an interest rate of 8% per annum.
      The
      funding received in 2005 was part of the convertible note payable as described
      below. The short term notes to our Chairman were subsequently consolidated
      into
      a long term convertible note as described below.





In
      September 2003, we negotiated a successor agreement with our Chairman regarding
      the line of credit, which expired July 1, 2003 totaling $1,300,200, excluding
      interest. The line of credit of $750,000 and the short term borrowing of
      $550,200 were consolidated into a single convertible note for up to $1,500,000
      excluding accrued interest, at an interest rate of 6% and due July 1, 2004.
      The
      maturity date of the note was extended until July 1, 2006. Subsequently,
      the maturity date was extended to October 1, 2007. The
      convertible note is secured by the assets and revenues of the Company and is
      senior to all other debt obligations. The note plus accrued interest will be
      convertible, in full or in part, at the option of the holder for a term of
      up to
      5 years beginning at September 1, 2003 at a conversion rate of $0.38 per share.
      The conversion rate was determined as 15% above the average share price over
      the
      prior 20 trading days ($0.33 per share). The note has an anti-dilution provision
      in the event that we sell stock to other investors at less than $0.20 per share.
      This convertible note agreement is made contingent upon the agreement of the
      holder to provide additional funding to us by purchasing restricted common
      stock
      at prices we agree to us or other means. In August 2004, the Board of Directors
      granted the Chairman the right to consolidate the short-term debt and its
      related accrued interest into the convertible note under the same terms. The
      Chairman exercised the right to consolidate all outstanding short term notes
      and
      accrued interest into the long-term convertible note under the same terms.
      In
      December 2005, our Chairman agreed to extend the maturity date of the note
      until
      October 1, 2007.


36





The
      Chairman converted $500,000 and $826,087 of the convertible note into 1,315,790
      and 2,173,913 shares of restricted common stock on November 30 and December
      31,
      2004, respectively, in accordance with the terms of the Stock Purchase
      Agreement. These amounts were converted at a conversion price applicable to
      the
      convertible debt of $0.38 per share. At December 31, 2005, the convertible
      note
      outstanding balance was $1,268,625, convertible into 3,338,487 shares of
      restricted common stock.





During
      the year ended June 30, 2006, we paid the accrued interest on the
      convertible note of $94,887 in accordance with the Board of Directors written
      resolution (without the Chairman’s participation) to clarify and confirm the
      interest payment terms. Under the terms of the interest payment, we will pay
      the
      interest on the note for the previous quarter within 10 business days subsequent
      to the end of the quarter.  At June 30, 2006, the accrued interest on the
      long term convertible note to our Chairman was $18,864. On July 1, 2006, we
      issued a short term note to our Chairman for the outstanding accrued interest
      amount of $18,864 at the 8% interest rate per annum. On June 15, 2006, we issued
      a note payable of $132,950 to our Chairman with an interest rate of 8% per
      annum
      and the maturity date of October 1, 2007.





For
      the
      fiscal years ended June 30, 2006 and 2005, we received $0 and $10,417
      respectively, from our President, to fund operations. The loan amount was
      accounted as a short term note with the interest rate of 6% per annum. We repaid
      our President $0 and $89,626 of our short term notes owed to him during the
      fiscal years ended June 30, 2006 and 2005, respectively.





At
      June
      30, 2006 and 2005, we paid $6,900 for each year to our President for the
      sub-lease of office space. The term of the sub-lease is a month to month
      period.





In
      August
      2006, we borrowed $7,000 from one of our officers under a short term note
      payable at a 8% interest rate per annum and we repaid it in September
      2006.





Messrs.
      Lerner and Granito are deemed to be our promoters. Mr. Lerner received 4,273,000
      shares and Mr. Granito received 2,930,000 shares of common stock for founding
      us. There have not been any other transactions with promoters.





Other
      than the relationships with University of Florida at Gainesville, Dr. Schultz,
      who is our board member, is a full time professor at University of Florida.
      No
      other officer or director has any relationship with any company or entity that
      will be working on developing our family of technologies or patents.





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


**(a)**  **Exhibits**





Exhibit
                Number
            Description2.1
            Merger
                Agreement dated March 19, 2001 between Above AverageInvestments
                Ltd. and Quick-Med Technologies, Inc. (1)2.2
            Amendment
                to Merger Agreement (1)3.1
            Articles
                of Incorporation (1)3.2
            Bylaws
                (1)10.1
            Quick-Med
                Technologies, Inc. MMP License Agreement (1)10.2
            Quick-Med
                Technologies,  Inc. Stock Option Plan (1)10.3
            Cooperative
                Research and Development Agreement with the U.S. Army Medical Research
                Institute of Chemical Defense (1)10.4
            Financing
                Agreement with Euro Atlantic Capital Corporation (1)10.5
            Consulting
                Agreement - Gregory Schultz (1)10.5.1
            Consulting
                Agreement - Christopher Batich (1)10.5.2
            Consulting
                Agreement - Bruce Mast (1)10.5.3
            Consulting
                Agreement - William Toreki (1)10.6
            Note
                issued to Michael Granito by Quick-Med Technologies,
                Inc. (1)10.7
            Employment
                Agreement with Gerard Bencen (1)10.8
            Research
                and Development Agreement with The Collaborative Group, Ltd.
                (2)10.8.1
            Amendment
                to Research and Development Agreement with Engelhard
                Corporation(4)10.9
            Agreement
                Between Noville, Inc. and Quick-Med Technologies, Inc.
                (3)31.1
            Certification
                of Principal Executive Officer Pursuant to Rule 13a-14(a) and 15d-14(a),
                filed herewith.31.2
            Certification
                of Chief Financial Officer Pursuant to Rule 13a-14(a) and 15d-14(a),
                filed
                herewith.32.1
            Certification
                of Principal Executive Officer pursuant to 18 U.S.C. Section 1350,
                as
                adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
                filed
                herewith.32.2
            Certification
                of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
                adopted
                pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed
                herewith.99.3
            Assignment
                of Patent for Wound Care (1)99.4
            Assignment
                of Patent for Mustard Gas (1)99.5
            Assignment
                of Patent for Anti-wrinkle cream
                (1)





NOTES:


(1)  Incorporated
      by reference to the Company's registration statement on Form SB-2 (file no.
      333-41672)





(2)
            Incorporated
                by reference to the Company’s Annual Report on Form 10-KSB for the year
                ended September 30, 2002


(3)
            Incorporated
                by reference to the Company’s Quarterly Report on Form 10-QSB for the
                three-month ended September 30,
                2002


(4)
            Incorporated
                by reference to the Company’s Form 8-K filed on August 11,
                2006


37








**ITEM
                14.**
            **PRINCIPAL
                ACCOUNTANT FEES AND SERVICES**




The
      following table sets forth fees billed to us by our auditors during the fiscal
      years ended June 30, 2006 and June 30, 2005 for: (i) services rendered for
      the
      audit of our annual financial statements and the review of our quarterly
      financial statements, (ii) services by our auditor that are reasonably related
      to the performance of the audit or review of our financial statements and that
      are not reported as Audit Fees, (iii) services rendered in connection with
      tax
      compliance, tax advice and tax planning, and (iv) all other fees for services
      rendered including a review of SEC registration statement filing. "Audit Related
      Fees" consisted of consulting regarding accounting issues.





June
                30, 2006
            June
                30, 2005(i)
            Audit
                Fees
            $
                35,500
            $
                31,000(ii)
            Audit
                Related Fees
            $5,000
            $
                0(iii)
            Tax
                Fees
            $
                5,000
            $10,000(iv)
            All
                Other Fees
            $0
            $
                0




While
      we
      have established an audit committee of the Board of Directors, we have not
      established a pre-approval policy. All services provided by the auditors for
      fiscal 2006 were accepted by the audit committee and approved by the full Board
      of Directors.


38





**SIGNATURES**





In
      accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
      the
      registrant certifies that it has caused this Annual Report on Form 10-KSB to
      be
      signed on its behalf by the undersigned, thereunto duly authorized.





**QUICK-MED
      TECHNOLOGIES, INC.**








Date:
                September 28, 2006
            By:
                /s/ DAVID S. LERNER____________________________________David
                S. LernerPresident
                and Principal Executive Officer








In
      accordance with the Securities Exchange Act of 1934, the Annual Report on Form
      10-KSB has been signed below by the following persons on behalf of the
      registrant in the capacities and on the dates indicated:





**Signature**
            **Title**
            **Date**/s/
                DAVID S. LERNER
            President
                and Director
            September
                27, 2006David
                S. Lerner
            (Principal
                Executive Officer)/s/
                MICHAEL R. GRANITO
            Chairman
                of the Board
            September
                27, 2006Michael
                R. Granito/s/
                PAUL G. CERJAN
            Director
            September
                27, 2006Paul
                G. Cerjan/s/
                GREGORY S. SCHULTZ
            Vice
                President, Laboratory &
            September
                27, 2006Gregory
                S. Schultz
            Clinical
                Research, and Director/s/
                GEORGE E. FRIEL
            Director
            September
                27, 2006George
                E. Friel/s/
                GERALD M. OLDERMAN
            Vice
                President, Research
            September
                27, 2006Gerald
                M. Olderman
            &
                Development andCommercialization,
                and Director/s/
                RICHARD CAFFREY
            Director
            September
                27, 2006Richard
                F. Caffrey/s/
                CHERYL TURNBULL
            Director
            September
                27, 2006Cheryl
                L. Turnbull/s/
                NAM H. NGUYEN
            Chief
                Financial Officer
            September
                27, 2006Nam
                H. Nguyen
            (Principal
                Financial and Accounting Officer)





39






**TABLE
        OF CONTENTS**
 
 
 
 Report
        of
        Independent Registered Public Accounting
        Firm.........................................................................................................................................................................  F-2
  Financial
        Statements:
 
 Balance
        Sheets as of June 30, 2006 and
        2005....................................................................................................................................................................................... F-3
 
 Statements
        of
        Operations for the years ended June 30, 2006 and 2005
        ........................................................................................................................................... F-4
  Statements
        of
        Changes in Stockholders’ Deficit for the years ended June 30, 2006 and 2005
        ...................................................................................................  F-5
  Statements
        of
        Cash Flows for the years ended June 30, 2006 and 2005
        .......................................................................................................................................... F-6
 
 Notes
        to
        Financial Statements
        ...................................................................................................................................................................................................................... F-7
        -20
           
 F
            -1












**Report
        of Independent Registered Public Accounting Firm**
  
 
 To
        the
        Board of Directors and Stockholders
 Quick-Med
        Technologies, Inc.
 
 We
        have
        audited the accompanying balance sheets of Quick-Med
        Technologies, Inc. as of June
        30,
        2006 and
        2005 ,
        and the
        related statements of operations, changes in stockholders’ deficit and cash
        flows for the years then ended. These financial statements are the
        responsibility of the Company’s management. Our responsibility is to express an
        opinion on these financial statements based on our audit.
  We
        conducted our audit in accordance with the standards of the Public Company
        Accounting Oversight Board (United States).  Those standards require that
        we plan and perform the audit to obtain reasonable assurance about whether
        the
        financial statements are free of material misstatement.  The Company has
        determined that it is not required to have, nor were we engaged to perform,
        an
        audit of its internal control over financial reporting. Our audit included
        consideration of internal control over financial reporting as a basis for
        designing audit procedures that are appropriate in the circumstances, but
        not
        for the purpose of expressing an opinion on the effectiveness of the Company’s
        internal control over financial reporting. Accordingly, we express no such
        opinion.  An audit also includes examining, on a test basis, evidence
        supporting the amounts and disclosures in the financial statements, assessing
        the accounting principles used and significant estimates made by management,
        as
        well as evaluating the overall financial statement presentation.  We
        believe that our audit provides a reasonable basis for our opinion.
  In
        our
        opinion, the financial statements referred to above present fairly, in all
        material respects, the financial position of Quick-Med
        Technologies, Inc. ,
        as of June
        30,
        2006 and
        2005 ,
        and the
        results of its operations and its cash flows for the years then ended, in
        conformity with accounting principles generally accepted in the United States
        of
        America.
 
 The
        accompanying financial statements have been prepared assuming the Company
        will
        continue as a going concern. The Company has experienced recurring losses
        and
        negative cash flows from operations for the years ended June
        30,
        2006 and
        2005 ,
        and has
        a net capital deficiency. These matters raise substantial doubt about the
        Company’s ability to continue as a going concern. Management’s plans regarding
        those matters are described in the footnotes accompanying the financial
        statements. The financial statements do not include any adjustments that
        might
        result from the outcome of this uncertainty.
 
 
 Boca
        Raton, Florida
 September
        25, 2006








F
          -2




**QUICK-MED TECHNOLOGIES, INC.****BALANCE SHEETS****AS OF JUNE 30, 2006 AND 2005**


**ASSETS****2006**
              
              
              **2005**Current
                  assets:Cash
                  and cash equivalents
              
              $
              184,142
              
              $
              844,309Accounts
                  receivable
              
              
              45,001
              
              
              49,108Total
                  current assets
              
              
              229,143
              
              
              893,417Property
                  and equipment, net
              
              
              15,804
              
              
              10,807Other
                  assets:Prepaid
                  expenses
              
              
              4,980
              
              
              12,436Intangible
                  asset, net
              
              
              275,766
              
              
              310,784Total
                  other assets
              
              
              280,746
              
              
              323,220Total
                  assets
              
              $
              525,693
              
              $
              1,227,444**LIABILITIES
                  AND STOCKHOLDERS' DEFICIT**Current
                  liabilities:Accounts
                  payable
              
              $
              218,949
              
              $
              106,440Accrued
                  expenses
              
              
              6,842
              
              
              6,842Accrued
                  interest on note payable - director
              
              
              18,864
              
              
              37,746Total
                  current liabilities
              
              
              244,655
              
              
              151,028License
                  payable
              
              
              160,000
              
              
              160,000Long-term
                  liability - note payable - director
              
              
              132,950
              
              
              -Long-term
                  liability - convertible note payable - director
              
              
              1,268,625
              
              
              1,268,625Total
                  liabilities
              
              
              1,806,230
              
              
              1,579,653Commitments
                  and contingenciesStockholders'
                  deficit:Common
                  stock, $0.0001 par value; 100,000,000authorized
                  shares; 30,221,215 and 29,730,519 shares issuedand
                  outstanding at June 30, 2006 and 2005, respectively
              
              
              3,022
              
              
              2,973Additional
                  paid-in capital
              
              
              11,506,487
              
              
              11,194,222Outstanding
                  stock options
              
              
              1,399,959
              
              
              939,537Accumulated
                  deficit
              
              
              (14,190,005
              )
              
              (12,488,941
              )Total
                  stockholders' deficit
              
              
              (1,280,537
              )
              
              (352,209
              )Total
                  liabilities and stockholders' deficit
              
              $
              525,693
              
              $
              1,227,444
   See
          accompanying notes to financial statements.
   F
              -3




**QUICK-MED
        TECHNOLOGIES, INC.**
 **STATEMENTS
        OF OPERATIONS**
 **FOR
        THE YEARS ENDED JUNE 30, 2006 AND 2005**




**2006**
              
              
              **2005**Revenues
              
              $
              1,230,441
              
              $
              181,723Expenses:Cost
                  of revenues
              
              
              187,158
              
              
              27,746Research
                  and development
              
              
              865,388
              
              
              579,034General
                  and administrative expenses
              
              
              815,178
              
              
              627,177Licensing
                  and patent expenses
              
              
              319,960
              
              
              239,836Depreciation
                  and amortization
              
              
              50,021
              
              
              45,517Stock-based
                  compensation
              
              
              629,433
              
              
              516,072Total
                  expenses
              
              
              2,867,138
              
              
              2,035,382Loss
                  from operations
              
              
              (1,636,697
              )
              
              (1,853,659
              )Other
                  income (expense):Other
                  income
              
              
              -
              
              
              17,478Interest
                  income
              
              
              11,638
              
              
              9,709Interest
                  expense
              
              
              (76,005
              )
              
              (100,871
              )Loss
                  before income taxes
              
              
              (1,701,064
              )
              
              (1,927,343
              )Provision
                  (benefit) for income taxes
              
              
              -
              
              
              -Net
                  loss
              
              $
              (1,701,064
              )
              $
              (1,927,343
              )Net
                  loss per share (basic and diluted)
              
              $
              (0.06
              )
              $
              (0.08
              )Weighted
                  average commonshares
                  outstanding (basic and diluted)
              
              
              30,082,797
              
              
              23,274,818
  See
          accompanying notes to financial statements.
   F
            -4




**QUICK-MED
        TECHNOLOGIES, INC.**
 **STATEMENTS
        OF CHANGES IN STOCKHOLDERS’ DEFICIT**
 **FOR
        THE YEARS ENDED JUNE 30, 2006 AND 2005**







**Additional****Common
                  Stock**
              
              
              
              **Paid-In**
              
              **Accumulated**
              
              **Outstanding****Shares**
              
              **Amount**
              
              **Capital**
              
              **Deficit**
              
              **Stock
                  Options**
              
              **Total**Balance,
                  June 30, 2004
              
              
              17,652,027
              
              
              1,765
              
              $
              7,611,358
              
              $
              (10,561,598
              )
              $
              781,950
              
              $
              (2,166,525
              )Stock
                  issuance for cash
              
              
              7,323,913
              
              
              732
              
              
              1,896,268
              
              
              -
              
              
              -
              
              
              1,897,000Stock
                  issued in loan conversion
              
              
              3,489,703
              
              
              349
              
              
              1,325,738
              
              
              -
              
              
              -
              
              
              1,326,087Stock
                  options granted for services
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              159,754
              
              
              159,754Stock
                  issued for services
              
              
              1,248,210
              
              
              125
              
              
              356,193
              
              
              -
              
              
              -
              
              
              356,318Exercise
                  of stock options
              
              
              16,666
              
              
              2
              
              
              4,665
              
              
              -
              
              
              (2,167
              )
              
              2,500Net
                  loss, July 1, 2004 to June 30, 2005
              
              
              -
              
              
              -
              
              
              -
              
              
              (1,927,343
              )
              
              -
              
              
              (1,927,343
              )Balance,
                  June 30, 2005
              
              
              29,730,519
              
              
              2,973
              
              $
              11,194,222
              
              $
              (12,488,941
              )
              $
              939,537
              
              $
              (352,209
              )Stock
                  issued for cash
              
              
              154,118
              
              
              15
              
              
              113,538
              
              
              -
              
              
              -
              
              
              113,553Stock
                  options granted for services
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              491,922
              
              
              491,922Stock
                  issued for services
              
              
              161,578
              
              
              17
              
              
              137,494
              
              
              -
              
              
              -
              
              
              137,511Exercise
                  of stock options
              
              
              175,000
              
              
              17
              
              
              61,233
              
              
              -
              
              
              (31,500
              )
              
              29,750Net
                  loss, July 1, 2005 to June 30, 2006
              
              
              -
              
              
              -
              
              
              -
              
              
              (1,701,064
              )
              
              -
              
              
              (1,701,064
              )Balance,
                  June 30, 2006
              
              
              30,221,215
              
              
              3,022
              
              $
              11,506,487
              
              $
              (14,190,005
              )
              $
              1,399,959
              
              $
              (1,280,537
              )
  See
          accompanying notes to financial statements.
   F
              -5




**QUICK-MED
        TECHNOLOGIES, INC.**
 **STATEMENTS
        OF CASH FLOWS**
 **FOR
        THE YEARS ENDED JUNE 30, 2006 AND 2005**





**2006**
            
            
            **2005**Cash
                flows from operating activities:Net
                loss
            
            $
            (1,701,064
            )
            $
            (1,927,343
            )Adjustments
                to reconcile net loss to netcash
                used in operating activities:Depreciation
                and amortization
            
            
            50,021
            
            
            45,517Stock
                granted for services
            
            
            137,511
            
            
            356,318Stock-based
                compensation
            
            
            491,922
            
            
            159,754(Increase)
                decrease in:Accounts
                receivable
            
            
            4,107
            
            
            (49,108
            )Prepaid
                expenses
            
            
            7,456
            
            
            6,341Increase
                (decrease) in:Accounts
                payable
            
            
            112,509
            
            
            (116,446
            )Accrued
                interest
            
            
            (18,882
            )
            
            98,482Net
                cash used in operating activities
            
            
            (916,420
            )
            
            (1,426,485
            )Cash
                flows from investing activities:Purchase
                of fixed assets
            
            
            (9,813
            )
            
            (11,755
            )Patents
            
            
            (10,187
            )
            
            (7,547
            )Net
                cash used in investing activities
            
            
            (20,000
            )
            
            (19,302
            )Cash
                flows from financing activities:Issuance
                of common stock for cash, net
            
            
            113,553
            
            
            1,897,000Proceeds
                from stock option exercise
            
            
            29,750
            
            
            2,500Increase
                in short-term note payable - director
            
            
            -
            
            
            10,417Increase
                in long-term note payable - director
            
            
            132,950
            
            
            -Repayments
                of short-term notes payable - director
            
            
            -
            
            
            (89,626
            )Increase
                in convertible note payable - director
            
            
            -
            
            
            450,000Net
                cash provided by financing activities
            
            
            276,253
            
            
            2,270,291Net
                (decrease) increase in cash and cash equivalents
            
            
            (660,167
            )
            
            824,504Cash
                and cash equivalents at beginning of period
            
            
            844,309
            
            
            19,805Cash
                and cash equivalents at end of period
            
            $
            184,142
            
            $
            844,309**Supplementary
                Information:**Cash
                paid for:Interest
            
            $
            94,886
            
            $
            5,370Income
                taxes
            
            $
            -
            
            $
            -Non-cash
                disclosures of investing andfinancing
                activities:Stock
                options granted to consultant
            
            $
            270,860
            
            $
            159,754Conversion
                of debt to equity
            
            $
            -
            
            $
            1,325,738




See
        accompanying notes to financial statements.






F
          -6




**QUICK-MED
        TECHNOLOGIES, INC.**
 **NOTES
        TO FINANCIAL STATEMENTS**





***NOTE
        1 - DESCRIPTION OF BUSINESS***
 
 Founded
        in April 1997, Quick-Med Technologies Inc. (the ”Company”) is a life sciences
        company focused on developing proprietary, broad-based technologies in medical
        and consumer healthcare markets. The Company’s two core technologies under
        development are: (1) MultiStatTM, a family of advanced patented methods and
        compounds shown to be effective in skin therapy applications; and (2) Novel
        Intrinsically MicroBonded Utility Substrate (NIMBUSTM), a family of advanced
        polymers bio-engineered to have antimicrobial, super-absorbent, and other
        properties that can be used in a wide range of applications. Currently,
        MultiStatTM has been developed in a cosmetic product line with the anti-aging
        products under launch. MultiStatTM is also being employed in a drug product line
        as a post-injury treatment for mustard gas exposure, with the initial product
        currently at a developmental state of development in partnership with the
        U.S.
        Army. Quick-Med Technologies Inc.’s NIMBUSTM technology has initially been
        targeted at (a) medical device, including advanced wound dressing products,
        and
        (b) several enhanced consumer products, including order-controlled products
        (e.g. apparel or hygiene), and antibacterial related products. In each instance,
        the Company intends to form joint ventures or joint development partnerships
        with leading firms in the respective industry to co-develop and commercialize
        its products.
 
 The
        Company specializes in the research and development of biomedical products
        and
        devices for antibacterial applications. The Company conducts research efforts
        or
        collaborates with third parties as necessary to develop products and administer
        the patent process. The Company does not expect to produce nor directly market
        its products. Instead, the Company intends to partner with clients for those
        activities.
 
 Since
        its
        inception, the Company has been heavily dependent upon the receipt of capital
        investment or other financing and revenues to fund its continuing activities.
        In
        addition to the normal risks associated with a new business venture, there
        can
        be no assurance that the Company’s product development will be successfully
        completed or that it will be a commercial success. Further, the Company is
        dependent upon certain related parties to provide continued funding and capital
        resources.
  
 ***NOTE
        2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
        POLICIES***
 
 *Basis
        of Presentation*
 
 The
        accompanying financial statements have been prepared assuming that the Company
        will continue as a going concern. The Company has negative cash flows from
        operations and an accumulated deficit that raises substantial doubt about
        its
        ability to continue as a going concern. The financial statements do not include
        any adjustments that might result from the outcome of this
        uncertainty.
 
 *Cash
        and Cash Equivalents*
 
 All
        highly liquid investments purchased with maturity of three months or less
        from
        the time of purchase are considered to be cash equivalents.
 
 *Use
        of Estimates*
 
 The
        preparation of financial statements in conformity with generally accepted
        accounting principles requires management to make estimates and assumptions
        that
        affect the reported amounts of assets and liabilities and disclosure of
        contingent assets and liabilities at the date of the financial statements
        and
        the reported amounts of revenues and expenses during the reporting period.
        Actual results could differ from those estimates.
  
 F
            -7
  **QUICK-MED
          TECHNOLOGIES, INC.**
 **NOTES
          TO FINANCIAL STATEMENTS**
  ***NOTE
        2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
        continued***
 
 *Intangible
        Assets*
 
 The
        cost
        of obtaining license agreements along with the costs to defend the patents
        underlying the license agreements are capitalized and are amortized using
        the
        straight-line method over the estimated useful lives of the underlying license
        agreements. The costs of obtaining and maintaining new patents are capitalized
        and amortized using the straight-line method over the estimated useful lives
        of
        the patents. The cost of patents in process is not amortized until the patent
        is
        issued.
 
 *Property
        and Equipment*
 
 Property
        and equipment are stated at cost. Depreciation on property and equipment
        is
        computed using the straight-line method over the expected useful lives of
        the
        assets.
 
 *Accounts
        Receivable and Allowance for Doubtful Accounts*
 
 Accounts
        receivable as of June 30, 2006 represents amounts due from Engelhard Corporation
        (a subsidiary of BASF) and is reported in the balance sheet reduced by an
        allowance for doubtful accounts for estimated losses resulting from receivables
        not considered to be collectible.
 
 *Research
        and Development Costs*
 
 Research
        and development costs are expensed as incurred.
 
 *Earnings
        Per Share*
 
 Basic
        net
        earnings (loss) per common share are computed by dividing net earnings (loss)
        applicable to common shareholders by the weighted-average number of common
        shares outstanding during the period. Diluted net earnings (loss) per common
        share is determined using the weighted-average number of common shares
        outstanding during the period, adjusted for the dilutive effect of common
        stock
        equivalents, consisting of shares issuable upon exercise of common stock
        options
        and warrants. In periods when losses are reported, the weighted-average number
        of common shares outstanding excludes common stock equivalents, because their
        inclusion would be anti-dilutive.
 
 *Revenue
        Recognition*
  The
        Company recognizes the revenue of its royalties from the sale of products
        by the
        cosmetic and personal care division of Engelhard Corporation (a subsidiary
        of
        BASF) under the master agreement for product development, manufacturing and
        distribution (the “Master Agreement”). The Company also recognizes the revenue
        from the non-refundable exclusivity license fee derived from Engelhard
        Corporation under the Master Agreement on a pro rata basis over the term
        of the
        related exclusive license agreement. Revenue from the research agreement
        is
        recognized on a pro rata basis over the term of the agreement. Revenue
        from the small business innovation research program is recognized based on
        the
        research work performed in accordance with the program
        requirements.
 
 *Stock
        Compensation*
 
 The
        Company has adopted Statement of Financial Accounting Standards No. 123 (“SFAS
        123”), “Accounting for Stock-Based Compensation.” SFAS 123 encourages the use of
        a fair-value-based method of accounting for stock-based awards, under which
        the
        fair value of stock options is determined on the date of grant and expensed
        over
        the vesting period. Under SFAS 123, companies may, however, measure compensation
        costs for those plans using the method prescribed by Accounting Principles
        Board
        Opinion No. 25 (“APB No. 25”), “Accounting for Stock Issued to Employees.”
Companies that apply APB No. 25 are required to include pro forma disclosures
        of
        net earnings and earnings per share as
  F
            -8
  **QUICK-MED
          TECHNOLOGIES, INC.**
 **NOTES
          TO FINANCIAL STATEMENTS**
 
  ***NOTE
        2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
        continued***
 
 if
        the
        fair-value-based method of accounting had been applied. The Company elected
        to
        account for such plans under the provisions of APB No. 25. The Company accounts
        for stock options or warrants granted to consultants at fair value pursuant
        to
        SFAS 123.
 
 For
        the
        year ended June 30, 2005, the Company’s net loss and loss per share would have
        been increased to the pro forma amounts indicated below:
  **2005**Net
                    lossAs
                    reported
                $
                (1,927,343
                )Pro
                    forma
                $
                (1,958,793
                )Loss
                    per shareAs
                    reported
                $
                (0.08
                )Pro
                    forma
                $
                (0.08
                )
 
 
 In
        December 2004, the Financial Accounting Standards Board ("FASB") issued a
        final
        standard, SFAS 123R, "Share-Based Payment," ("SFAS 123R"), which requires
        companies to expense the value of employee stock options and similar awards.
        Under SFAS 123R, share-based payment awards result in a cost that will be
        measured at fair value on the grant date of the awards, based on the estimated
        number of awards that are expected to vest. Compensation cost for awards
        that
        vest would not be reversed if the awards expire without being exercised.
        SFAS
        123R is effective for the Company beginning in the quarter ended September
        30,
        2005 and applies to all outstanding and unvested share-based payment awards
        at
        the adoption date. The Company adopted the modified prospective approach
        as its
        implementation method under this pronouncement. The fair value of stock options
        was determined using the Black-Scholes option-pricing model. The adoption
        of  SFAS 123R did not have a material impact on the Company's
        financial condition or results of operations.
 
  Concentration
        of credit risk of financial
        instruments
 Financial
        instruments that potentially subject the Company to credit risk consist of
        cash
        equivalents and accounts receivable. As of June 30, 2006, the Company’s cash
        levels exceeded the federally insured limit but were maintained with a high
        quality institution and management is regularly monitoring its cash position.
        As
        of June 30, 2006, all of the Company’s accounts receivable were derived from
        Engelhard Corporation. The credit risk of the receivable is considered limited
        given the customer credit rating. There were no write-offs of uncollectible
        receivable during the year ended June 30, 2006.
 
 
 
 F
            -9
  **QUICK-MED
          TECHNOLOGIES, INC.**
 **NOTES
          TO FINANCIAL STATEMENTS**
 ***NOTE 3
        - FAIR VALUE OF FINANCIAL INSTRUMENTS***
 
 The
        Company’s financial instruments are accounts receivable, and accounts payable.
        The carrying values of accounts receivable and accounts payable approximate
        fair
        values based on their short-term nature.
 
 ***NOTE 4
        - PROPERTY AND EQUIPMENT***
 
 Property
        and equipment consist of the following at June 30, 2006 and 2005:
 
 **2006**
                
                
                **2005**Computer
                    equipment
                
                $
                21,134
                
                $
                15,808Equipment
                
                
                9,597
                
                
                5,111Less:
                    accumulated depreciation
                
                
                (14,927
                )
                
                (10,112
                )Net
                    property and equipment
                
                $
                15,804
                
                $
                10,807
 
 Depreciation
        expense for the years ended June 30, 2006 and 2005 was $4,815 and $2,995,
        respectively.
 
 ***NOTE 5
        - INTANGIBLE ASSETS***
 
 *License
        Agreement*
 
 The
        Company has a license agreement with two inventors (“Licensors”) for the
        worldwide rights to the MMP inhibitors.  The license agreement transfers to
        the Company the technology that is the subject of issued patents as well
        as
        pending patent applications, which were filed by the original inventors.
        The
        licenses are amortized on a straight-line basis over the estimated useful
        lives
        of the underlying patents or the license agreement. The U.S. patents expire
        beginning November 2007 through November 2016 and the international patents
        expire beginning on November 21, 2011 through December 8, 2019. Accumulated
        amortization for the years ended June 30, 2006 and 2005 was $241,296 and
        $196,090, respectively.
 
 The
        Company assesses whether its intangible assets are impaired as required by
        SFAS
        No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets” based
        on an evaluation of undiscounted projected cash flows through the remaining
        useful lives. If impairment exists, the amount of such impairment is calculated
        as the estimated fair value of the assets.
 
 Under
        the
        terms of the license agreement, the Company paid $200,000 and granted 160,000
        shares of common stock valued at $0.05 per share and granted 160,000 stock
        options. The stock options are valued at the estimated minimum value in
        accordance with SFAS 123 of $8,000. In order to maintain the Company’s exclusive
        rights to the licenses, the agreements require total payments of $260,000
        if
        certain milestones regarding the proof-of-concept and development of a prototype
        are reached. If a milestone on the “Civilian Chemical Burn” and “Other topical
        Medical Uses” categories is not met by the third anniversary of the agreement,
        the licenses granted within these categories become nonexclusive. The Company
        elected not to pay each inventor $25,000 per year until all such milestones
        are
        met. At June 30, 2006 and 2005, the balance due under the license agreement
        is
        $160,000.
  As
          additional compensation to the Licensors, the Company will pay a royalty
          based
          on the Company’s net sales of licensed products. The royalty rate is 2% on the
          first $1,500,000 of applicable quarterly revenue and 1.5% of sales above
          $1,500,000 on applications of products other than applications for military
          and cosmetic
          products.  For each sublicense granted by the Company, the Licensors will
          be paid 3% of the up-front licensing fee, limited to $100,000.
 
 F
            -10
 
 **QUICK-MED
          TECHNOLOGIES, INC.**
 **NOTES
          TO FINANCIAL STATEMENTS**
 ***NOTE 5
        - INTANGIBLE ASSETS, continued***
  In
        November 2002, the Company and the University of Florida Research Foundation
        (the “University”) entered into an agreement whereby the University gave the
        Company exclusive sub-license rights to the use of its patents and patent
        applications from the effective date of the agreement until the earlier of
        the
        date that
 no
        licensed patents remain enforceable patents or the payment of earned royalties
        ceases more than three calendar quarters. The royalty rate is 3% of the first
        $10 million of cumulative realized revenues and 1.8% of all subsequent realized
        revenues.
 
 During
        the fiscal year 2004, the Company filed five new patent applications relating
        to
        the new projects: combination cosmetic cream, NIMBUS treatment of lumber,
        and
        antimicrobial and antiproteolytic wound dressing and method. As of June 30,
        2006, the total capitalized costs of these five new patent applications was
        $74,112.
 
 During
        the fiscal year 2005, the Company was issued three international patents
        relating to the antimicrobial and antiproteolytic wound dressing and method
        of
        fabrication, and treatment for tissue ulceration
        and reinstated two patent applications relating to the new projects: combination
        cosmetic cream and NIMBUS treatment of lumber. As of June 30, 2006, the total
        capitalized costs of these two new patent applications was $7,547. The three
        patents expire on December 8, 2019 and November 21, 2011,
        respectively.
 
 During
        the fiscal year 2006, the Company was issued both US and international patents
        for its NIMBUSTM technology on “ Intrinsically
        Bactericidal Absorbent Dressing And Method Of Fabrication”. These
        patents expire on December 8, 2019. The total capitalized costs for this
        issued
        patent were $35,470 and are being amortized over the life of the
        patents.
 
 **June
                    30, 2006**
                
                **June
                    30, 2005****Gross**
                
                **Accumulated**
                
                **Gross**
                
                **Accumulated****Amount**
                
                **Amortization**
                
                **Amount**
                
                **Amortization****Amortized
                    Intangible Assets**License
                    agreement
                
                $
                461,660
                
                $
                (241,296
                )
                $
                425,215
                
                $
                (196,090
                )Patents
                    in process
                
                
                55,402
                
                
                -
                
                
                81,659
                
                
                -Total
                
                $
                517,062
                
                $
                (241,296
                )
                $
                506,874
                
                $
                (196,090
                )
 Amortization
        of patents in process commences when the patents are issued.
 
 **June
                    30, 2006**
                
                **June
                    30, 2005****Gross**
                
                **Accumulated**
                
                **Gross**
                
                **Accumulated****Amount**
                
                **Amortization**
                
                **Amount**
                
                **Amortization****Aggregate
                    Amortization Expense**For
                    the years ended
                
                $
                45,206
                
                $
                241,296
                
                $
                42,521
                
                $
                196,090**Estimated
                    Amortization Expense**
                
                
                **Amount**For
                    the year ended June 30, 2007
                
                $
                46,068For
                    the year ended June 30, 2008
                
                $
                46,068For
                    the year ended June 30, 2009
                
                $
                46,068For
                    the year ended June 30, 2010
                
                $
                46,068For
                    the year ended June 30, 2011
                
                $
                26,986
 
 F
            -11
  **QUICK-MED
          TECHNOLOGIES, INC.**
 **NOTES
          TO FINANCIAL STATEMENTS**
 
  ***NOTE 6
        - RELATED PARTY TRANSACTIONS***
 
 For
        the
        fiscal years ended June 30, 2006 and 2005, the Company received $132,950
        and
        $450,000, respectively, from the Company’s Chairman. In June 2006, the
        Company issued a note payable to the Chairman for $132,950 with an 8%
        interest rate per annum and a maturity date of October 1, 2007. The funding
        received from the Chairman in 2004 was part of the convertible note payable
        as described below. In 2003, the Chairman funded the Company by purchasing
        our restricted common stock for $600,000 and loaning us $175,000 in a short
        term
        note, of which $50,000 was repaid. In addition, the Chairman paid $125,000
        in cash for a joint development project on behalf of the Company, which was
        accounted for as a short term note at an interest rate of 6% per annum. The
        short term notes were subsequently consolidated into a long term convertible
        note as described below.
 
 In
        September 2003, we negotiated a successor agreement with the Chairman
        regarding the line of credit, which expired July 1, 2003 totaling $1,300,200,
        excluding interest. The line of credit of $750,000 and the short term borrowing
        of $550,200 have been consolidated into a single convertible note for up
        to
        $1,500,000 excluding accrued interest, at an interest rate of 6% and originally
        due July 1, 2004. During the year ended June 30, 2006, the maturity date
        of the
        note was extended until October 1, 2007 by the Chairman. The convertible
        note is secured by the assets and revenues of the Company and is senior to
        all
        other debt obligations. The note plus accrued interest is convertible, in
        full
        or in part, at the option of the Chairman for a term of up to 5 years beginning
        September 1, 2003 at a conversion rate of $0.38 per share. The conversion
        rate
        was determined at 15% above the then average share price over the prior 20
        trading days ($0.33 per share). The note has an anti-dilution provision in
        the
        event that the Company sells stock to other investors at less than $0.20
        per
        share. In August 2004, the Board of Directors granted the Chairman the
        right to consolidate the short-term debt and its related accrued interest
        into
        the convertible note under the same terms. The Chairman exercised the right
        to
        consolidate all outstanding short term notes and accrued interest into the
        long-term convertible note under the same terms.
 
 As
        more
        fully described in Note 7, the Chairman converted $500,000 and $826,087 of
        the convertible note  into 1,315,790 and 2,173,913 shares of 
restricted common stock on November 30 and December 31, 2004, respectively,
        in
        accordance with the terms of the Stock Purchase Agreement. These amounts
        were
        converted at a conversion price applicable to the convertible debt of $0.38
        per
        share. At June 30, 2006, the convertible note outstanding balance was
        $1,268,625, which is convertible into 3,338,487 shares of restricted common
        stock.
 During
        the year ended June 30, 2006, the Company paid accrued interest on the
        convertible note of approximately $94,886. At June 30, 2006, the Company
        accrued
        interest on the convertible note of approximately $18,864. Effective July
        1,
        2006, the Company issued a short term note payable to the Chairman for the
        unpaid quarterly accrued interest at a rate of 8% per annum.
 
 For
        the
        fiscal year ended June 30, 2005, the Company received $10,417 from the
        Company’s President to fund operations. The loan amount was accounted as short
        term note with an interest rate of 6% per annum. The Company repaid
        $89,626 of the short term notes during the fiscal year ended June 30,
        2005.
 
 At
        June
        30, 2006 and 2005, the Company paid $6,900 for each year in rent payments
        to the
        President for the sub-lease of office space. The term of the sub-lease is
        for a
        month to month period.
 
 ***NOTE 7
        - STOCKHOLDERS’ EQUITY (DEFICIT)***
 
 Fiscal
        2006
 
 In
        July
        and August 2005, the Company issued a total of 54,118 shares of restricted
        common stock for an aggregate purchase price of $33,553 or $0.62 cents per
        share
        for cash.
   F
            -12
  **QUICK-MED
        TECHNOLOGIES, INC.**
 **NOTES
        TO FINANCIAL STATEMENTS**




*NOTE 7 - STOCKHOLDERS’ EQUITY (DEFICIT),
      continued*


In
        August
        2005, the Company issued 175,000 shares of restricted common stock for an
        aggregate exercise price of $29,750 or $0.17 per share resulting from the
        exercise of a stock option.
 
 In
        September 2005, the Company issued 130,000 shares of restricted common stock
        for
        the payment of services rendered by the members of the Board of Directors.
        In
        addition, the Company granted stock options and warrants of 710,000 and 175,000
        respectively to employees and consultants with exercise prices of $0.80 per
        share as performance bonus according to the vesting schedule. Further, the
        Company issued 5,556 shares of restricted common stock for payment of services
        provided by a consultant.
 
 In
        November and December 2005, the Company issued a total of 13,324 shares of
        restricted common stock for payment of services provided by two
        consultants.
 
 In
        February 2006, the Company issued a total of 100,000 shares of restricted
        common
        stock for an aggregate purchase price of $80,000 or $0.80 per share for
        cash.
 
 In
        January, February and March 2006, the Company issued a total of 5,071 shares
        of
        restricted common stock for payment of services provided by a
        consultant.
 
 In
        April,
        May and June 2006, the Company issued a total of 7,627 shares of restricted
        common stock for payment of services provided by consultants.
 
 Fiscal
        2005
 
 On
        November 30, 2004, the Company completed an agreement to sell 5,000,000 shares
        of its restricted common stock to Phronesis Partners, L.P. (“Phronesis”), a
        Delaware limited partnership, for $1,000,000 before
        commission and expenses of $120,000 (the ”Stock Purchase Agreement”). In
        connection with the agreement, the Company Chairman converted $500,000 of
        the
        convertible debt owed to him into 1,315,790 shares of the Company’s restricted
        common stock at a conversion price applicable to the convertible debt of
        $0.38
        per share.
  
 F
            -13
 
 **QUICK-MED
          TECHNOLOGIES, INC.**
 **NOTES
          TO FINANCIAL STATEMENTS**
 
 ***NOTE 7
        - STOCKHOLDERS’ EQUITY (DEFICIT), continued***
 
 In
        connection with the Stock Purchase Agreement, the Company entered into the
        stockholders agreement, the registration rights agreement, the warrant
        agreement, the conversion agreement and the confidentiality agreement.
 
 The
        Company granted Phronesis warrants to purchase up to $1,000,000 in shares
        of
        restricted common stock at an exercise price as defined in the warrant
        agreement.
 
 Phronesis
        was granted certain rights, including registration rights, right of first
        refusal, tag-along rights, drag-along rights, preemptive rights, and the
        right
        to designate an observer and a director. In addition, one of the ancillary
        agreements provides for certain restrictions on related party transactions
        between and among the Company, the Chairman and the President and the sale
        of
        shares.
 
 On
        December 31, 2004, the Company and Phronesis agreed to amend the exercise
        price
        for the warrant to $0.46 per share. All other terms of the Stock Purchase
        Agreement and the warrant agreement remained the same. On the same date,
        Phronesis exercised its warrant to purchase 2,173,913 shares of our restricted
        common stock at a per share price of $0.46, or an aggregate purchase price
        of
        $1,000,000 before commissions of $70,000.
 
 In
        connection with the exercise of the warrant and in accordance with the terms
        of
        the Stock Purchase Agreement, the Chairman immediately converted $826,087
        of his
        convertible debt into 2,173,913 shares of restricted common stock (equal
        to the
        number of shares acquired by Phronesis) at the $0.38 conversion price per
        share.
 
 During
        the fiscal year ended June 30, 2005, the Company issued 1,414,876 shares
        of
        restricted common stock in payment for services rendered by the employees,
        directors and service providers.
 
 In
        February 2005, the Company sold 150,000 shares of its restricted common stock
        for $87,000 in cash.
 
 
 ***NOTE 8
        - COMMITMENTS***
 
 The
        Company leases an equipped laboratory in Gainesville, Florida. The lease
        expires
        in March 2007. Rent expense for the years ended June 30, 2006 and 2005 was
        approximately $18,000 and $15,000, respectively.
 
 The
        following is a schedule of minimum future payments on the operating lease
        as of
        June 30, 2006:
 
 **For
                    The Years Ending June 30,**2007
                $
                    13,7882008
                -2009
                -Thereafter
                -Total
                $
                    13,788
 ***NOTE 9
        - STOCK OPTIONS AND WARRANTS***
 
 The
        Company adopted a qualified equity incentive plan (the “Plan”) on March 4, 2001.
        Under the Plan the Company is authorized to grant up to 3,000,000 shares
        of
        common stock. On December 13, 2004, the shareholders approved the Plan and
        ratified the amendment to increase the total number of shares to be granted
        under the Plan from 3,000,000 to 4,000,000 effective November 1, 2004.
 
 In
        December 2004, the Financial Accounting Standards Board ("FASB") issued a
        final
        standard, SFAS 123R, "Share-Based Payment," ("SFAS 123R"), which requires
        companies to expense the value of employee stock options and similar awards.
        Under SFAS 123R, share-based payment awards result in a cost that will be
        measured at fair value on the grant date of the awards, based on the estimated
        number of awards that are expected to vest. Compensation cost for awards
        that
        vest would not be reversed if the awards expire without being exercised.
        SFAS
        123R is effective for the Company beginning in the quarter ended September
        30,
        2005 and applies to all outstanding and unvested share-based payment awards
        at
        the adoption date. The Company adopted the modified prospective approach
        as its
        implementation method under this pronouncement. The fair value of stock options
        was determined using the Black-Scholes option-pricing model. The fair value
        of
        the restricted stock awards was based on the closing price of the Company's
        Common Stock on the date of grant. For the year ended June 30, 2006, the
        Company
        recorded costs related to this pronouncement, which include the effects of
        any  share and option grants made during the year, of approximately
        $629,000 or $0.02 per share on a basic and diluted basis.
 
 On
        September 9, 2005, the Board of Directors (the “Board”) granted 130,000 shares
        of restricted common stock as payment for the services rendered by the board
        members for the year ended June 30, 2005
        and
        all shares were immediately vested. In addition, the Board granted 710,000
        stock
        options and 175,000 warrants to our employees and directors and consultants,
        respectively, in recognition of individual
        performance for the year ended June 30, 2005. The stock options and warrants
        were vested one-third immediately, one-third will be vested on
   F
            -14
  **QUICK-MED
          TECHNOLOGIES, INC.**
 **NOTES
          TO FINANCIAL STATEMENTS**
 ***NOTE 9
        - STOCK OPTIONS AND WARRANTS, continued***
  July
        1,
        2006 and the remaining one-third will be vested on July 1, 2007, assuming
        the
        person receiving the equity awards is employed by the Company at the time
        of
        vesting. The exercise price of those stock options and warrants is $0.80
        per
        share, which was the closing price of the common stock on the date of grant.
        The
        weighted average grant date fair value of options
        was $0.72 per share based on the Black-Scholes option-pricing model. The
        options
        and warrants expire five years from the date of grant.
 
 The
        weighted average grant date fair value of options granted during the fiscal
        year
        ended June 30, 2006 were estimated on the date of grant using the Black-Scholes
        option-pricing model with the assumptions noted in the following table. Expected
        volatilities are based on historical volatility of common stock, and other
        factors. The expected term of the options represents the period of time that
        options granted are expected to be outstanding and is derived from historical
        terms and other factors.
 
 Assumptions
        utilized to value options are as follows:
 
 Risk-free
        interest rate  4.75%
        to
        6%
 Expected
        life (years)           
5
 Expected
        volatility   50%
        to
        138%
 Expected
        dividends           
None
 
 Prior
        to
        July 1, 2005, the Company had elected to account for the stock options granted
        to employees under the Accounting Principles Board Opinion No. 25, “Accounting
        for Stock Issued to Employees,” and related interpretations.
 
 Under
        APB
        No.25, the difference between the option price and the fair value of the
        underlying shares resulted in a stock option compensation expense, which
        was
        prospectively recorded in the income statement over two fiscal years. The
        Company accounts for stock options granted to consultants under Financial
        Accounting Standards Board Statement No. 123, “Accounting for Stock-Based
        Compensation.” During
        2002, 50,000 options were granted to a consultant vesting over a three-year
        period. Using the Black
        Scholes model $57,250 of compensation expense was recorded on the financial
        statements. The total stock-based compensation expense for the year ended
        June
        30, 2005 was approximately $516,000.
 
 During
        2002, 1,140,000 unqualified options were granted under the Plan. The exercise
        prices for 990,000 and 150,000 of the options were $2.84 and $0.95,
        respectively, representing the average trading price of the Company’s stock
        during the first 30 days after commencement of the stock trading on the Over
        the
        Counter (“OTC”) Market. The vesting provisions for 100,000 of the options are
        immediate and the remainder of the 1,040,000 options vested one-third on
        January
        15, 2002, one third on January 15, 2003, and one-third on January 15, 2004.
        All
        of the options expire five years after the grant date.
 
 In
        July
        2003, 1,231,500 unqualified options were granted under the Plan to employees,
        directors, and service providers. The options had an exercise price of $0.55,
        the average closing trading price at the grant date. The options vested
        immediately. All of the options expire five years after the grant date.
 
 In
        August
        2004, 585,000 unqualified options under the Plan were granted to directors,
        employees and service providers. The options had an exercise price of $0.17,
        the
        average closing trading prices from July
        1 to
        15, 2004. The options vested immediately. All of the options expire five
        years
        after the grant date. On August 24, 2005, 175,000 options were exercised
        for an
        aggregate price of $29,750.
   F
            -15
  **QUICK-MED
          TECHNOLOGIES, INC.**
 **NOTES
          TO FINANCIAL STATEMENTS**
 
 *NOTE 9 - STOCK OPTIONS AND WARRANTS,
        continued*
  On
        October 1, 2004, the Company granted 50,000 unqualified options to a consultant,
        one third of which vested immediately, one third vested on July 1, 2005 and
        the
        remaining one third vested on July 1, 2006. The options had an exercise price
        of
        $0.15, the closing trading price at the grant date. Using the Black Scholes
        option pricing model, $4,333 of compensation expense was recorded during
        this
        fiscal year period. All the options expire five years after the grant date.
        On
        June 29, 2005, 16,666 options were exercised for an aggregate price of
        approximately $2,500.
 
 On
        February 21, 2005, the Company granted 10,000 unqualified options to a
        consultant, 7,000 options of which were vested immediately, with the remaining
        3,000 will be vested on a pro rata basis over the subsequent 12 months period.
        The exercise price of these options was the average closing trading price
        of the
        previous fifteen (15) days of the grant date. Using the Black Scholes option
        pricing model, $4,293 of compensation expense was recorded in this period.
        All
        of the options expire five years after the grant date.
 
 A
        summary
        of options for the years ended June 30, 2006 and 2005 is shown
        below:
  **June
                    30, 2006**
                
                
                **June
                    30, 2005****Number**
                
                
                **Weighted-Average**
                
                
                **Number**
                
                
                **Weighted-Average****of
                    Shares**
                
                
                **Exercise
                    Price**
                
                
                **of
                    Shares**
                
                
                **Exercise
                    Price**Outstanding
                    at beginning of period
                
                
                3,069,834
                
                $
                1.73
                
                
                3,164,000
                
                $
                2.68Granted
                
                
                710,000
                
                
                0.80
                
                
                642,500
                
                
                0.17Exercised
                
                
                (175,000
                )
                
                0.17
                
                
                (16,666
                )
                
                0.15Forfeited
                
                
                -
                
                
                -
                
                
                (720,000
                )
                
                2.22Expired
                
                
                (825,000
                )
                
                2.61
                
                
                -
                
                
                -Outstanding
                    at end of period
                
                
                2,779,834
                
                $
                1.33
                
                
                3,069,834
                
                $
                1.73Exercisable
                    at end of period
                
                
                2,543,167
                
                
                
                
                
                2,872,667Available
                    for issuance at end of period
                
                
                1,028,500
                
                
                
                
                
                1,094,000
  During
        the year ended June 30, 2006, the Company issued common stock warrants to
        consultants in recognition of their performance. These warrants were accounted
        for in accordance with the fair value provisions of SFAS 123R. The warrants
        vested one-third immediately on September 9, 2005, with one-third vested
        on July
        1, 2006, and the remaining one-third to be vested on July 1, 2007. The warrants
        were valued on the date of grant using the Black-Scholes option-pricing model.
        During the fiscal year 2005, the Company also issued common stock warrants
        for
        consulting services rendered under agreements. The vesting provisions were
        immediate when services rendered or during the term of the agreement. The
        warrants were valued on the date of grant using the Black-Scholes option-pricing
        model.
 
 Assumptions
        utilized to value warrants are as follows:
 
 Risk-free
        interest rate  6.00%
 Expected
        life (years)  5
 Expected
        volatility   138%
 Expected
        dividends  None
 
 
 F
            -16
  **QUICK-MED
          TECHNOLOGIES, INC.**
 **NOTES
          TO FINANCIAL STATEMENTS**
 
 ***NOTE 9
        - STOCK OPTIONS AND WARRANTS, continued***
  The
        following is a summary of warrants granted, exercised, canceled and outstanding
        involving the grants in the years ended June 30, 2006 and 2005:
  **June
                    30, 2006**
                
                **June
                    30, 2005****Number**
                
                **Weighted-Average**
                
                **Number**
                
                **Weighted-Average****of
                    Shares**
                
                **Exercise
                    Price**
                
                **of
                    Shares**
                
                **Exercise
                    Price**Outstanding
                    at beginning of period
                
                
                718,048
                
                $
                0.24
                
                
                567,500
                
                
                0.20Granted
                
                
                195,920
                
                
                0.84
                
                
                150,548
                
                
                0.38Exercised
                
                
                -
                
                
                -
                
                
                -
                
                
                -Forfeited
                
                
                -
                
                
                -
                
                
                -
                
                
                -Outstanding
                    at end of period
                
                
                913,968
                
                $
                0.37
                
                
                718,048
                
                $
                0.24Exercisable
                    at end of period
                
                
                697,302
                
                
                
                
                
                559,715
 ***NOTE
        10 - INCOME TAXES***
  The
        Company accounts for income taxes under the
        provisions of Statement of Financial Accounting Standards No. 109, “Accounting
        for Income Taxes.” This standard requires, among other things, recognition of
        future tax consequences, measured by enacted tax rates attributable to taxable
        and deductible temporary differences between financial statement and income
        tax
        bases of assets and liabilities. Valuation allowances are established, when
        necessary, to reduce deferred tax assets to the amount expected to be realized.
        Income tax expense is the tax payable for the period and the change during
        the
        period in the deferred tax asset and liability.
  For
        federal income tax purposes, the Company elected to capitalize start-up costs
        incurred during 1999 and 2000 totaling $357,989. The start-up costs are being
        amortized over sixty (60) months beginning in 2001. An analysis of the
        components of the (loss) before income taxes and the related income tax
        (benefit) is presented in the following tables. The tax amounts have been
        calculated using the 34% federal and 5.5% state income tax rates.
 
 The
        (provision) benefit for income taxes consists of the following:
 
 **2006**
                
                
                **2005**Current
                
                $
                -
                
                $
                -Deferred
                
                
                -
                
                
                -$
                -
  Deferred
        tax assets for June 30, 2006 and 2005 consist of the following:
 
 **2006**
                
                
                **2005**Deferred
                    tax asset:Depreciation
                    and amortization
                
                $
                1,303
                
                $
                1,303Tax
                    benefit of capitalized start-up costs
                
                
                -
                
                
                13,471Stock
                    based compensation
                
                
                2,099,127
                
                
                1,862,272Net
                    operating loss carry forward
                
                
                3,189,659
                
                
                2,775,512Research
                    tax credit
                
                
                7,203
                
                
                7,203Less:
                    valuation allowance
                
                
                (5,297,292
                )
                
                (4,659,761
                )Deferred
                    tax asset
                
                $
                -
                
                $
                -
  Valuation
                      allowance:Beginning
                      of year
                  
                  (4,659,761
                  )
                  
                  (3,931,950
                  )Decrease
                      (increase) during the year
                  
                  (637,531
                  )
                  
                  (727,811
                  )Ending
                      balance
                  
                  (5,297,292
                  )
                  
                  (4,659,761
                  )Net
                      deferred taxes
                  $
                  -
                  
                  $
                  -
   F
            -17
  **QUICK-MED
          TECHNOLOGIES, INC.**
 **NOTES
          TO FINANCIAL STATEMENTS**
 
 *NOTE 10 - INCOME TAXES,
          continued*
 A
        reconciliation of income tax at the statutory rate to the Company’s effective
        tax rates for the periods ended June 30, 2006 and 2005, is as
        follows:
  **2006**
                
                **2005**Federal
                    income tax at statutory rate of 34%
                
                $
                (576,031
                )
                $
                (653,628
                )State
                    tax, net of federal benefit
                
                
                (61,500
                )
                
                (69,783
                )Other
                
                
                (1,128
                )
                
                (4,400
                )Valuation
                    allowance
                
                
                638,659
                
                
                727,811$
                -
                
                $
                -
 As
        of
        June 30, 2006, the Company had a net operating loss carry forward of
        approximately $8,476,373 which will begin to expire in 2019.
 
 ***NOTE
        11 - NOTES PAYABLE***
 
 In
        June
        2006, the Company issued a note payable to its Chairman for $132,950 with
        an 8%
        interest rate per annum and a maturity date of October 1, 2007.
 
 In
        September 2003, the Company negotiated a successor agreement with its Chairman
        regarding the line of credit, which expired July 1, 2003, excluding interest
        (see Note 6). The line of credit of $750,000 and the short term borrowing
        of
        $550,200 were consolidated into a single convertible note for up to $1,500,000
        excluding accrued interest, at an interest rate of 6% and due July 1, 2004.
        During the year ended June 30, 2006, the maturity date of the note was extended
        until October 1, 2007. The convertible note is secured by the assets and
        revenues of
   F
            -18
  **QUICK-MED
          TECHNOLOGIES, INC.**
 **NOTES
          TO FINANCIAL STATEMENT**
  ***NOTE
        11 - NOTES PAYABLE, continued***
 
 the
        Company and is senior to all other debt obligations. The note plus accrued
        interest will be convertible, in full or in part, for a term of up to 5 years
        beginning September 1, 2003, at a conversion rate of $0.38 per share. The
        conversion rate was determined as 15% above the average share price over
        the
        prior 20 trading days ($0.33 per share). The note has an anti-dilution provision
        in the event that the Company sells stock to other investors at less than
        $0.20
        per share.
 
 As
        more
        fully described in Notes 6 and 7, the Chairman converted $500,000 and $826,087
        of the convertible note payable into 1,315,790 and 2,173,913 shares of
        restricted common stock on November 30 and December 31, 2004, respectively,
        in
        accordance with the terms of the Stock Purchase Agreement. These amounts
        were
        converted at a conversion price applicable to the convertible debt of $0.38
        per
        share. At June 30, 2006, the convertible note outstanding balance of $1,268,625
        was convertible into 3,338,487 shares of restricted common stock.
 
 During
        the period ended June 30, 2006, the Company paid accrued interest on the
        convertible note of approximately $94,886. At June 30, 2006, the Company
        accrued
        interest on the convertible note of approximately $18,864. Effective July
        1,
        2006, the Company issued a short term note payable for the unpaid
        quarterly accrued interest at an interest rate of 8% per annum.
 
 ***NOTE
        12 - GOING CONCERN***
 
 For
        the
        remainder of the year ended June 30, 2007, the Company will need additional
        cash
        infusions to meet its operating expenses. The Company’s common stock began
        trading on September 4, 2002 on the OTC Bulletin Board and the Company intends
        to raise additional equity or debt. The Company may also secure strategic
        partnerships or other joint ventures to either conduct its research or fund
        a
        portion of the expenses. No assurances can be made that we will be successful
        in
        these activities. Should the events not occur, the financial statements will
        be
        materially affected.
 
 ***NOTE
        13 - SUBSEQUENT EVENTS***
 
 On
        August
        2, 2006, the Company and Engelhard Long Island, Inc. (“Engelhard”), a
        wholly-owned subsidiary of BASF Catalysts LLC, finalized a Fourth Amendment
        to
        that certain Letter of Intent (“LOI”) dated
        February 1, 2006 and effective through April 28, 2006. The First Amendment,
        dated April 26, 2006, the Second Amendment, dated May 26, 2006, and the Third
        Amendment, dated June 13, 2006, extended the effective period of the LOI
        to May
        26, 2006, June 16, 2006 and June 30, 2006, respectively. The Fourth Amendment,
        effective as of June 30, 2006, extended the effective period of the LOI to
        August 1, 2007. The LOI amends certain terms included in the Master Agreement
        for Product Development, Manufacturing and Distribution (the “Master
        Agreement”), which was entered into between the Company and Engelhard on August
        15, 2002. Pursuant to the Master Agreement, as amended by the LOI, the Company
        granted to Engelhard an exclusive license to develop and market the Company’s
        Ilomastat product (the “Licensed Product”) for the field of over-the-counter
        anti-aging cosmetics and a nonexclusive license for the field of
        over-the-counter acne treatments and skin moisturizers in the cosmetics market.
        In consideration for this license, as amended by the LOI, the Company will
        receive monthly royalty payments based on a percentage of the net revenue
        Engelhard receives from sales of the Licensed Product but no less than annual
        minimum royalty payments equal to $1,140,000 for the first two years, assuming
        the LOI is not terminated during such period. Pursuant to the Fourth Amendment,
        these royalty payments replace any financial and other milestone or windfall
        obligations under the Master Agreement.
 
 In
        addition, the Fourth Amendment amended the Master Agreement to transfer all
        right, title and interest to the Engelhard intellectual property held by
        the
        Company back to Engelhard in exchange for one lump payment of
        $166,500.
  
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  **QUICK-MED
          TECHNOLOGIES, INC.**
 **NOTES
          TO FINANCIAL STATEMENTS**
  ***NOTE
        13 - SUBSEQUENT EVENTS, continued***
 
 Other
        than the foregoing, the LOI, as amended, is not binding on either party and
        contemplates that the parties may enter into further negotiations on other
        matters related to the agreements between the parties.
 
 On
        September 18, 2006, the Company entered into an Amendment of Solicitation
        /
        Modification of Contract with the U.S.
        Army
        Medical Research Acquisition Activity Department, in which the U.S. Army authorized the release of an additional
        $770,000 to the Company to further pursue Quick-Med’s research regarding the
        development of a prototype wound dressing to speed healing of wounds from
        chemical blistering agents. This funding is made under the U.S. Army’s Small
        Business Innovation Research Program. At the end of the Phase II project,
        the
        Company is required to submit a final, publicly releasable Phase II R&D
        Project Summary.
 
 
 
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