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 March 31, 2006


Commission
      File No. 0-23339





US
      GLOBAL
      NANOSPACE, INC.


(Name
      of
      small business issuer in its charter)





Delaware
            13-3720542(State
                or other jurisdiction of
            (I.R.S.
                EmployerIncorporation
                or organization)
            Identification
                No.)2533
                North Carson Street, Suite 5107
              Carson
                City, Nevada 89706


(Address
      of principal executive offices)





Issuer’s
      telephone number: 775-841-3246





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





Securities
      registered pursuant to Section 12(g) of the Act:  Common
      Stock, $.01 par value





Check
      whether the issuer (1) has filed all reports required to be filed by Section
      13
      or 15(d) of the Exchange Act during the past 12 months (or for such shorter
      period that the registrant was required to file such reports), and (2) has
      been
      subject to such filing requirements for the past 90 days. Yes x; No o





Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will be contained,
      to
      the best or registrant’s knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-KSB or any
      amendment to this Form 10-KSB. o





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





Issuer’s
      revenues for its most recent fiscal year: $259,969





Aggregate
      market value of the voting stock held by non-affiliates computed by reference
      to
      the price at which the stock was sold, or the average bid and asked prices
      of
      such stock, as of a specified date within the past 60 days: $3,771,480 as of
      August 11, 2006.





Check
      whether the issuer has filed all documents and reports required to be filed
      by
      Section 12, 13 and 15(d) of the Exchange Act after the distribution of
      securities under a plan confirmed by a court. Not applicable





At
      August
      11, 2006, a total of 193,292,856 shares of registrant’s common stock were
      outstanding.





Transitional
      Small Business Disclosure Format (check one): Yes o; No x







TABLE
      OF
      CONTENTS




PART
                  I
              PageItem
                  1.Description
                  of Business
              1Item
                  2.Description
                  of Property
              12Item
                  3.Legal
                  Proceedings
              12Item
                  4.Submission
                  of Matters to a Vote of Security Holders
              14PART
                  IIItem
                  5.Market
                  for Common Equity and Related Stockholder Matters
              14Item
                  6.Management’s
                  Discussion and Analysis or Plan of Operation
              17Item
                  7.Financial
                  Statements
              26Item
                  8.Changes
                  In and Disagreements with Accountants on Accounting and Financial
                  Disclosure
              27Item
                  8a.Controls
                  and Procedures
              27Item
                  8b.Other
                  Information
              28PART
                  IIIItem
                  9.Directors,
                  Executive Officers, Promoters and Control Persons; Compliance with
                  Section
                  16(a) of the Exchange Act
              28Item
                  10.Executive
                  Compensation
              30Item
                  11.Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters
              34Item
                  12.Certain
                  Relationships and Related Transactions
              34Item
                  13.Exhibits
              36Item
                  14.Principal
                  Accountant Fees and Services
              38
  
 **PART
        I**


**ITEM
      1. DESCRIPTION OF BUSINESS**





**CORPORATE
      HISTORY**





US
      Global
      Nanospace, Inc. (referred to in this report as “USGN”, “the Company”, “we”, “us”
or “our”) is a development stage company with expertise in the emerging fields
      of autonomous wide area perimeter security and nanotechnology. Through March
      31,
      2006, the end of our fiscal year, our operations included designing and
      developing products and building prototype and demonstration systems for use
      by
      defense and health and safety agencies and organizations, both public and
      private. We are also looking for alliances to assist us with licensing,
      manufacturing, and marketing our products.




We
      were
      originally incorporated in the Province of British Columbia in1984 as First
      West
      Canada Capital Corporation, or FWCC. On December 20, 1993, FWCC became a Wyoming
      corporation. On December 23, 1993, FWCC merged into its wholly owned subsidiary,
      FWCC Merger Corp., which was incorporated in the state of Delaware.




On
      November 4, 1992, Caring Products International, Inc. was incorporated under
      the
      laws of the state of Delaware. On December 30, 1993, Caring Products merged
      with
      and into FWCC Merger Corp., and FWCC Merger Corp. became the surviving
      corporation. The name of the surviving entity was changed to Caring Products
      International, Inc.




On
      September 26, 2002, Caring Products International, Inc. changed its name to
      US
      Global Aerospace, Inc. As Caring Products International, Inc., USGN and its
      subsidiaries designed a line of proprietary urinary incontinence products with
      disposable liners that were sold under the Rejoice brand name in the U.S.,
      Canada and Europe. Due to a lack of funding necessary to support full retail
      distribution in chain stores and hospitals, we closed our marketing offices
      and
      liquidated our remaining inventory. We discontinued all operations related
      to
      the production, marketing and sale of our incontinence products during the
      fiscal year ended March 31, 2001.




On
      March
      30, 2001, we consummated a private placement of 90,000 shares of our common
      stock to Raymond Bills, a previously unaffiliated accredited investor. Mr.
      Bills
      paid $250,000 in consideration for the issuance. After giving effect to the
      transaction and including 30,563 previously issued and outstanding shares of
      common stock, Mr. Bills was the beneficial owner of approximately 75% of our
      issued and outstanding common stock. In connection with the transaction, Mr.
      Bills joined our board of directors. Concurrently, four of the five members
      of
      the board resigned. Ian Rice also joined the board of directors, serving as
      its
      chairman.




1


On
      May
      17, 2002, we completed a share exchange with USDR Global Aerospace, Ltd., a
      Delaware corporation (“USDRGA”), and the USDRGA stockholders. At the closing, we
      issued an aggregate of 20,000,000 unregistered, restricted shares of our
      pre-split common stock to the USDRGA stockholders in exchange for all of the
      issued and outstanding shares of capital stock of USDRGA, consisting of an
      aggregate of 5,000,000 unregistered, restricted pre-split shares of common
      stock. The four to one exchange ratio was determined by taking into account
      the
      fair market value of USDRGA, which included an evaluation of the assets and
      liabilities and management expertise of USDRGA. USDRGA stockholders John
      Robinson and Gerald Wiener exchanged their shares of USDRGA common stock for
      12,000,000 and 8,000,000 pre-split shares of our common stock, respectively.
      At
      the closing of the share exchange, Robinson and Wiener owned approximately
      48%
      and 32% of our issued and outstanding pre-split shares of common stock,
      respectively, and USDRGA became our wholly owned subsidiary.





Effective
      on the closing date, our two officers and directors, Raymond Bills and Ian
      Rice,
      resigned as officers and appointed:





John
      Robinson, the Chairman and Chief Executive Officer of USDRGA,


as
      our
      Chairman of the Board and Chief Executive Officer;





Gerald
      Wiener, the President and Chief Operating Officer of USDRGA,


as
      our
      President;





Gaddy
      Wells, the Secretary of USDRGA, as our Secretary; and





Julie
      Seaman, the Treasurer and Chief Financial Officer of USDRGA,


as
      our
      Treasurer.





In
      addition, subject to and effective upon compliance with Rule 14f-1 under the
      Securities Exchange Act of 1934, Rice and Bills resigned as our directors and
      appointed Robinson, Wiener, Wells and Seaman as our new board of directors.
      Effective June 14, 2002, Mr. Wells resigned his positions as an officer and
      future director of USGN, as well as his positions as an officer and director
      of
      USDGRA, as a result of issues regarding potential conflicts of interest.
      Effective June 17, 2002, Ms. Seaman was appointed as Secretary of USGN, in
      addition to being Treasurer and a director of USGN. Effective July 29, 2002,
      Mr.
      Wiener resigned as a director and as President of USGN, and as the President
      and
      Chief Operating Officer of USDRGA.





Effective
      December 31, 2002, USGN filed a Certificate of Ownership with the Secretary
      of
      State of Delaware effecting the merger of USDRGA with and into USGN, and USGN
      assumed all the assets and liabilities of USDRGA.




On
      February 13, 2003, our Board of Directors approved a 3 for 1 forward split
      of
      our common stock for shareholders of record as of February 24, 2003. The 3
      for 1
      stock split became effective on March 5, 2003. Unless otherwise specified,
      all
      references to the number of shares and per share data in this report give effect
      to this stock split.





Effective
      July 21, 2003, US Global Aerospace, Inc. changed its name to US Global
      Nanospace, Inc.





2


On
      January 14, 2004, our Board of Directors approved an amendment to the Company’s
      Amended and Restated Certificate of Incorporation to increase the authorized
      common stock from 100,000,000 to 300,000,000 shares and to increase the
      authorized preferred stock from 1,000,000 to 10,000,000 shares.





On
      August
      3, 2005, our Board of Directors appointed Carl Gruenler as President and Chief
      Executive Officer. John Robinson retained the position of Chairman. On December
      8, 2005, John Robinson resigned as Chairman. On December 21, 2005, Carl Gruenler
      was appointed to the Board of Directors as Chairman. On January 7, 2006, Julie
      Seaman resigned as Chief Financial Officer and the Board of Directors appointed
      Kevin Cronin, as Chief Financial Officer, Secretary and Treasurer. On May 24,
      2006 the Board of Directors resolved to add an additional Director, and
      appointed Pat Scorzelli to the Board of Directors as Chairman.





**OUR
      BUSINESS**





US
      Global
      Nanospace, Inc. is a development stage company that specializes in identifying,
      developing, and commercializing advanced products the core technologies of
      which
      are primarily wide area perimeter security based or nanoscience derived. Our
      primary products include an integrated system to direct autonomous response
      featuring proprietary software and control elements, and biological and chemical
      decontaminants. Other products include optimized polymer and organic materials
      and nanofibers, advanced filtration systems for air, water, and cigarettes,
      and
      blast mitigation and fire protection materials. We are currently focusing our
      efforts on obtaining global partners and/or licensees and marketing the products
      that we have developed for defense, security, and health and safety
      applications. Our target customers for these systems, materials, formulas,
      and
      processes include agencies or organizations under the direct control of the
      federal government of the United States, plus domestic and foreign businesses
      and foreign government agencies or organizations, to the extent permitted by
      applicable law or regulations.





**Our
      Products**





Our
      products include the following:





MAPSANDSTM





The
      Modular Autonomous Perimeter Security and Non-Lethal Defense System (MAPSANDSTM)
      is a new product in wide area perimeter security. We designed MAPSANDSTM to
      address the need for autonomous wide-area perimeter security and access denial
      for sovereign borders, oil/gas/water pipelines, power plants, seaports, ships,
      airports, oil and gas refineries, water treatment and desalinization facilities,
      offshore oil rigs and other high value infrastructure. Unlike other wide area
      security systems, MAPSANDSTM eliminates the need for fences, manned control and
      dispatch, and response teams.





3


In
      July
      2004, we filed a provisional patent application, and in June 2005 a utility
      patent application, with the U.S. Patent and Trademark Office for the entire
      MAPSANDSTM system. In July 2005, USGN filed a corresponding PCT international
      patent application. MAPSANDSTM combines USGN-developed proprietary, secure and
      robust control software plus advanced wireless communications and remote power
      systems with detection and tracking sensors, directed energy acoustics and
      a
      suite of accurately delivered non-lethal and/or lethal munitions. Unlike
      traditional perimeter security solutions, the MAPSANDSTM system architecture was
      designed to secure perimeters ranging in length from less than one mile to
      several hundred continuous miles and to deliver a programmed response based
      on
      predetermined rules of engagement. The concept originated from energy company
      inquiries to use our anti-ballistic material expertise to design a system to
      protect pipelines. It became apparent that to autonomously protect high value
      infrastructure over a wide area it would be necessary to develop an integrated
      system to detect and track, establish intent and engage approaching intruders
      a
      safe distance away from any intended target.





MAPSANDSTM
      is designed to automatically protect and defend high-value remote installations
      with or without human intervention, eliminating the issues of inadequate
      manpower or misplaced loyalty that have plagued existing wide-area security
      endeavors.





MAPSANDSTM
      incorporates advanced radars capable of detecting, tracking and targeting to
      aim
      directional acoustic devices delivering clear verbal warnings and aversive
      warning tones to area perimeter intruders. These powerful acoustic devices
      are
      designed to be effective at operationally significant ranges to help determine
      an approaching intruder’s intent and affect the intruder’s behavior. In the
      event an area perimeter intruder fails to heed the increasingly threatening
      acoustic warnings delivered by MAPSANDSTM, the system can be programmed to
      accurately and autonomously target and disperse non-lethal deterrent munitions,
      such as flash bang, tear gas, malodorants, or rubber pellets to establish a
      pre-set area denial perimeter. A variety of advanced tactical options are
      available based on customer specifications and rules of engagement, subject
      to
      compliance with applicable laws, treaties and regulations. Continuous remote
      location power, another key element of the system, is supplied through advanced,
      highly reliable solar and wind power configurations.





ALL-CLEARTM





All-ClearTM
      is designed for the neutralization of chemical and biological weapons and
      contaminants, and for general disinfection and sterilization of surfaces.
      All-ClearTM was designed for military decontamination applications, as well as
      for use by fire/emergency personnel, law enforcement agencies, or other first
      responders to terrorist, hazardous materials (HAZMAT), or other emergency
      incidents.





We
      believe the advantages of All-ClearTM Chem/Bio Decon Foam include the use of fast
      acting ingredients, non-hazardous residuals, non-oxidizing action, no flight
      restrictions, and expandability for new applications. To our knowledge,
      All-ClearTM is the first environmental and surface friendly decontaminant that is
      highly effective in eliminating chemical and biological warfare agents, such
      as
      Sarin and Anthrax. The foam is developed to neutralize agents without the
      harmful effects that most chlorine and oxidizing decontamination agents have
      on
      sensitive apparatus like landing gear and brake assemblies. Unlike other
      decontamination products that rely on chemical reactions to oxidize agents
      All-ClearTM uses an enzyme to selectively destroy nerve agents and a biocide
      mixture to sterilize biological agents, including anthrax spores.





4


The
      foam’s active ingredients are not rapidly depleted by reaction with other
      materials, such as dirt and grease, resulting in a long-lasting product. The
      foam can be dispensed using commonly available fire-fighting equipment in
      addition to numerous readily available commercial applicators.





The
      worldwide market for decontamination solutions is emerging and is expected
      to
      become significant as government agencies and emergency services establish
      contingency plans and preparedness for chemical or biological attack or
      naturally-occurring infectious diseases that could possibly lead to pandemics.
      We believe that the commercial market for All-ClearTM can be expanded beyond
      terrorist response to include treating industrial and infectious waste and
      the
      decontamination of aircraft and vehicles arriving from quarantine areas, as
      well
      as agricultural applications such as treating livestock areas to destroy and
      prevent the spread of infectious diseases in animals. We also believe that
      the
      consumer market for general disinfectant products could be well served by
      All-ClearTM’s low-toxicity and non-corrosive characteristics.





All-ClearTM
      has been developed pursuant to the agreement with Kidde Fire Fighting, Inc.
      and
      is being marketed internationally to foreign governments, militaries and
      companies and has been presented to the U.S. Department of Homeland Security
      and
      the U.S. Department of Defense. Before it can be marketed and sold in the United
      States, Environmental Protection Agency (EPA) registration must be obtained.
      Following the completion of efficacy and toxicity testing, an application for
      registration of the product was submitted to the EPA in late 2005 by Kidde.
      Final EPA registration is expected by late 2006. All-ClearTM has successfully
      passed the Boeing Series D6-17487, Revision P, corrosion test for use of foam
      on
      aircraft exteriors. This was required to prove non-corrosive capability and
      is
      key for Air Forces and commercial airlines worldwide, as well as for maintaining
      the integrity of other critical equipment.





RADOME
      AND RADOMEX IMPACT RESISTANT AIRCRAFT RADOME





Radomes
      provided our primary source of revenue for the year ending March 31,
      2006.





We
      have
      developed radomes, a protective fairing typically found on aircraft that is
      used
      to protect radar antenna, that are designed to allow efficient radar signal
      transmission. A fairing is a structure whose primary function is to produce
      a
      smooth outline and to reduce drag, for example, as on an airplane. This product
      is available in limited quantities. We are currently supplying a standard
      composite radome for the Bell 212/412 and the Agusta AB212/412 series military
      and commercial helicopters to Agusta Aerospace and Bell Helicopter.





5


In
      addition, we have developed materials suitable for producing an impact
      resistant\ballistic resistant radome, or RadomeX. RadomeX is designed to provide
      variable threat ballistic protection to the flight crew, the radar equipment
      and
      the aircraft while allowing the radar to operate. RadomeX products are currently
      under development.





NANOFILTERCX





NanoFilterCX
      is a cigarette filter. It is designed to provide nanofiber-based high-efficiency
      mechanical filtration for reduction of cigarette smoke toxins. We believe it
      is
      superior to current common cigarette filters in that it provides





·
            the
                opportunity for cost-effective pricing in comparison to current common
                cigarette filters,





·
            feasible
                integration into the manufacturing process,





·
            consistent
                smoking action and taste, and





·
            a
                reduction of specific smoke toxin
                levels.





In
      addition to the direct benefit to smokers of reducing toxins, we anticipate
      that
      NanoFilterCX will be manufactured from a variety of polymers to optimize design
      and production requirements. The NanoFilterCX is still under development and
      is
      not yet being marketed.





NANOFILTER
      PATHOGEN/ALLERGEN AIR FILTER PURIFICATION SYSTEMS:





The
      core
      of USGN’s NanoFilter technology was initially developed for NASA for use during
      extended crewed space flight applications lasting in excess of 120 days, to
      provide ultra-fine particulate matter air filtration and purification.





The
      Nanofilter is comprised of advanced polymeric nanofiber combined with a patented
      particle stimulation mechanism. The result is an optimized porous nanofilter
      media that is enveloped with an electronic field causing the airborne
      particulate matter to move in a churning motion perpendicular to the airflow
      direction without ionization, thus significantly enhancing the London/Van der
      Waals force interaction (a type of particle attraction), resulting in a
      super-efficient air filtration and purification system to effectively capture
      bacteria, viruses, smoke, dust, odorants, and other sub-micron sized particulate
      matter.





Unlike
      traditional filter technology that relies on more restrictive filter elements
      and reduced flow rates in order to catch smaller particles, nanofilter
      technology provides less restricted air-flow, minimal pressure drop, and a
      substantial increase in energy efficiency. Applications for this technology
      currently exist in industrial, commercial, and residential buildings, as well
      as
      mass transit vehicles. This product is still being developed and is not yet
      being marketed.





6


The
      following three products (GARDS-Guardian
      Antiballistic Replacement Door Skins, SAV-A GUNNER (SAG) HMMWV Turret, and
      BLAST-X) are not currently being marketed, however, we may decide to market
      them
      in the future. We expect to use the anti-ballistic knowledge derived from their
      development to support additional security system components and capabilities
      in
      the future.





GARDS
      -GUARDIAN ANTIBALLISTIC REPLACEMENT DOOR SKINS





The
      Guardian Antiballistic Replacement Door Skin (GARDS) for the AM General High
      Mobility Multipurpose Wheeled Vehicle (“HMMWV”, commonly pronounced Hum-Vee) are
      lightweight and flexible antiballistic panels designed to protect vehicle
      occupants in elevated-threat locations.





GARDS
      are
      designed to be attached in the field to the interior of the existing HMMWV
      doorframe, upgrading threat level protection to NIJ Level IIIA or higher,
      providing for an increase in protection from small arms fire, projectiles,
      fragmentation and shrapnel when compared to the original equipment fabric doors.
      GARDS are designed to be installed in fifteen minutes. They weigh as little
      as
      six pounds per panel, require no maintenance and as the original door structure
      and canvas cover remain intact, are intended to be unnoticeable from the outside
      of the vehicle. GARDS’ strength, durability and low weight is a result of our
      G-Lam anti-ballistic material. G-Lam is created with a process that results
      in
      mechanical properties that, to our knowledge, are far superior to common
      anti-ballistic composite materials. GARDS are designed to provide maximum
      protection against specific ballistic threats, fragmentation and shrapnel.
      G-Lam
      is also designed to be impervious to petroleum distillates and maintain
      performance at temperatures in excess of 400 degrees Fahrenheit.





SAV-A
      GUNNER (SAG) HMMWV TURRET





The
      S.A.G. Turret has been designed as a durable, lightweight shielded turret
      offering protection against specific ballistic threats, fragmentation and
      shrapnel for the HMMWV.





The
      S.A.G. Turret weighs approximately 160 pounds and offers rapid rotational
      capability. The S.A.G. Turret is approximately 4 feet in diameter, is designed
      to interface precisely with military HMMWV rotating turret rings and is designed
      to be installed by two people in less than one hour using common hand tools.
      USGN’s proprietary G-Lam material used in the turret is designed to be
      impervious to petroleum distillates and to maintain performance at temperatures
      in excess of 400 degrees Fahrenheit.





7


BLAST-X
      EXPLOSION MITIGATION MATERIAL





Blast-X
      is a lightweight blast mitigation material that may be manufactured in various
      mediums, including flat panels, conformable panels, and cast shapes. Blast-X
      integrates blast mitigation and containment technologies into a single unit
      or
      system of products that are designed to reduce risk to persons and property,
      preserve forensic evidence, increase safety in work environments, and prevent
      sympathetic detonation in munitions containers. Sympathetic detonation is the
      detonation of one explosive item by exploding another explosive item adjacent
      to
      it.





Blast-X
      is comprised of two distinct components; a mitigation medium to attenuate
      explosive shock waves, reduce initial shock pressure levels and minimize fire
      as
      it interacts with the heat and pressure of the blast environment, and a back
      panel made of USGN’s G-Lam anti-ballistic/anti-fragment material to contain
      blast fragments and debris.





Blast-Cast
      is a castable blast mitigation product designed for munitions containers,
      munitions storage facilities, and any application where blast mitigation and
      more specifically sympathetic detonations are a concern. Blast-Cast is a custom
      manufactured solution that can be molded into myriad forms, in accordance with
      the customer’s specifications.





The
      components in Blast-X can also be used separately or spaced, depending on the
      definition of threat while considering new construction or retrofits. The blast
      mitigation portion of Blast-X is more appropriately placed as near as possible
      to the blast source, while the fragment barrier portion can be placed closer
      to
      the areas that are to be protected (e.g. occupied rooms and critical
      equipment).





**Distribution/Manufacturing**





We
      do not
      manufacture or distribute our products on a commercial scale and it is currently
      not our intention to do so. We work with industry suppliers to facilitate the
      development, manufacture and marketing strategy of our technologies and
      products.





Under
      the
      Development and License Agreement between us and Kidde Fire Fighting, Inc.
      dated
      as of August 13, 2004, we agreed with Kidde to develop, produce, market and
      commercialize decontaminant foam products. This agreement required Kidde to
      pay
      us a license fee in the amount of $100,000 and a fee in the amount of $100,000
      in consideration for the assignment of the trademark, All-ClearTM. These fees
      were paid in two equal installments. As required by the agreement, the first
      installment was paid in August 2004 and the second installment was paid in
      November 2004. Pursuant to the agreement, we are responsible for formulating
      existing products and Kidde is responsible for developing manufacturing
      processes relating to the existing products. The term of the agreement began
      on
      August 13, 2004 and will continue until the later of 10 years or the date on
      which the manufacture, use or sale of any product developed pursuant to the
      agreement would no longer infringe a valid claim of patent rights (if any exist)
      held by us, alone, or with Kidde. If a competitor develops a similar product
      that eliminates the possibility that the product we developed can compete with
      such product, the agreement would be mutually terminated over a six month
      period. The All-ClearTM product has been developed and tested and is being
      marketed internationally to foreign governments, militaries and companies and
      has been presented to the U.S. Department of Homeland Security and the U.S.
      Department of Defense. Before it can be marketed and sold in the United States
      other than to the U.S. Department of Defense, an application for registration
      of
      the product must be submitted to the EPA specifically necessitating registration
      either as a sterilant or as a newly proposed anthrax inactivation formula.
      All
      efficacy and toxicity testing has been completed and the application was
      submitted to the EPA in late 2005. We anticipate final EPA registration in
      late
      2006. All-ClearTM has successfully passed the Boeing Series D6-17487, Revision P,
      corrosion test for use of foam on aircraft exteriors. This proves non-corrosive
      capability which is a requirement for use by Air Forces and commercial airlines
      worldwide. Internationally, All-ClearTM has been evaluated by the Canadian DOD
      and several European, Asian and Middle Eastern countries. If Kidde is able
      to
      successfully market the product, we would earn royalties on the number of
      products sold in a Kidde fiscal year, as defined in the agreement. The royalties
      are computed on the number of products sold and do not include reductions for
      expenses associated with the production, marketing and sale of the
      product.





8


In
      addition, we are in the process of negotiating licensing, manufacturing or
      distribution arrangements with other international companies or independent
      contractors that have the infrastructure to manufacture, distribute or sell
      our
      products or technology on a commercial scale worldwide. We are also in the
      process of negotiating directly with government agencies and private sector
      companies for the sale or licensing of our products. We will continue to use
      consultants knowledgeable in the industries we target to market and obtain
      orders.





**Competition**





Large
      scale security systems for borders and high value infrastructure is a developing
      and highly competitive market. We believe that the autonomous full engagement
      capability of MAPSANDSTM is unique in the global market for wide area security
      systems. To our knowledge, current systems require fences, manned control,
      and
      response teams. MAPSANDSTM, with its detection, tracking, interrogation, and
      flexible and robust engagement capability, should eliminate the need for fences,
      manned control, or response teams to fulfill the area denial mission,
      Additionally, MAPSANDSTM is designed to consistently and strictly follow
      established rules of engagement, and is not subject to compromise, such as
      indecision or shifting allegiances, as are systems requiring human involvement.
      Furthermore, based on available industry information, we believe that
      implementation costs for MAPSANDSTM systems should be competitive and operating
      costs should be lower. As wide area security market education expands and the
      evaluation of mission effectiveness continues, we believe that MAPSANDSTM will
      establish a significant presence in the large scale security systems
      market.





Nanotechnology
      is an emerging industry. We believe that the global number of development-stage
      companies involved in the development of nanomaterials will continue to grow
      and
      they may represent competitive risks in the future. Some of these development
      stage companies, especially in other countries, are receiving significant
      government assistance.





9


We
      face
      current and potential competition from companies that develop products for
      similar uses, as well as the in-house capabilities of several of our potential
      customers, such as the military. Many of these competitors are larger, more
      diversified and better capitalized than we are. Competitive companies pose
      risks
      to us because they may have substantially greater financial and technical
      resources, larger research and development staffs, and greater manufacturing,
      marketing and distribution capabilities.





We
      have a
      continuing need for skilled and professional individuals for the research and
      development of our products. The demand for individuals with specialized
      engineering and technical skills is high and we anticipate that it will remain
      so for the foreseeable future. In our attempt to compete with other companies
      with similar hiring needs, we may incur increased labor, recruiting or training
      costs so as to have access to the required skills.





**Sources
      and Availability of Raw Materials**





The
      raw
      materials used to produce our products are easily obtained from multiple sources
      at competitive prices. If any of these supply sources becomes unavailable,
      we
      believe that we would be able to secure alternate supply sources within a short
      period of time and with minimal or no disruption.





**Intellectual
      Property**





If
      we
      consider it to be advantageous, we may apply for patents as our products are
      developed, or we may enter into license agreements for technologies that we
      believe are synergistic to our products, or that expand the range of our
      products. At this time, we do not believe that our business would be materially
      affected by the expiration of any patents, if they are issued.





On
      July
      30, 2004, we filed a provisional patent application covering the MAPSANDSTM
technology. We filed a corresponding non-provisional U.S. patent application
      on
      June 1, 2005 and an International (PCT) patent application on July 29, 2005.
      The
      U.S. and PCT patent applications remain pending and are awaiting examination
      by
      the respective applicable patent offices.





On
      June
      3, 2005, we filed a joint provisional patent application with Kidde directed
      to
      a new decontaminant product jointly developed by us and Kidde. On July 30,
      2006,
      we filed a corresponding joint U.S. non-provisional patent application and
      a
      joint international (PCT) patent application.





The
      discoveries or technologies covered by the patent applications may
      not have
      commercial value. Also, if patents are issued, they may not provide commercially
      meaningful protection against competitors. Other parties may be able to design
      around the issued patents or independently develop technology, having effects
      similar or identical to our technology. In addition, the scope of the patent
      applications is subject to uncertainty and competitors or other parties may
      obtain similar patents of uncertain scope. For example, other parties may
      discover uses for chemical and/or biological decontamination systems or
      technology different from the uses covered in our patent applications, and
      these
      other uses may be separately patentable.





10


We
      have
      applied for registration of three trademarks, All-ClearTM (word mark), All-ClearTM
US Global NanospaceTM (design mark) and MAPSANDS with the United States Patent
      and Trademark Office. Under the Development and License Agreement between the
      Company and Kidde Fire Fighting, Inc. dated as of August 13, 2004, we have
      assigned our interest in the All-ClearTM registration applications to Kidde. On
      June 14, 2005, the United States Patent and Trademark Office issued a Notice
      of
      Allowance for the All-ClearTM word mark and on December 13, 2005, the United
      States Patent and Trademark Office issued a Notice of Allowance for the
      All-ClearTM design mark. Both applications are awaiting the filing by Kidde Fire
      Fighting, Inc. of statements of use. The United States Patent and Trademark
      Office has notified us that the mark, MAPSANDS, has been approved for
      publication.





**Government
      Regulation**





The
      development of our products may be subject to government regulation. For
      example, the use of our All-ClearTM product as a biological decontamination
      product is regulated by the EPA and requires EPA approval prior to sale and
      marketing in the U.S., except possibly for sales to the U.S. Department of
      Defense. The EPA estimates that it may take up to eight months to obtain
      approval from the date the application is submitted. If All-ClearTM is used as a
      hospital disinfectant or sterilizer or for other biological contaminants, the
      registration process with the EPA is estimated to take 120 days from the date
      the application is submitted. The efficacy and toxicity testing of All-ClearTM
has been completed, Kidde Fire and Security submitted the EPA application in
      late 2005, and we expect EPA approval by the end of 2006.





Additionally,
      before we could make sales of our MAPSANDSTM system outside of the U.S., we would
      be required to obtain an export license from the U.S. Department of State.
      We
      requested, and we were granted, a temporary license for the demonstration of
      the
      system in the Middle East.





Sales
      of
      our potential products outside of the U.S. may be governed by the International
      Traffic in Arms Regulations, the Export Administration Regulations, the Patriot
      Act and the Bioterrorism Safety Act. Although these laws and regulations do
      not
      restrict those present foreign sales programs, there can be no assurance that
      future changes to these regulatory regimes will not affect or otherwise limit
      our foreign sales.





**Research
      and Development**





Research
      and development is a critical component of our business and is ongoing. We
      spent
      $1,571,022 on research and development during the last fiscal year and $526,746
      during the fiscal year ended March 31, 2005. Our research and development costs
      will continue to be substantial.





11


**Employees**





We
      currently have 2 full-time employees, the company’s officers. Depending on the
      project, we also retain the services of between 12 and 17
      consultants.





**ITEM
      2. DESCRIPTION OF PROPERTY**





Our
      corporate office is located in Carson City, Nevada. The lease term for our
      previous facility at 1016 Harris Road, Arlington, Texas facility has expired.





**ITEM
      3. LEGAL PROCEEDINGS**





On
      January 3, 2005, we first received a Wells Notice from the U.S. Securities
      and
      Exchange Commission. The Wells Notice notified us that the SEC staff intended
      to
      recommend that the SEC bring a civil action against us and our officers and
      directors for alleged violations of U.S. securities laws. The SEC’s concerns
      principally regard certain prior public statements made by us regarding the
      marketability of our products. We have been in ongoing dialogue with the SEC,
      and prepared and submitted initial and supplemental Wells Submissions in
      response to the original Wells Notice. Notwithstanding receipt of the Wells
      Notice, we have cooperated and continue to cooperate with the SEC.  On
      January 20, 2006, the SEC staff re-issued a Wells Notice to us, Julie Seaman,
      who is one of our current directors, and John Robinson, who is our former
      Chairman and Chief Executive Officer, in connection with the previously
      announced SEC inquiry. The re-issued Wells Notices against us and Mr. Robinson
      alleged the same violations of U.S. securities laws as those violations that
      the
      SEC alleged in its prior Wells Notices. The January 20, 2006 Wells Notice
      against Ms. Seaman alleged substantially fewer violations than the Wells Notice
      issued to her on January 3, 2005. On
      July
      20, 2006 we, separate from the other parties identified in the previously issued
      Wells Notice, agreed to a settlement with the SEC staff. The settlement is
      subject to the final approval of the SEC Commissioners.





We
      previously entered into a license agreement with TIAX, LLC on an exclusive
      basis
      for technology related to a decontamination system we hoped would be usable
      for
      our All-ClearTM product. By letter dated May 27, 2005, TIAX LLC notified us that
      TIAX believed that we were in default under the Patent and Technology License
      Agreement dated July 24, 2003 (the “Agreement”), as amended, between TIAX and us
      for failure to pay $192,914 TIAX alleged was due under the agreement. Under
      the
      terms of the Agreement, the Agreement terminates upon 30 days written notice
      of
      default if the default is not cured to the satisfaction of TIAX within the
      30-day notice period. On June 27, 2005, we responded to TIAX stating that we
      disagreed with TIAX’s assessment of the amounts due TIAX under this agreement.
      We also informed TIAX that the decontaminant product being marketed by Kidde
      had
      been jointly developed by us and Kidde, and that we did not believe that this
      new product was subject to our agreement with TIAX. We had made a
      counter-proposal to TIAX, offering to pay TIAX 25% of royalties received by
      us
      from Kidde. On July 19, 2005, TIAX rejected our counter-proposal to modify
      the
      payment terms of the Agreement and notified us that TIAX would exercise its
      right to terminate the agreement unless the Company paid $196,344 in full by
      August 18, 2005. Of this $196,344, the Company has received invoices from TIAX
      in an aggregate amount of approximately $165,000 that it has reflected as
      accounts payable in its financial statements as of June 30, 2005, although
      the
      Company disputes this amount. Upon receipt of this notice from TIAX that the
      alleged default had not been cured, we took the position that the Agreement
      had
      already terminated as of June 28, 2005. While collaborating on development
      of
      the All-ClearTM product, we and Kidde discovered that the formulation developed
      by TIAX did not meet the requirements for a commercial product. Accordingly,
      we
      and Kidde developed an alternative formulation that is more effective against
      chemical and biological pathogens than the TIAX formulation, and that, in
      addition, is non-toxic and non-corrosive. We terminated our license agreement
      with TIAX because we are not using the TIAX licensed technology. On
      January 2, 2006, we learned
      that TIAX LLC filed a complaint for breach of contract in Middlesex Superior
      Court in Massachusetts (the “Court”).  The complaint seeks payment of
      $226,344 that TIAX alleges remains payable by us under the Agreement.  Our
      position is that the Agreement terminated on June 28, 2005, and that TIAX’s
      claims are without merit.  On February 6, 2005, we filed an answer to the
      complaint and a counterclaim against TIAX for fraudulent misrepresentation
      and
      breach of covenant of good faith and fair dealing. On June 30, 2006, the Court
      granted TIAX’s motion for dismissal of our counterclaim for breach of the
      covenant of good faith and fair dealing, but upheld our counterclaim of
      fraudulent misrepresentation which stands pending trial. We received a request
      from TIAX to meet and discuss a settlement to preclude the costs of trial.
      We
      are working towards a negotiated settlement of this matter.





12


On
      January 11, 2006, we learned that Everest International, Inc. (“Everest”), the
      owner of our business facility in Arlington, Texas, filed a suit against us
      for
      breach of the Gross Lease Agreement dated April 28, 2003 (the “Lease”) between
      West Harris Property, Inc. and us. The suit sought damages for unpaid rent
      and
      late fees totaling $52,900. Additionally, the suit sought payment of the rent
      specified in the Lease for the remainder of the Lease term, reduced to present
      worth, beginning from January 1, 2005 through the end of the lease term on
      May
      31, 2006, plus interest, attorneys’ fees and costs. The monthly rent due under
      the lease was $11,000. Since Everest filed the suit, Everest had received
      $12,500 against the balance owed. Everest was also in possession of an $11,000
      security deposit paid by us upon execution of the Lease, which Everest had
      applied to any charges in default. The suit also named Julie Seaman, one of
      our
      directors, as a defendant in her capacity as a personal guarantor of the Lease.
      On June 15, 2006 we and Ms. Seaman, entered into a Settlement Agreement and
      Mutual Release (the “Settlement Agreement”) with Everest. The Settlement
      Agreement was modified on June 21, 2006. Pursuant to the Modified Settlement
      Agreement, we agreed to convey certain tangible assets located in the Arlington
      facility to Everest by June 21, 2006, and we (i) agreed to issue to Everest
      893,617 unregistered shares of common stock within 10 calendar days of June
      21,
      2006, (ii) agreed to pay Everest $10,000 in cash by June 21, 2006, (iii)
      forfeited all claims to the $11,000 security deposit, and (iv) agreed to tender
      to Everest a cash payment of $32,000 at 10% per year via monthly installments
      of
      $1,464.43 commencing on October 1, 2006 with no prepayment penalty, all in
      consideration of a full release and dismissal of the lawsuit previously filed
      by
      Everest. As all requirements of the Settlement Agreement have been met, the
      action has been dismissed without prejudice.





13


On
      August
      9, 2006 we learned that Western Security Bank (the “Bank”), an Arizona
      corporation, filed a suit against us for default of the balance owed of the
      $1,650,000 promissory note signed on June 30, 2003. The suit seeks the
      accelerated payment of $710,114 in principal, accrued interest, and penalties
      owed the Bank through July 7, 2006 due to our failure to make all required
      monthly amounts, which amount is alleged to have totaled $880,708 on that date,
      plus $374.78 per day from July 8, 2006 until paid and attorney’s fees. The
      promissory note calls for payments of $25,400 per month, some of which have
      not
      been paid. The suit also names John D. Robinson, our former officer and
      director, and United States Defense Research, Ltd., a Nevada limited liability
      company, as defendants in their capacities as personal guarantors. We have
      been
      in frequent contact with the Bank and we continue to seek an amicable resolution
      of the matter.





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





None.





**PART
      II**





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


**MATTERS**





**Market
      Information**





Our
      common stock has traded on the NASD OTC Bulletin Board under the symbol USGA
      since October 4, 2002. From July 12, 2001 to October 4, 2002, our common stock
      traded on the NASD OTC Bulletin Board under the symbol CPRD. From June 21,
      1999
      to July 12, 2001 our common stock traded on the OTC Bulletin Board under the
      symbol BDYR. From December 15, 1997 through June 20, 1999, our common stock
      traded on the Nasdaq Capital (formerly SmallCap) Market under the symbol BDRY.
      Our common stock traded on the OTC Bulletin Board under the symbol CGPD from
      November 21, 1997 through December 14, 1997, under the symbol CGPDD from October
      21, 1997 through November 20, 1997 and under the symbol CGPD from August 14,
      1997 through October 20, 1997. We voluntarily delisted our common shares from
      the Vancouver Stock Exchange in January 1998, and from the British Columbia
      Stock Exchange on June 17, 2002. We also voluntarily delisted our common shares
      from the Berlin Bremen Stock Exchange on May 26, 2004, after discovering we
      were
      listed without our consent or approval.





The
      table
      below sets forth the range of high and low bid quotes of our common stock for
      each quarter for the last two fiscal years as reported by Yahoo Finance. The
      bid
      prices represent inter-dealer quotations, without adjustments for retail
      mark-ups, markdowns or commissions and may not necessarily represent actual
      transactions.




PERIOD
            
            
            HIGH
            
            
            LOWFiscal Year Ended March 31, 2006
            
            First
                Quarter
            
            $
            0.120
            
            $
            0.040Second
                Quarter
            
            $
            0.160
            
            $
            0.060Third
                Quarter
            
            $
            0.130
            
            $
            0.050Fourth
                Quarter
            
            $
            0.080
            
            $
            0.040Fiscal Year Ended March 31, 2005
            
            First
                Quarter
            
            $
            0.760
            
            $
            0.250Second
                Quarter
            
            $
            0.430
            
            $
            0.170Third
                Quarter
            
            $
            0.350
            
            $
            0.140Fourth
                Quarter
            
            $
            0.250
            
            $
            0.100





**Holders**





There
      were approximately 164 stockholders of record of common stock as of August
      11,
      2006. This does not include an indeterminate number of holders who hold their
      common stock in street name.





**Dividends**





We
      have
      never declared or paid cash dividends on our common stock, and our present
      policy is not to pay cash dividends on our common stock. Any payment of cash
      dividends in the future will be wholly dependent upon our earnings, financial
      condition, capital requirements and other factors deemed relevant by our board
      of directors. It is not likely that cash dividends will be paid in the
      foreseeable future.





**Sales
      of Unregistered Shares**





During
      the last fiscal year we sold securities that were not registered under the
      Securities Act of 1933. The following transactions were not reported in our
      previously filed quarterly reports. The transactions are as follows:





On
      January 7, 2006 the Company became obligated, pursuant to the terms of an
      Employment Agreement with Mr. Kevin Cronin, to issue to him 1,000,000 shares
      of
      restricted common stock. The per share value of the common stock on the date
      of
      the Agreement was $0.074. The common stock will vest in equal increments on
      the
      last day of each month of the initial term of the Agreement. The Company relied
      on Section 4(2) of the Securities Act to issue the securities, inasmuch as
      the
      common stock was sold without any form of general solicitation or general
      advertising and the Company provided to Mr. Cronin, who is a certified public
      accountant and who has several years experience working for public corporations,
      information concerning the Company that registration would otherwise
      provide.





14


**Securities
      Authorized for Issuance under Equity Incentive Plan**





Set
      forth
      in the table below is information regarding awards made through compensation
      plans or arrangements through March 31, 2006, the most recently completed fiscal
      year.





**Equity
      Compensation Plan Information**


Plan
                Category
            Number
                of securities to be issuedupon exercise of outstanding
                options,warrants and rights
            Weighted
                average exerciseprice of outstanding optionswarrants and
                rights
            Number
                of securities remainingavailable for future issuanceunder the
                equity compensation
              plan
                (excluding securities
              reflected
                in the first columnShareholder
                Approved(1)
            6,500,000(3)
            $0.06
            20,981,219Not
                Approved by Shareholders(2)
            0(4)
            N/A
            5,150,000


(1)
      The
      name of this plan is the US Global Nanospace, Inc. 2002 Amended and Restated
      Stock Plan.


(2)
      The
      name of this plan is the US Global Nanospace, Inc. 2005 Stock Plan.


(3)
      As of
      March 31, 2006, we had registered 90,000,000 shares from the date the US Global
      Nanospace, Inc. 2002 Amended and Restated Stock Plan was adopted. There are
      currently 6,500,000 shares reserved for the stock options granted to our
      officers on January 31, 2006, leaving 20,981,219 shares available for
      issuance.


(4)
      As of
      March 31, 2006, no options, warrants or rights were granted under the US Global
      Nanospace, Inc. 2005 Stock Plan, however, we have awarded 19,850,000 shares
      of
      common stock to our former Chief Financial Officer and various consultants
      in
      exchange for services rendered to us. Therefore, as of March 31, 2006 there
      was
      available for future issuance under the US Global Nanospace, Inc. 2005 Stock
      Plan 5,150,000 shares of common stock.




On
      August
      25 2005, our Board of Directors approved and adopted the US Global Nanospace,
      Inc. 2005 Stock Plan (the “2005 Plan”). Pursuant to the 2005 Plan, we may issue
      up to 25,000,000 shares of our common stock (the “Plan Shares”) to employees,
      officers, directors, consultants, independent contractors and advisors who
      provide services to us that do not relate to capital raising or stock support
      activities. Awards under the 2005 Plan may be in the form of stock options,
      stock awards subject to payment of consideration, or stock bonuses, and may
      be
      subject to vesting conditions. Incentive stock options (“ISOs”) may be granted
      to employees only. The Board of Directors administers and interprets the 2005
      Plan in the absence of a committee of the Board formed for such purpose. The
      term of the 2005 Plan is 10 years.





15


Options
      may be subject to vesting conditions, which are determined by the Board of
      Directors or the committee. The exercise price of a stock option is determined
      by the Board of Directors or the committee. The exercise price for an ISO must
      be its fair market value on the date of grant, unless the grant is made to
      a
      holder of 10% or more of our common stock, in which case the exercise price
      must
      be 110% of the fair market value on the date of grant. The exercise price of
      options that do not qualify as ISOs must be at least 85% of the fair market
      value of our common stock on the date of grant. The term of an option may not
      exceed 10 years, unless the option is an ISO granted to a holder of 10% or
      more
      of our common stock, in which case the term may not exceed five years. Options
      may be exercised for cash only. So long as a public market for our stock exists,
      a recipient of an option grant may exercise his option through a “same day sale”
commitment from the recipient and a broker-dealer that is a member of the
      National Association of Securities Dealers (an “NASD Dealer”) whereby the
      recipient irrevocably elects to exercise the option and to sell a portion of
      the
      shares so purchased to pay for the exercise price, and whereby the NASD Dealer
      irrevocably commits upon receipt of such shares to forward the exercise price
      directly to us or through a “margin” commitment from the recipient and an NASD
      Dealer whereby the recipient irrevocably elects to exercise the option and
      to
      pledge the shares so purchased to the NASD Dealer in a margin account as
      security for a loan from the NASD Dealer in the amount of the exercise price,
      and whereby the NASD Dealer irrevocably commits upon receipt of such shares
      to
      forward the exercise price directly to us. If the service of a recipient of
      an
      option grant is terminated for any reason other than death or disability, the
      recipient will have a period of three months (but not more than five years)
      from
      the date of termination to exercise any portion of the option that has vested.
      If the service of a recipient of an option grant is terminated due to death
      or
      disability, he will have a period of 12 months (but not more than five years)
      from the date of termination to exercise any portion of the option that has
      vested. If the service of a recipient of an option grant is terminated for
      cause, he will not be entitled to exercise any portion of the option
      grant.





Stock
      grants may also be subject to vesting conditions, which are determined by the
      Board of Directors or the committee. The purchase price of shares sold pursuant
      to a stock award must be at least 85% of the fair market value of the shares
      on
      the date of grant. Payment for shares may be with cash, by cancellation of
      indebtedness owed by us to the recipient, by surrender of other shares owned
      by
      the recipient that have been held for a period of six months or that were
      obtained in the public market or by waiver of compensation accrued to or due
      to
      the recipient from us.





Stock
      bonuses, too, may be subject to vesting conditions which are determined by
      the
      Board of Directors or the committee.





The
      transfer of awards made under the 2005 Plan is restricted. During the
      recipient’s lifetime an award will be exercisable only by the recipient. During
      the lifetime of the recipient, any elections with respect to an award may be
      made only by the recipient unless otherwise determined by the Board of Directors
      or the committee and set forth in the award agreement with respect to awards
      that are not ISOs.





At
      the
      discretion of the Board of Directors or the committee, we may reserve a right
      to
      repurchase a portion of or all of the unvested shares held by a recipient
      following such recipient's termination date. Such repurchase shall be for cash
      and/or cancellation of purchase money indebtedness and the price per share
      shall
      be the recipient's exercise price or purchase price, as applicable.





16


**ITEM
      6. MANAGEMENT’S DISCUSSION AND ANALYSIS AND PLAN OF
      OPERATION**





This
      section and other parts of this Annual Report on Form 10-KSB by the Company
      contains forward-looking statements. These are statements regarding financial
      and operating performance and results and other statements that are not
      historical facts. The words “expect,” “project,” “estimate,” “believe,”
“anticipate,” “intend,” “plan,” “forecast,” and similar expressions are intended
      to identify forward-looking statements. Certain important risks could cause
      results to differ materially from those anticipated by some of the
      forward-looking statements. Some, but not all, of the risks that could cause
      actual results to differ from those suggested by the forward-looking statements
      include, among other things:





·
            our
                ability to successfully market the products we have developed and
                to
                continue to develop products with demonstrated competitive advantages
                for
                the defense and health and safety
                markets;





·
            whether
                or not our products are able to compete successfully with products
                of
                other suppliers and whether or not some or all of our products are
                rendered obsolete by newer
                products;





·
            the
                implementation of any government regulation that could make it more
                difficult or more costly to bring our products to
                market;





·
            our
                ability to obtain financing as and when we need it;
                and





·
            other
                factors, all of which are difficult to predict and many of which
                are
                beyond our control.





You
      are
      cautioned not to place undue reliance on these forward-looking statements,
      which
      relate only to events as of the date on which the statements are made. We
      undertake no obligation to publicly revise these forward-looking statements
      to
      reflect events or circumstances that arise after the date hereof. You should
      refer to and carefully review the information in future documents we file with
      the Securities and Exchange Commission.





**Overview**





US
      Global
      Nanospace, Inc. is a development stage company that specializes in identifying,
      developing, and commercializing products the core technologies of which relate
      to wide area perimeter security or are nanoscience derived. Our products include
      our MAPSANDS TM technology, an integrated system to protect against the breach of protected
      property boundaries, and All-ClearTM, a biological and chemical decontaminant.
      Other products include optimized polymer and organic materials and nanofibers,
      advanced filtration systems for air, water, and cigarettes, and blast mitigation
      and fire protection materials. We are currently focusing our efforts on securing
      global partners and marketing the products that we have developed for defense,
      security, and health and safety applications. Our target customers for these
      systems, materials, formulas, and processes include agencies or organizations
      under the direct control of the federal government of the United States, plus
      domestic and foreign businesses and foreign government agencies or
      organizations, to the extent permitted by applicable law or
      regulations.





17


Since
      our
      inception on March 20, 2002, we have been unprofitable. We have incurred net
      losses of $23,627,613 since inception through March 31, 2006. As a development
      stage company, our limited history of operations makes prediction of future
      operating results difficult. We believe that period-to-period comparisons of
      our
      operating results should not be relied on as predictive of our future
      results.





**Critical
      Accounting Policies and Estimates**





Management’s
      discussion and analysis of results of operations and financial condition are
      based upon our financial statements. These statements have been prepared in
      accordance with accounting principles generally accepted in the United States
      of
      America. These principles require management to make certain estimates and
      judgments that affect the reported amounts of assets, liabilities, revenues
      and
      expenses, and related disclosure of contingent assets and liabilities. On an
      on-going basis, we evaluate our estimates based on historical experiences 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
      have
      identified the following accounting principles that we believe are key to an
      understanding of our financial statements and that require our more significant
      judgments and estimates in preparing our financial statements.





Revenue
      Recognition. We recognize revenues in accordance with SEC Staff Accounting
      Bulletin (SAB) No. 101, and as amended by SAB No. 104. Revenues are recognized
      when persuasive evidence of an arrangement exists, delivery has occurred, or
      services have been rendered, the price is fixed and determinable and
      collectibility is reasonably assured. During the fiscal year ended March 31,
      2006, our revenues were primarily derived from product sales. Revenue for
      product sales is recognized at the time of delivery of the product. Revenue
      under contracts based on a fixed fee is recognized based on conditions being
      met. Revenue under contracts based on royalty fees is recognized when the
      amounts are earned and determinable, which is generally when cash payment is
      received. However, since we are not able to forecast product sales by licensees,
      royalty payments that are based on product sales by the licensees are not
      determinable until the licensee has completed their computation of the royalties
      due and/or remitted their cash payment. Should information on licensee product
      sales become available so as to enable us to recognize royalty revenue on an
      accrual basis, materially different revenues and results of operations could
      occur.





18


**Plan
      of Operation**





We
      are a
      development stage enterprise as defined under Statement of Financial Accounting
      Standards (“SFAS”) No. 7. We remain committed to identifying, developing, and
      commercializing advanced nanotechnology and defense and security products.
      These
      products include complex polymer materials, polymer nanofiber materials,
      nanofiber filter materials, biological and chemical decontaminants, blast
      mitigation materials, and autonomous wide area security systems. We believe
      there is synergy between advanced security solutions to protect infrastructure
      and nanofiber based materials for blast mitigation and filtration, and we are
      exploring ways in which these products may be used together. **** One
      such
      effort is underway for providing blast mitigation protection for pipelines
      and
      storage facilities.





During
      the last fiscal year with the introduction of MAPSANDSTM, we shifted our primary
      market and licensing efforts to autonomous wide area security systems worldwide. We
      believe that MAPSANDSTM represents a new and innovative approach to wide area
      perimeter security. In
      MAPSANDS TM
      w e
      have
      developed, integrated and commercialized
      an advanced set of technologies which we believe will change
      the landscape and economics of the border and perimeter security market.  The
      integration of advanced technologies into an autonomous security system should
      generate both significant economic
      advantages and superior mission effectiveness, thereby helping our customers
      to
      effectively secure critical infrastructure and take control of
      borders.





We
      generated operating revenues in the amount of $259,969 for the year ended March
      31, 2006, primarily from the sales of radomes. We do not manufacture or
      distribute our products on a commercial scale. We are in the process of
      negotiating licensing, manufacturing or distribution arrangements with other
      international companies or independent contractors that have the infrastructure
      to manufacture, distribute or sell our products on a commercial scale worldwide.
      We are also in the process of negotiating directly with government agencies
      and
      private sector companies for the sale or licensing of our products.





Our
      capital requirements, particularly as they relate to product research and
      development, have been and will continue to be significant. Our future cash
      requirements and the adequacy of available funds will depend on many factors,
      including the pace at which we are able to launch our products, whether or
      not a
      market develops for our products and, if a market develops, the pace at which
      it
      develops, and the pace at which the technology involved in making our products
      changes.





To
      date,
      we have funded our operations from inception through loans in the amount of
      $1,650,000 from a bank, loans in the amount of $3,241,818 from unrelated third
      parties, existing shareholders and directors, and revenues totaling $1,116,519.
      Furthermore, in an effort to conserve cash, our officers have deferred their
      salaries or have accepted shares of our common stock in lieu of cash for their
      compensation. During the next 12 months, if we fail to earn revenues in an
      amount sufficient to fund our operations, we intend to raise capital through
      an
      offering of our securities or from additional loans. We cannot guarantee that
      financing will be available to us, on acceptable terms or at all. If we do
      not
      earn revenues sufficient to support our business and we fail to obtain other
      financing, either through an offering of our securities or by obtaining
      additional loans, we may be unable to maintain our operations.





19


**Results
      of Operations**





Our
      revenues from operations for the year ended March 31, 2006 were $259,969
      compared to revenues of $716,201 for the period ended March 31, 2005. This
      significant decrease in revenues is attributable to revenues generated under
      the
      agreement with Kidde Fire Fighting in the previous year, pursuant to which
      we
      received a one-time license fee of $100,000 and a one-time trademark fee of
      $100,000 in two installments that were paid in August 2004 and November 2004.
      Additionally, the decrease in our current year revenues is also attributable
      to
      our decision to focus on developing and marketing the MAPSANDSTM system. Due to
      this decision, we did not actively market our S.A.G. turret, GARDS panels,
      and
      blast mitigation materials, which we sold during the prior fiscal
      year.





Our
      cost
      of revenues from operations for the year ended March 31, 2006 was $85,992 as
      compared to cost of revenues of $381,554 from the period ended March 31, 2005.
      The cost of revenues includes the cost of raw materials, packaging supplies,
      shipping charges, royalties, commissions, direct and indirect labor and other
      indirect manufacturing costs.





The
      gross
      margin percentage during the year ended March 31, 2006 of 67% increased from
      the
      gross margin percentage of 47% from the fiscal year ended March 31, 2005. This
      increase is attributable to the fact that current year sales were primarily
      for
      radomes, which has a higher margin than the mix of product sales in the prior
      year. Because sales in future years may include sales for the MAPSANDSTM system
      or components and royalties from Kidde’s sales of All-ClearTM, it is difficult to
      project future gross margin percentages.





During
      the year ended March 31, 2006 we spent $1,571,022 on research and development
      as
      compared to $526,746 for research and development during the year ended March
      31, 2005. Our research and development costs increased significantly due
      primarily to our development of the MAPSANDSTM system. We anticipate our research
      and development costs will continue to be significant as we continue to enhance
      the baseline MAPSANDSTM system and develop additional products.





During
      the year ended March 31, 2006 we incurred $3,942,021 in general and
      administrative expenses as compared to $3,547,961 related to general and
      administrative expenses during the year ended March 31, 2005. Costs were higher
      in this fiscal year due primarily to stock paid to marketing consultants in
      support of MAPSANDSTM, stock bonuses paid to our former Chief Financial Officer
      and key consultants, and stock awarded to two new officers. These higher costs
      this fiscal year were offset in part by reductions in legal costs and the
      absence of costs associated with payments to a development partner in the prior
      year. Of this amount for the year ended March 31, 2006, $427,769 is expense
      related to legal fees and $135,193 for accounting fees. During the year ended
      March 31, 2006, we continued to pay our consultants and employees with our
      common stock in order to conserve cash. We anticipate that general and
      administrative expenses will continue to be significant as we continue our
      licensing and marketing efforts and incur other increased costs associated
      with
      operating as a public company.





20





We
      had an
      operating loss of $5,339,066 for the year ended March 31, 2006, as opposed
      to an
      operating loss of $3,740,060 for the year ended March 31, 2005. We had a net
      loss of $5,445,839 for the year ended March 31, 2006, as compared to a net
      loss
      of $3,842,078 for the year ended March 31, 2005. This increase in the operating
      loss and net loss is primarily attributable to the increase in general and
      administrative non-cash compensation primarily from the issuance of stock for
      marketing our products.





Other
      income (expense) of $106,773 for the year ended March 31, 2006 was made up
      of
      interest expense of $129,309 offset by $22,536 of other revenue.





**Liquidity
      and Capital Resources**





At
      March
      31, 2006 we had cash on hand of $21,256. Since our inception, we have incurred
      significant losses, and as of March 31, 2006 we had an accumulated deficit
      of
      $23,627,613. Due to the nature of our business, we incur sizeable research
      and
      development and general and administrative expenses and we expect these expenses
      to continue in the future. We have not achieved profitability and anticipate
      that we will continue to incur a net loss until we generate substantial revenues
      from our products which, to date, we have been unable to do.





From
      inception through the year ended March 31, 2006, we have funded our operations
      through loans in the amount of $1,650,000 from a bank, loans in the amount
      of
      $3,241,818 from unrelated third parties, existing shareholders and directors,
      and revenues totaling $1,116,519. Our primary sources of cash during the year
      ended March 31, 2006 were loans totaling $312,713, revenues totaling $259,969
      and other income totaling $22,536. As of March 31, 2006, we had outstanding
      balances under loan agreements of $950,634. This amount is comprised of $710,114
      of principal and accrued interest and fees of $91,776, under a loan agreement
      with a bank, $127,995 under a loan agreement with USDR, Inc. and $20,749 under
      a
      loan agreement with an existing shareholder. The bank loan is secured by our
      assets and personally guaranteed by Mr. John Robinson, our former Chairman
      and
      Chief Executive Officer, and matures in May 2008. We have no borrowing capacity
      under this bank loan and the bank has notified us of its determination that
      we
      are currently in default of our payment obligation. At March 31, 2006, we also
      owed USDR Aerospace, Ltd., an entity controlled by Mr. Robinson, royalties
      in
      the amount of $39,108 for intellectual property licensed to us. We also owe
      Mr.
      Robinson and Ms. Julie Seaman, our former Chief Executive Officer and our former
      Chief Financial Officer, a total of $606,350 and $411,981, respectively, for
      accrued but unpaid employment and consulting compensation.





21


We
      are
      severely hampered by a shortage of cash. In order to conserve cash, our officers
      have deferred their salaries, and during the year ended March 31, 2006, our
      officers accepted shares of our common stock in lieu of cash. Our officers
      will
      continue to be paid with our common stock until we reach certain milestones,
      the
      achievement of which will allow us to pay them in cash. We also do not
      manufacture or distribute our products on a commercial scale. Under the Kidde
      agreement, Kidde Firefighting, Inc. is responsible for all of the costs of
      manufacturing, marketing and distribution of our All-Clear TM product.
      In addition, we are in the process of negotiating certain licensing,
      manufacturing or distribution arrangements with other international companies
      or
      independent contractors that have the infrastructure to manufacture, distribute
      or sell our products on a commercial scale worldwide. We are also in the process
      of negotiating directly with certain government agencies and private sector
      companies for the sale or licensing of our products. However, because we cannot
      predict if, or when, our products such as MAPSANDSTM and All-ClearTM will generate
      revenues that will be sufficient to sustain our operations, we may pursue equity
      or debt financing. In order to generate significant investor interest, we
      believe that we must resolve the issues relating to the Wells Notice, which
      we
      are actively attempting to do. We also intend to continue trying to find
      strategic partners to assist us with the marketing of MAPSANDSTM, which should
      produce substantial revenues. However, MAPSANDSTM is a new technology that
      approaches perimeter security in an innovative way. As such, it may not be
      immediately adopted over other, more traditional ways of maintaining security.
      We cannot be certain that we will be successful in obtaining financing. If
      we
      cannot obtain financing when and as we need it, we may be unable to maintain
      our
      operations.





Net
      cash
      used in operating activities for the year ended March 31, 2006 was $230,835
      as
      compared to $130,318 in the year ended March 31, 2005. The primary uses of
      cash
      for the fiscal year ended March 31, 2006 consisted of general operating costs
      and product research and development expenses.





During
      the year ended March 31, 2006, in order to conserve cash, we issued our common
      stock to satisfy notes payable totaling $777,594, accounts payable totaling
      $524,223, and services and wages totaling $3,840,008.





Autonomous
      wide area security systems and nanotechnology reflect novel and unproven
      business models, which may not be successful and will ultimately depend on
      demand for such products and cost-effectiveness of manufacturing. We anticipate
      that any business model we develop will be subject to change. At this time
      it is
      impossible for us to predict the degree to which demand for our products, if
      any, will evolve or whether any potential market will be large enough to provide
      any meaningful revenue or profit for us.





22


**New
      Accounting Pronouncements**





In
      November 2004, the Financial Accounting Standards Board (FASB) issued SFAS
      No.
      151, “Inventory Costs”, which clarifies the accounting for abnormal amounts of
      idle facility expense, freight, handling costs, and wasted material. SFAS No.
      151 will be effective for inventory costs incurred during fiscal years beginning
      after June 15, 2005. We do not believe the adoption of SFAS No. 151 will have
      a
      material impact on our financial statements.





In
      December 2004, the Financial Accounting Standards Board (FASB) issued SFAS
      No.
      153, “Exchanges of “Nonmonetary Assets”, which eliminates the exception for
      nonmonetary exchanges of similar productive assets and replaces it with a
      general exception for exchanges of nonmonetary assets that do not have
      commercial substance. SFAS No. 153 will be effective for nonmonetary asset
      exchanges occurring in fiscal periods beginning after June 15, 2005. We do
      not
      believe the adoption of SFAS No. 153 will have a material impact on our
      financial statements.





In
      December 2004, the Financial Accounting Standards Board (FASB) issued SFAS
      No.
      123R, which eliminates the ability to account for share-based compensation
      transactions using the intrinsic value method under Accounting Principles Board
      (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and generally
      would require instead that such transactions be accounted for using a
      fair-value-based method. This statement is effective for the Company as of
      the
      first interim period or fiscal year beginning after December 15, 2005.
      Management has adopted this statement as of July 1, 2005.


In
        May
        2005, the Financial Accounting Standards Board (FASB) issued SFAS No. 154,
        “Accounting Changes and Error Corrections, A Replacement of APB Opinion No.
        20
        and FASB Statement No. 3.” SFAS 154 requires retrospective application to prior
        periods’ financial statements for changes in accounting principles, unless it is
        impracticable to determine either the period-specific effects or the cumulative
        effect of the change. SFAS 154 also requires that retrospective application
        of a
        change in accounting principle be limited to the direct effects of the change.
        Indirect effects of a change in accounting principle, such as a change in
        non-discretionary profit-sharing payments resulting from an accounting change,
        should be recognized in the period of the accounting change. SFAS 154 also
        requires that a change in depreciation, amortization, or depletion method
        for
        long-lived, non-financial assets be accounted for as a change in accounting
        estimate affected by a change in accounting principle. SFAS 154 is effective
        for
        accounting changes and corrections of errors made in fiscal years beginning
        after December 15, 2005. Early adoption is permitted for accounting changes
        and
        corrections of errors made in fiscal years beginning after the date this
        Statement is issued. The Company does not anticipate a material impact on
        the
        financial statements from the adoption of this consensus.





**FACTORS
      AFFECTING BUSINESS, OPERATING RESULTS AND FINANCIAL
      CONDITION**





An
      investment in our securities is very speculative and involves a high degree
      of
      risk. You should carefully consider the following risk factors, along with
      the
      other matters referred to in this Annual Report, before you decide to buy our
      securities. If you decide to buy our securities, you should be able to afford
      a
      complete loss of your investment.





RISKS
      ASSOCIATED WITH OUR BUSINESS





23


WE
      ARE A
      DEVELOPMENT STAGE COMPANY AND HAVE HAD LIMITED OPERATIONS TO DATE, THEREFORE
      YOU
      HAVE NO BASIS ON WHICH TO DETERMINE IF OUR BUSINESS CAN BE SUCCESSFUL.





Current
      management acquired control of USGN on May 17, 2002. We are a development stage
      company and, to date, we have had limited operations. During the fiscal year
      ended March 31, 2006 we had a net loss of $5,445,839. Our accumulated deficit
      since inception through March 31, 2006 was $23,627,613.





SOME
      OF
      OUR PRODUCTS ARE STILL BEING DEVELOPED AND, AS YET, THEY ARE UNPROVEN,
      THEREFORE, WE CANNOT ASSURE YOU THAT WE WILL EVER BECOME PROFITABLE.





Our
      current business model depends on generating revenue through sales of our
      products or licensing of our technology. Some of these products are in varying
      stages of development and testing. If we cannot successfully develop and prove
      our products, we will not become profitable.





THE
      SUCCESS OF OUR BUSINESS REQUIRES CONTINUED FUNDING. IF WE DO NOT RECEIVE
      ADEQUATE FUNDING, WE MAY BE UNABLE TO CONTINUE OUR OPERATIONS.





Our
      ability to continue in existence and to develop our business depends upon our
      ability to obtain funding for our operations. If we do not receive adequate
      funding, it is unlikely that we could continue our business.





WE
      HAVE
      RECEIVED A WELLS NOTICE AND SUBPOENAS FOR INFORMATION AND TESTIMONY FROM THE
      SEC
      FOR CERTAIN PRIOR PUBLIC STATEMENTS. ALTHOUGH WE HAVE SIGNED A SETTLEMENT
      AGREEMENT WITH THE SEC, WE CANNOT FULLY PREDICT THE OUTCOME OF THIS MATTER
      UNTIL
      THE AGREEMENT IS REVIEWED BY THE SEC COMMISSIONERS. IT COULD RESULT IN A CIVIL
      ACTION INVOLVING, AMONG OTHER THINGS, MONETARY RELIEF FROM US OR OUR OFFICERS
      AND DIRECTORS. ANY SUCH DEVELOPMENT COULD HAVE A MATERIAL ADVERSE EFFECT ON
      OUR
      BUSINESS, RESULTS OF OPERATIONS, AND FINANCIAL CONDITION.





On
      January 3, 2005, we received a Wells Notice from the staff of the U.S.
      Securities and Exchange Commission. The Wells Notice notified us that the SEC
      staff intended to recommend that the SEC bring a civil action against us and
      our
      officers and directors for alleged violations of SEC laws. The SEC’s concerns
      principally regard certain prior public statements made by us regarding the
      marketability of our products. We have been in ongoing dialogue with the SEC,
      and prepared and submitted initial and supplemental Wells Submissions in
      response to the original Wells Notice.  On
      July
      20, 2006, the Company, separate from the other parties identified in the
      previously announced Wells Notice, agreed to a settlement with the staff of
      the
      SEC of the proceeding commenced by the Wells Notice.  The
      settlement is subject to the final approval of the SEC
      Commissioners.





24


Any
      civil
      action or any negotiated resolution may involve, among other things, equitable
      relief, including material penalties, which could have a material adverse effect
      on our business, results of operations and financial condition.





THE
      SUCCESS OF OUR BUSINESS REQUIRES ACCEPTANCE OF OUR PRODUCTS IN THE MARKETPLACE.
      IF A DEMAND FOR OUR PRODUCTS DOES NOT DEVELOP, OUR BUSINESS WILL BE
      UNSUCCESSFUL.





Autonomous
      wide area security and nanotechnology reflect novel and unproven business
      models, which may or may not be successful and will ultimately depend on demand
      for our products. Our ability to grow and sustain our business is dependent
      upon
      our ability to gain significant acceptance of our products, primarily in the
      defense security and health and safety markets. Without significant acceptance
      in these markets, we will not be able to achieve and sustain profitable
      operations. At this time it is impossible for us to predict the degree to which
      demand for our products will evolve or whether any potential market will be
      large enough to provide any meaningful revenue or profit for us.





WE
      ARE
      SUBJECT TO THE RISKS AND UNCERTAINTIES INHERENT IN NEW BUSINESSES. OUR FAILURE
      TO PLAN OR FORECAST ACCURATELY COULD HAVE A MATERIAL ADVERSE IMPACT ON OUR
      DEVELOPMENT.





We
      are
      subject to the risks and uncertainties inherent in new businesses, including
      the
      following:





·
            Our
                projected capital needs may be inaccurate, and we may not have enough
                money to develop our products and bring them to
                market;





·
            We
                may experience unanticipated development or marketing expenses, which
                may
                make it more difficult to develop our products and bring them to
                market;





·
            Even
                if we are able to develop our products and bring them to market,
                we may
                not earn enough revenue from the sales of our products to cover the
                costs
                of operating our business.





If,
      because of our failure to plan or project accurately, we are unsuccessful in
      our
      efforts to develop our products or if the products we provide do not produce
      revenues as we project, we are not likely to ever become profitable and we
      may
      be required to curtail some or all of our operations.





WE
      ARE
      DEPENDENT ON PROPRIETARY TECHNOLOGY, WHICH WE MAY NOT BE ABLE TO ADEQUATELY
      PROTECT. ADDITIONALLY, THIRD PARTIES MAY ALLEGE THAT WE INFRINGE ON THEIR
      INTELLECTUAL PROPERTY. IF WE WERE TO BECOME INVOLVED IN LITIGATION, IT WOULD
      BE
      COSTLY AND WOULD DIVERT MANAGEMENT’S ATTENTION FROM OUR BUSINESS OPERATIONS.
      THIS COULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS AND RESULTS OF OPERATIONS.





25


We
      rely
      on a combination of trade secret and patent laws, nondisclosure and other
      contractual and technical measures to protect our proprietary rights in our
      products. However, we cannot assure you that these provisions will be adequate
      to protect our proprietary rights. In addition, the laws of certain foreign
      countries do not protect intellectual property rights to the same extent as
      the
      laws of the United States. Although we believe that our intellectual property
      rights do not infringe upon the proprietary rights of third parties, a
      competitor may claim that we have infringed on its products. Any such claims
      could be time-consuming, divert management from our daily operations, result
      in
      litigation, or cause product shipment delays.





WE
      HAVE
      BEEN NAMED AS A DEFENDANT IN A LEGAL PROCEEDING INITIATED BY WESTERN SECURITY
      BANK. IF THIS MATTER IS NOT SETTLED AND THE BANK RECOVERS A JUDGMENT, WE COULD
      BE REQUIRED TO SEVERELY CURTAIL, OR COMPLETELY CEASE, OUR
      OPERATIONS.





As
      disclosed in the section of this Annual Report titled “Legal Proceedings”, we
      have been sued by Western Security Bank for failure to pay a loan. The bank
      is
      seeking a judgment in the amount of $880,708 in principal, accrued interest
      and
      late charges plus daily interest and attorney’s fees. If the bank is able to
      recover a judgment against us, and we are not able to work out a realistic
      payment schedule, the bank may exercise its rights to enforce its judgment.
      This
      could result in the bank taking possession of our property, including our
      intellectual property. If that were to happen, we could be required to severely
      curtail, or even to cease, our operations.





**ITEM
      7. FINANCIAL STATEMENTS**





INDEX
      TO
      FINANCIAL STATEMENTS




Report
                  of Independent Registered Public Accounting Firm
              F-1Balance
                  Sheet as of March 31, 2006
              F-2Statements
                  of Operations for the years ended March 31, 2006 and 2005 and for
                  the
                  period from inception through March 31, 2006
              F-3Statement
                  of Stockholders’ Deficit for the period from inception through March 31,
                  2006
              F-4
                  - F-6Statements
                  of Cash Flows for the years ended March 31, 2006 and 2005and for
                  the
                  period from inception through March 31, 2006
              F-7Notes
                  to Financial Statements
              F-8
                  - F-16






26


REPORT
      OF
      INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





The
      Board
      of Directors and Stockholders


US
      Global
      Nanospace, Inc.





We
      have
      audited the accompanying balance sheet of US Global Nanospace, Inc. (the
      Company), a development stage company, as of March 31, 2006, and the related
      statements of operations, stockholders’ deficit, and cash flows for the years
      ended March 31, 2006 and 2005 and for the period from March 20, 2002 (date
      of
      inception) through March 31, 2006. These financial statements are the
      responsibility of the Company’s management. Our responsibility is to express an
      opinion on these financial statements based on our audits.




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




In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the financial position of US Global Nanospace, Inc. as of
      March 31, 2006, and the results of its operations and its cash flows for the
      years ended March 31, 2006 and 2005 and for the period from March 20, 2002 (date
      of inception) through March 31, 2006, in conformity with accounting principles
      generally accepted in the United States.




The
      accompanying financial statements have been prepared assuming that the Company
      will continue as a going concern. As shown in the financial statements, the
      Company incurred net losses of $5,445,839 for the year ended March 31, 2006
      and
      $3,842,078 for the year ended March 31, 2005, and, as of March 31, 2006, the
      Company’s total liabilities exceeded its total assets by $2,965,295. These
      factors, among others, as discussed in note 3 to the financial statements,
      raise
      substantial doubt about the Company’s ability to continue as a going concern.
      Management’s plans in regard to these matters are also described in note 3. The
      financial statements do not include any adjustments that might result from
      the
      outcome of this uncertainty.





/s/
              Grobstein,
              Horwath & Company LLPSherman
              Oaks,
              CaliforniaAugust 21, 2006








F-1
 
 US
        GLOBAL
        NANOSPACE, INC.
 (A
        development stage company)
 BALANCE
        SHEET
  March
        31,
        2006





ASSETSCURRENT
                ASSETSCash
            
            $
            21,256Accounts
                receivable
            
            
            51,379Other
                receivables
            
            
            75,130Prepaid
                expenses
            
            
            1,489Inventory
            
            
            4,134Total
                current assets
            
            
            153,388Total
                assets
            
            $
            153,388LIABILITIES
                AND STOCKHOLDERS’ DEFICITCURRENT
                LIABILITIESCurrent
                maturities of bank note payable
            
            $
            710,114Accounts
                payable
            
            
            672,122Accrued
                salaries and expenses
            
            
            1,451,730Accrued
                interest
            
            
            38,086Related
                party payable
            
            
            39,108Loans
                payable
            
            
            141,560Total
                current liabilities
            
            
            3,052,720BANK
                NOTE PAYABLE, less current portion
            
            
            —COMMITMENTS
                AND CONTINGENCIES
            
            
            65,963STOCKHOLDERS’
                DEFICITPreferred
                  stock authorized, 10,000,000 shares $0.01 par value,none
                  issued or outstandingCommon
                  stock authorized, 300,000,000 shares $0.001 par value,176,487,425
                  issued and outstanding
            
            
            176,487Additional
                paid-in capital
            
            
            20,874,108Deferred
                compensation and services
            
            
            (388,277
            )Accumulated
                development stage deficit
            
            
            (23,627,613
            )Total
                stockholders’
                deficit
            
            
            (2,965,295
            )Total
                liabilities and stockholders’ deficit
            
            $
            153,388





The
      accompanying notes are an integral part of these financial
      statements.


F-2


US
      GLOBAL
      NANOSPACE, INC.


(A
      development stage company)


STATEMENTS
      OF OPERATIONS




Year
                ended
              March
                31,2006
            
            Year
                ended
              March
                31,2005
            
            CumulativeResults
                of operationsFrom
                March 20, 2002(date
                of inception)through
                March 31,2006REVENUES
            
            $
            259,969
            
            $
            716,201
            
            $
            1,116,519COST
                OF REVENUES
            
            
            85,992
            
            
            381,554
            
            
            494,274Gross
                Profit
            
            
            173,977
            
            
            334,647
            
            
            622,245OPERATING
                EXPENSESResearch
                and development
            
            
            1,571,022
            
            
            526,746
            
            
            4,998,323General
                and administrative
            
            
            3,942,021
            
            
            3,547,961
            
            
            19,292,436Total
                operating expenses
            
            
            5,513,043
            
            
            4,074,707
            
            
            24,290,759Operating
                loss
            
            
            (5,339,066
            )
            
            (3,740,060
            )
            
            (23,668,514
            )OTHER
                INCOME (EXPENSE)Debt
                restructure
            
            
            —
            
            
            —
            
            
            918,573Other
                income
            
            
            22,536
            
            
            47,907
            
            
            80,488Interest
                expense
            
            
            (129,309
            )
            
            (149,925
            )
            
            (958,160
            )Total
                other income (expense)
            
            
            (106,773
            )
            
            (102,018
            )
            
            40,901NET
                LOSS
            
            $
            (5,445,839
            )
            $
            (3,842,078
            )
            $
            (23,627,613
            )Net
                  loss per share, basic anddiluted
            
            $
            (0.04
            )
            $
            (0.04
            )Basic
                  and diluted weighted averagenumber
                  of common shares
            
            
            140,990,746
            
            
            94,864,858





The
      accompanying notes are an integral part of these financial
      statements.


F-3


US
      GLOBAL
      NANOSPACE, INC.


(A
      development stage company)


STATEMENT
      OF STOCKHOLDERS’ DEFICIT


FROM
      INCEPTION THROUGH MARCH 31, 2006




Common
                Stock
            
            Additional
              Paid-in
            
            Deferred
              Compensation
            
            Deficit
              Accumulated
              During
                the Development
            
            Total
              Stockholders’Shares
            
            Amount
            
            Capital
            
            and
                Services
            
            Stage
            
            DeficitBalance
                at inception ( March 20,2002)
            
            
            —
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            —Activity
                (inception through March 31, 2004)
            
            
            87,429,116
            
            $
            87,428
            
            $
            11,590,401
            
            $
            (399,743
            )
            $
            (14,339,696
            )
            $
            (3,061,610
            )Balance
                at April 1, 2004
            
            
            87,429,116
            
            $
            87,428
            
            $
            11,590,401
            
            $
            (399,743
            )
            $
            (14,339,696
            )
            $
            (3,061,610
            )Issuance
                  of common stock on April 7, 2004 in consideration
                  for wages at $0.70 per share
            
            
            35,392
            
            
            35
            
            
            24,739
            
            
            
            
            
            
            
            
            24,774Issuance
                  of common stock on April 15, 2004 inconsideration
                  for services at $0.67 per share
            
            
            90,000
            
            
            90
            
            
            60,210
            
            
            
            
            
            
            
            
            60,300Issuance
                    of common stock on April 23, 2004 inconsideration
                    for notes payable at $0.33 per share
            
            
            1,147,950
            
            
            1148
            
            
            377,675
            
            
            
            
            
            
            
            
            378,823Issuance
                  of common stock on May 5, 2004 in consideration
                for
                  wages at $0.38 per share
            
            
            485,761
            
            
            486
            
            
            184,103
            
            
            
            
            
            
            
            
            184,589Issuance
                    of common stock on July 27, 2004 inconsiderationfor
                    accounts payable at $0.28 per share
            
            
            71,430
            
            
            71
            
            
            19,929
            
            
            
            
            
            
            
            
            20,000Issuance
                    of common stock on August 3, 2004 inconsideration
                    for notes payable at $0.29 per share
            
            
            3,471,094
            
            
            3,471
            
            
            1,003,146
            
            
            
            
            
            
            
            
            1,006,617Issuance
                    of common stock on August 3, 2004inconsideration
                    for accounts payable at $0.29 per share
            
            
            174,745
            
            
            175
            
            
            50,501
            
            
            
            
            
            
            
            
            50,676Issuance
                    of common stock on August 16, 2004 inconsideration
                    for accounts payable at $0.24 per share
            
            
            395,834
            
            
            396
            
            
            94,604
            
            
            
            
            
            
            
            
            95,000Issuance
                  of common stock on September 17, 2004inconsideration
                  for wages at $0.20 per share
            
            
            1,169,199
            
            
            1,169
            
            
            232,671
            
            
            
            
            
            
            
            
            233,840Issuance
                  of common stock on September 17, 2004inconsideration
                  for services at $0.20 per share
            
            
            109,472
            
            
            109
            
            
            21,785
            
            
            
            
            
            
            
            
            21,894Issuance
                    of common stock on September 28, 2004inconsideration
                    for accounts payable at $0.17 per share
            
            
            444,216
            
            
            445
            
            
            75,072
            
            
            
            
            
            
            
            
            75,517Issuance
                    of common stock on October 6, 2004 inconsideration
                    for accounts payable at $0.18 per share
            
            
            250,000
            
            
            250
            
            
            44,750
            
            
            
            
            
            
            
            
            45,000


The
        accompanying notes are an integral part of these financial
        statements.




F-4


Issuance
                    of common stock on October 18, 2004 in consideration
                  for
                    accounts payable at $0.14 per share
              
              
              939,535
              
              
              940
              
              
              130,595
              
              
              
              
              
              
              
              
              131,535Issuance
                    of common stock on October 19, 2004 in consideration
                  for
                    wages at $0.24 per share
              
              
              44,380
              
              
              44
              
              
              10,607
              
              
              
              
              
              
              
              
              10,651Issuance
                    of common stock on October 21, 2004 in consideration
                  for
                    services at $0.28 per share
              
              
              267,858
              
              
              268
              
              
              74,732
              
              
              
              
              
              
              
              
              75,000Issuance
                    of common stock on October 22, 2004 in consideration
                  for
                    wages at $0.25 per share
              
              
              933,156
              
              
              933
              
              
              232,356
              
              
              
              
              
              
              
              
              233,289Issuance
                    of common stock on October 28, 2004 in consideration
                  for
                    services at $0.23 per share
              
              
              64,855
              
              
              65
              
              
              14,856
              
              
              
              
              
              
              
              
              14,921Issuance
                    of common stock on November 1, 2004 in consideration
                  for
                    services at $0.23 per share
              
              
              250,000
              
              
              250
              
              
              57,250
              
              
              
              
              
              
              
              
              57,500Issuance
                    of common stock on November 23, 2004 in consideration
                  for
                    services at $0.20 per share
              
              
              63,950
              
              
              64
              
              
              12,726
              
              
              (10,658
              )
              
              
              
              
              2,132Issuance
                      of common stock on November 23, 2004 in consideration
                    for
                      accounts payable at $0.20 per share
              
              
              11,050
              
              
              11
              
              
              2,199
              
              
              
              
              
              
              
              
              2,210Issuance
                    of common stock on December 1, 2004 in consideration
                  for
                    services at $0.191 per share
              
              
              39,267
              
              
              39
              
              
              7,461
              
              
              
              
              
              
              
              
              7,500Issuance
                    of common stock on December 31, 2004 in consideration
                  for
                    services at $0.805 per share
              
              
              20,000
              
              
              20
              
              
              16,080
              
              
              
              
              
              
              
              
              16,100Issuance
                    of common stock on January 3, 2005 in consideration
                  for
                    services at $0.245 per share
              
              
              561,225
              
              
              561
              
              
              136,939
              
              
              
              
              
              
              
              
              137,500Issuance
                      of common stock on January 10, 2005 in consideration
                    for
                      accounts payable at $0.185 per share
              
              
              132,560
              
              
              133
              
              
              24,391
              
              
              
              
              
              
              
              
              24,524Issuance
                    of common stock on January 17, 2005 in consideration
                  for
                    services at $0.20 per share
              
              
              62,500
              
              
              62
              
              
              12,438
              
              
              
              
              
              
              
              
              12,500Issuance
                      of common stock on January 21, 2005 in consideration
                    for
                      accounts payable at $0.19 per share
              
              
              497,946
              
              
              498
              
              
              94,112
              
              
              
              
              
              
              
              
              94,610Issuance
                    of common stock on January 25, 2005 in consideration
                  for
                    services at $0.19 per share
              
              
              1,169,552
              
              
              1,170
              
              
              221,045
              
              
              
              
              
              
              
              
              222,215Issuance
                    of common stock on January 25, 2005 in consideration
                  for
                    cash at $0.15 per share
              
              
              1,000,000
              
              
              1,000
              
              
              149,000
              
              
              
              
              
              
              
              
              150,000Issuance
                    of common stock on January 27, 2005 in consideration
                  for
                    services at $0.185 per share
              
              
              109,825
              
              
              110
              
              
              20,208
              
              
              
              
              
              
              
              
              20,318Issuance
                      of common stock on January 31, 2005 in consideration
                    for
                      accounts payable at $0.19 per share
              
              
              45,290
              
              
              45
              
              
              8,560
              
              
              
              
              
              
              
              
              8,605Issuance
                    of common stock on February 1, 2005 in consideration
                  for
                    services at $0.19 per share
              
              
              315,788
              
              
              316
              
              
              59,684
              
              
              
              
              
              
              
              
              60,000Issuance
                    of common stock on February 4, 2005 in consideration
                  for
                    services at $0.18 per share
              
              
              222,225
              
              
              222
              
              
              39,778
              
              
              
              
              
              
              
              
              40,000Issuance
                    of common stock on February 10, 2005 in consideration
                  for
                    services at $0.17 per share
              
              
              37,860
              
              
              38
              
              
              6,398
              
              
              
              
              
              
              
              
              6,436Issuance
                    of common stock on February 23, 2005 in consideration
                  for
                    services at $0.17 per share
              
              
              39,541
              
              
              40
              
              
              6,682
              
              
              
              
              
              
              
              
              6,722Issuance
                    of common stock on March 2, 2005 in consideration
                  for
                    services at $0.12 per share
              
              
              1,159,671
              
              
              1,159
              
              
              138,001
              
              
              
              
              
              
              
              
              139,160Issuance
                    of common stock on March 24, 2005 in consideration
                  for
                    services at $0.10 per share
              
              
              250,000
              
              
              250
              
              
              24,750
              
              
              
              
              
              
              
              
              25,000Issuance
                    of common stock on March 28, 2005 in consideration
                  for accounts
                    payable at $0.105 per share
              
              
              1,282,802
              
              
              1,283
              
              
              133,411
              
              
              
              
              
              
              
              
              134,694Issuance
                    of common stock on March 30, 2005 as collateral for accounts
                    payable
              
              
              957,706
              
              
              —
              
              
              —
              
              
              
              
              
              
              
              
              —Amortization
                    of deferred compensation and services
              
              
              
              
              
              
              
              
              
              
              
              402,941
              
              
              
              
              
              402,941Net
                    loss for the period
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (3,842,078
              )
              
              (3,842,078
              )Balance
                    at March 31, 2005
              
              
              105,752,751
              
              $
              104,794
              
              $
              15,413,845
              
              $
              (7,460
              )
              $
              (18,181,774
              )
              $
              (2,670,595
              )






F-5




Balance
                  at April 1, 2005
              
              
              105,752,751
              
              $
              104,794
              
              $
              15,413,845
              
              $
              (7,460
              )
              $
              (18,181,774
              )
              $
              (2,670,595
              )Issuance
                      of common stock on April 1, 2005 in consideration for services
                      at $0.097
                      per share
              
              
              1,055,986
              
              
              1,056
              
              
              101,375
              
              
              
              
              
              
              
              
              102,431Issuance
                      of common stock on April 8, 2005 in consideration for services
                      at $0.09
                      per share
              
              
              1,822,090
              
              
              1,822
              
              
              162,166
              
              
              
              
              
              
              
              
              163,988Issuance
                      of common stock on May 3, 2005 in consideration for services
                      at $0.08 per
                      share
              
              
              94,325
              
              
              94
              
              
              7,452
              
              
              
              
              
              
              
              
              7,546Issuance
                      of common stock on May 9, 2005 in consideration for accounts
                      payable at
                      $0.069 per share
              
              
              346,522
              
              
              347
              
              
              23,563
              
              
              
              
              
              
              
              
              23,910Issuance
                      of common stock on May 11, 2005 in consideration for notes
                      payable at
                      $0.064 per share
              
              
              4,734,704
              
              
              4,735
              
              
              298,286
              
              
              
              
              
              
              
              
              303,021Issuance
                      of common stock on May 18, 2005 in consideration for services
                      at $0.07 per
                      share
              
              
              300,000
              
              
              300
              
              
              20,700
              
              
              
              
              
              
              
              
              21,000Issuance
                      of common stock on June 1, 2005 in consideration for services
                      at $0.064
                      per share
              
              
              78,800
              
              
              79
              
              
              4,965
              
              
              
              
              
              
              
              
              5,044Issuance
                      of common stock on July 28, 2005 in consideration for accounts
                      payable at
                      $0.07 per share
              
              
              868,368
              
              
              868
              
              
              59,917
              
              
              
              
              
              
              
              
              60,785Issuance
                      of common stock on August 3, 2005 in consideration for services
                      at $0.065
                      per share
              
              
              2,000,000
              
              
              2,000
              
              
              128,000
              
              
              (86,666
              )
              
              
              
              
              43,334Issuance
                      of common stock on August 12, 2005 in consideration for accounts
                      payable
                      at $0.12 per share
              
              
              382,934
              
              
              383
              
              
              45,569
              
              
              
              
              
              
              
              
              45,952Issuance
                    of common stock on August 18,  2005 in consideration for accounts
                    payable at $0.077 per share
              
              
              —
              
              
              958
              
              
              72,330
              
              
              
              
              
              
              
              
              73,288Issuance
                      of common stock on August 25, 2005 in consideration for services
                      at $0.084
                      per share
              
              
              19,850,000
              
              
              19,850
              
              
              1,647,550
              
              
              (871,500
              )
              
              
              
              
              795,900Issuance
                      of common stock on September 15, 2005 in consideration for
                      services at
                      $0.13 per share
              
              
              2,645,940
              
              
              2,646
              
              
              341,326
              
              
              
              
              
              
              
              
              343,972Issuance
                      of common stock on September 15, 2005 in consideration for
                      services at
                      $0.13 per share
              
              
              1,599,275
              
              
              1,599
              
              
              206,307
              
              
              
              
              
              
              
              
              207,906Issuance
                      of common stock on September 27, 2005 in consideration for
                      services at
                      $0.095 per share
              
              
              526,316
              
              
              526
              
              
              49,474
              
              
              
              
              
              
              
              
              50,000Issuance
                      of common stock on September 27, 2005 in consideration for
                      accounts
                      payable at $0.10 per share
              
              
              339,099
              
              
              339
              
              
              33,571
              
              
              
              
              
              
              
              
              33,910Issuance
                      of common stock on September 29, 2005 in consideration for
                      accounts
                      payable at $0.093 per share
              
              
              1,167,236
              
              
              1,167
              
              
              107,386
              
              
              
              
              
              
              
              
              108,553Issuance
                      of common stock on September 29, 2005 in consideration for
                      services at
                      $0.093 per share
              
              
              1,505,377
              
              
              1,505
              
              
              138,495
              
              
              (75,000
              )
              
              
              
              
              65,000Issuance
                      of common stock on October 5, 2005 in consideration for services
                      at $0.082
                      per share
              
              
              250,000
              
              
              250
              
              
              20,250
              
              
              
              
              
              
              
              
              20,500Issuance
                      of common stock on October 20, 2005 in consideration for services
                      at $0.08
                      per share
              
              
              2,363,823
              
              
              2,364
              
              
              186,742
              
              
              
              
              
              
              
              
              189,105Issuance
                      of common stock on October 20, 2005 in consideration for accounts
                      payable
                      at $0.08 per share
              
              
              1,095,475
              
              
              1,095
              
              
              86,543
              
              
              
              
              
              
              
              
              87,638Issuance
                      of common stock on November 1, 2005 in consideration for services
                      at
                      $0.071 per share
              
              
              440,155
              
              
              440
              
              
              30,811
              
              
              
              
              
              
              
              
              31,251Issuance
                      of common stock on November 3, 2005 in consideration for services
                      at
                      $0.074 per share
              
              
              337,836
              
              
              338
              
              
              24,662
              
              
              
              
              
              
              
              
              25,000Issuance
                      of common stock on November 4, 2005 in consideration for services
                      at
                      $0.074 per share
              
              
              1,351,352
              
              
              1,351
              
              
              98,649
              
              
              
              
              
              
              
              
              100,000Issuance
                      of common stock on November 7, 2005 in consideration for services
                      at
                      $0.075 per share
              
              
              1,000,000
              
              
              1,000
              
              
              74,000
              
              
              
              
              
              
              
              
              75,000Issuance
                        of common stock on November 7, 2005 in consideration for
                        related party
                        payable at $0.075 per share
              
              
              4,009,660
              
              
              4,010
              
              
              296,710
              
              
              
              
              
              
              
              
              300,720Issuance
                      of common stock on November 8, 2005 in consideration for notes
                      payable at
                      $0.071 per share
              
              
              2,414,622
              
              
              2,415
              
              
              171,438
              
              
              
              
              
              
              
              
              173,853Issuance
                      of common stock on November 8, 2005 in consideration for services
                      at
                      $0.072 per share
              
              
              20,000
              
              
              20
              
              
              1,420
              
              
              
              
              
              
              
              
              1,440Issuance
                      of common stock on November 22, 2005 in consideration for services
                      at
                      $0.08 per share
              
              
              133,332
              
              
              133
              
              
              10,534
              
              
              (9,778
              )
              
              
              
              
              889Adjustment
                      of common stock on November 22, 2005, originally issued September
                      29, 2005
                      for services
              
              
              
              
              
              
              
              
              (18,886
              )
              
              
              
              
              
              
              
              (18,886
              )Issuance
                      of common stock on November 29, 2005 in consideration for services
                      at
                      $0.052 per share
              
              
              4,333,710
              
              
              4,334
              
              
              220,666
              
              
              
              
              
              
              
              
              225,000Issuance
                      of common stock on November 30, 2005 in consideration for services
                      at
                      $0.08 per share
              
              
              312,500
              
              
              313
              
              
              24,687
              
              
              
              
              
              
              
              
              25,000Issuance
                      of common stock on December 1, 2005 in consideration for services
                      at
                      $0.074 per share
              
              
              337,836
              
              
              338
              
              
              24,662
              
              
              
              
              
              
              
              
              25,000Issuance
                      of common stock on December 2, 2005 in consideration for services
                      at
                      $0.079 per share
              
              
              632,911
              
              
              633
              
              
              49,367
              
              
              
              
              
              
              
              
              50,000Issuance
                      of common stock on December 8, 2005 in consideration for services
                      at
                      $0.079 per share
              
              
              117,896
              
              
              118
              
              
              9,196
              
              
              
              
              
              
              
              
              9,314Issuance
                      of common stock on December 19,2005 in consideration for services
                      at $0.07
                      per share
              
              
              857,144
              
              
              857
              
              
              59,143
              
              
              
              
              
              
              
              
              60,000Issuance
                      of common stock on January 2, 2006 in consideration for services
                      at $.062
                      per share
              
              
              1,415,095
              
              
              1,415
              
              
              86,321
              
              
              
              
              
              
              
              
              87,736Issuance
                      of common stock on January 2, 2006 in consideration for services
                      at $.062
                      per share
              
              
              403,226
              
              
              403
              
              
              24,597
              
              
              
              
              
              
              
              
              25,000Issuance
                      of common stock on January 3, 2006 in consideration for services
                      at $.058
                      per share
              
              
              893,200
              
              
              893
              
              
              50,913
              
              
              
              
              
              
              
              
              51,806Issuance
                      of common stock on January 30, 2006 in consideration for services
                      at $.06
                      per share
              
              
              1,503,109
              
              
              1,503
              
              
              88,684
              
              
              
              
              
              
              
              
              90,187Issuance
                      of common stock on February 1, 2006 in consideration for services
                      at $.059
                      per share
              
              
              1,282,052
              
              
              1,282
              
              
              73,718
              
              
              
              
              
              
              
              
              75,000Issuance
                      of common stock on February 1, 2006 in consideration for services
                      at $.059
                      per share
              
              
              1,025,642
              
              
              1,026
              
              
              58,974
              
              
              
              
              
              
              
              
              60,000Issuance
                      of common stock on February 20, 2006 in consideration for services
                      at
                      $.071 per share
              
              
              1,056,336
              
              
              1,057
              
              
              73,943
              
              
              
              
              
              
              
              
              75,000Issuance
                      of common stock on March 24, 2006 in consideration for services
                      at $.05
                      per share
              
              
              208,340
              
              
              209
              
              
              10,209
              
              
              
              
              
              
              
              
              10,418Issuance
                      of common stock on March 27, 2006 in consideration for services
                      at $.057
                      per share
              
              
              510,205
              
              
              510
              
              
              24,490
              
              
              
              
              
              
              
              
              25,000Issuance
                      of common stock on January 2, 2006 in consideration for wages
                      at $.049 per
                      share
              
              
              3,112,245
              
              
              3,112
              
              
              149,388
              
              
              
              
              
              
              
              
              152,500Amortization
                  of deferred compensation and services
              
              
              
              
              
              
              
              
              
              
              
              662,127
              
              
              
              
              
              662,127Net
                  loss for the period
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (5,445,839
              )
              
              (5,445,839
              )Balance
                  at March 31, 2006
              
              
              176,487,425
              
              $
              176,487
              
              $
              20,874,108
              
              $
              (388,277
              )
              $
              (23,627,613
              )
              $
              (2,965,295
              )




The
      accompanying notes are an integral part of these financial statements.





F-6




**US
        GLOBAL NANOSPACE,
        INC.**
 (A
        development stage company)
 **STATEMENTS
        OF CASH FLOWS**




Year
                  Ended
                March
                  31,
                2006
              
              
              **Year
                  Ended**
                **March
                  31,**
                **2005**
              
              
              **March
                  20, 2002**
                **(date
                  of inception)**
                **through**
                **March
                  31, 2006**CASH
                  FLOWS FROM OPERATING ACTIVITIESNet
                  loss
              
              $
              (5,445,839
              )
              $
              (3,842,078
              )
              
              (23,627,613
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activitiesCommon
                  stock issued for services and wages
              
              
              3,840,008
              
              
              2,015,282
              
              
              15,423,936Forgiveness
                  of loans and accounts payable
              
              
              --
              
              
              --
              
              
              (918,573
              )Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              69,123
              
              
              (109,097
              )
              
              (51,379
              )Other
                  receivables
              
              
              7,449
              
              
              (11,301
              )
              
              (75,130
              )Prepaid
                  expenses
              
              
              (1,489
              )
              
              --
              
              
              (1,489
              )Inventory
              
              
              (2,405
              )
              
              2,966
              
              
              (4,134
              )Deposits
              
              
              11,000
              
              
              2,485
              
              
              --Accounts
                  payable
              
              
              513,043
              
              
              1,107,000
              
              
              2,880,274Accrued
                  salaries, compensation and expenses
              
              
              673,497
              
              
              662,389
              
              
              1,461,044Accrued
                  interest
              
              
              29,874
              
              
              18,263
              
              
              450,085Related
                  party payable
              
              
              8,941
              
              
              23,773
              
              
              339,828Commitments
                  and Contingencies
              
              
              65,963
              
              
              --
              
              
              65,963Net
                  cash used in operating activities
              
              
              (230,835
              )
              
              (130,318
              )
              
              (4,057,188
              )CASH
                  FLOWS FROM INVESTING ACTIVITIESCash
                  acquired in conjunction with share exchange agreement
              
              
              --
              
              
              --
              
              
              2,946Net
                  cash provided by investing activities
              
              
              --
              
              
              --
              
              
              2,946CASH
                  FLOWS FROM FINANCING ACTIVITIESProceeds
                  from bank note payable
              
              
              --
              
              
              --
              
              
              1,650,000Payments
                  on bank note payable
              
              
              (95,654
              )
              
              (419,232
              )
              
              (939,886
              )Proceeds
                  from loans payable
              
              
              312,713
              
              
              434,660
              
              
              3,241,818Payments
                  on loans payable
              
              
              (18,515
              )
              
              --
              
              
              (31,434
              )Proceeds
                  from issuance of common stock
              
              
              --
              
              
              150,000
              
              
              155,000Net
                  cash provided by financing activities
              
              
              198,544
              
              
              165,428
              
              
              4,075,498Net
                  increase (decrease) in cash
              
              
              (32,291
              )
              
              35,110
              
              
              21,256Cash
                  at beginning of period
              
              
              53,547
              
              
              18,437
              
              
              --Cash
                  at end of period
              
              $
              21,256
              
              $
              53,547
              
              
              21,256SUPPLEMENTAL
                  CASH FLOW INFORMATION:Cash
                  paid for:Interest
              
              $
              71,693
              
              $
              111,153
              
              $
              461,992Income
                  Taxes
              
              $
              --
              
              $
              3,045
              
              $
              13,288Non-cash
                  Investing and Financing Activities:Accounts
                  payable acquired in conjunction with shareExchange
                  agreement
              
              $
              --
              
              $
              --
              
              $
              (2,500
              )Common
                  stock issued in exchange for accounts payable
              
              $
              524,223
              
              $
              682,371
              
              $
              2,209,772Common
                  stock issued in exchange for related party loans
                payable
                  and accrued interest
              
              $
              777,594
              
              $
              1,385,440
              
              $
              2,863,851Common
                  stock issued in exchange for former officer
                bank
                  loan and lease guarantees
              
              $
              9,314
              
              $
              --
              
              $
              9,314


The
        accompanying notes are an integral part of these financial statements.


F-7


**US
      GLOBAL NANOSPACE,
      INC.**


(A
      development stage company)





**NOTES
      TO FINANCIAL STATEMENTS**


MARCH
      31,
      2006




**NOTE
      1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES**




USDR
      Global Aerospace, Ltd. (USDRGA), a development stage company, was incorporated
      in the state of Delaware on March 20, 2002. USDRGA entered into a share exchange
      agreement with US Global Nanospace, Inc. (USGN or the Company) (formerly known
      as Caring Products International, Inc.) on May 17, 2002, which resulted in
      the
      exchange of one share of the Company’s common stock for four shares of USGN. As
      a result of the transaction, the Company became a wholly owned subsidiary of
      USGN. Effective September 26, 2002, the Company changed its name from Caring
      Products International, Inc. to US Global Aerospace, Inc. On December 31, 2002,
      the Company completed a merger of its wholly owned subsidiary, USDR Global
      Aerospace, Ltd. with and into the Company. US Global Aerospace, Inc. was the
      resulting company from the mergers. Effective July 21, 2003, the Company changed
      its name from US Global Aerospace, Inc. to US Global Nanospace,
      Inc.





US
      Global
      Nano space,
      Inc. is
      a
      development stage company with expertise in the emerging fields of autonomous
      wide area perimeter security and nanotechnology. Our operations include
      designing and developing products and building prototype and demonstration
      systems for use by defense and health and safety agencies and organizations,
      both public and private.




A
      summary
      of the significant accounting policies consistently applied in the preparation
      of the accompanying financial statements follows.




**NET
      LOSS PER SHARE**




Basic
      loss per share is based on the weighted average number of shares outstanding
      during each period and income available to common shareholders.. The weighted
      average shares for computing basic loss per share were 140,990,746 and
      94,864,858, for the years ended March 31, 2006 and 2005, respectively. Because
      of the net losses for each of the periods presented, 6,500,000 potentially
      issuable shares of common stock were excluded from the computation diluted
      earnings per share.




**SHARE-BASED
      COMPENSATION**




As
      permitted under SFAS No. 148, “Accounting for Stock-Based
      Compensation-Transition and Disclosure,” which amended SFAS No. 123 (“SFAS
      123”), “Accounting for Stock Based Compensation,” the Company had previously
      elected to follow the intrinsic value method in accounting for its stock-based
      employee compensation arrangements, as defined by Accounting Principles Board
      Opinion (“APB”) No. 25. In
      December 2004, the FASB issued SFAS No. 123R, which eliminates the ability
      to
      account for share-based compensation transactions using the intrinsic value
      method under APB Opinion No. 25 and requires instead that such transactions
      be
      accounted for using a fair-value-based method for share-based grants and awards
      that occur on or after the adoption date of SFAS 123R. The Company adopted
      SFAS.
      123R, Share-Based Payment, as of July 1, 2005. For
      the
      year ended March 31, 2006 the Company recorded no compensation costs related
      to
      stock options granted to employees as the value is estimated by management
      to be
      insignificant. No stock options or similar instruments were issued in
      2005.




F-8


**REVENUE
      RECOGNITION**




We
      recognize revenues in accordance with SEC Staff Accounting Bulletin (SAB) No.
      101, and as amended by SAB No. 104. Revenues are recognized when persuasive
      evidence of an arrangement exists, delivery has occurred or services have been
      rendered, the price is fixed and determinable and collectibility is reasonably
      assured. During the fiscal year ended March 31, 2006, our revenues were
      primarily derived from product sales. Revenue for product sales is recognized
      at
      the time of delivery of the product. Revenue under contracts based on a fixed
      fee is recognized based on conditions being met. Revenue under contracts based
      on royalty fees is recognized when the amounts are earned and determinable,
      which is generally when cash payment is received. However, since we are not
      able
      to forecast product sales by licenses, royalty payments that are based on
      product sales by the licensees are not determinable until the licensee has
      completed their computation of the royalties due and/or remitted their cash
      payment. Should information on licensee product sales become available so as
      to
      enable us to recognize royalty revenue on an accrual basis, materially different
      revenues and results of operations could occur.


**RECLASSIFICATIONS**
 
 Certain
        reclassifications were made to previously reported amounts in the accompanying
        financial statements to make them consistent with the current year
        presentation.




**PRODUCT
      WARRANTIES**




We
      provide product warranties in conjunction with certain product sales. These
      warranties cover factors such as non-conformance to specifications and defects
      in material and design. Future estimated costs related to these warranties
      will
      be recorded in the period in which the related product sales occur. To date,
      we
      have not incurred any such costs and have not provided a warranty liability
      account.




**RESEARCH
      AND DEVELOPMENT**




Research
      and development costs are expensed as incurred.




**ADVERTISING
      AND MARKETING**




Advertising
      and marketing costs are expensed as incurred.




**INVENTORIES**




Inventories
      consist of finished goods and are stated at the lower of cost or market. Cost
      is
      determined using the first-in, first-out method.




**INCOME
      TAXES**




The
      Company accounts for income taxes in accordance with SFAS No. 109, “Accounting
      for Income Taxes” (SFAS 109), resulting in current and deferred income tax
      expenses. Current income tax expense approximates taxes to be paid or refunded
      for the current period. Deferred income tax expense results from changes in
      deferred tax assets and liabilities that represent decreases or increases in
      taxes expected to be paid in the future because of future reversals of temporary
      differences in the bases of assets and liabilities as measured by tax laws
      and
      their bases as reported in the financial statements.




Deferred
      tax assets are also recognized for net operating loss carryforwards and tax
      credit carryforwards. Valuation allowances are then recorded to reduce deferred
      tax assets to the amounts management concludes are more likely than not to
      be
      realized. Income taxes are further explained in Note 9.




**CONCENTRATION
      OF CREDIT RISK**




Financial
      instruments that potentially subject the Company to concentration of credit
      risk
      consist primarily of accounts receivable. The Company’s accounts receivable are
      from a limited number of corporations and governmental entities. The Company
      performs ongoing evaluations of its customers. An allowance for doubtful
      accounts has not been provided as the Company considers all accounts receivable
      to be fully collectible.




F-9


**USE
      OF ESTIMATES**




The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the amounts reported in the financial
      statements and accompanying notes. Actual results could differ from those
      estimates.




**NOTE
      2. BASIS OF PRESENTATION**




The
      share
      exchange transaction in Note 1 resulted in the owners and management of USDRGA
      having effective operating control of the combined entity. Under accounting
      principles generally accepted in the United States of America, the share
      exchange is considered to be a capital transaction in substance, rather than
      a
      business combination. That is, the share exchange is equivalent to the issuance
      of stock by USDRGA for the net monetary assets of US Global Nanospace, Inc.
      (USGN fka Caring Products International) accompanied by a recapitalization,
      and
      is accounted for as a change in capital structure. Accordingly, the accounting
      for the share exchange is identical to that resulting from a reverse
      acquisition, except that no goodwill is recorded. Under reverse takeover
      accounting, the post-reverse-acquisition financial statements of the “legal
      acquirer” USGN, are those of the “legal acquiree” (USDRGA), (i.e. the accounting
      acquirer).




All
      references to share and per-share amounts have been retroactively restated
      to
      reflect the share exchange and recapitalization of the Company. In conjunction
      with the share exchange and recapitalization, the Company recorded net assets
      of
      USGN totaling $446, which included cash of $2,946 and payables of
      $2,500.




**NOTE
      3. GOING CONCERN AND MANAGEMENT PLANS**


We
        are a
        development stage enterprise as defined under Statement of Financial Accounting
        Standards (“SFAS”) No. 7. We remain committed to identifying, developing, and
        commercializing advanced nanotechnology and defense and security products.
        These
        products include complex polymer materials, polymer nanofiber materials,
        nanofiber filter materials, biological and chemical decontaminants, blast
        mitigation materials, and autonomous wide area security systems. We believe
        there is synergy between advanced security solutions to protect infrastructure
        and nanofiber based materials for blast mitigation and filtration, and we
        are
        exploring ways in which these products may be used together. **** One
        such
        effort is underway for providing blast mitigation protection for pipelines
        and
        storage facilities.
 
 During
        the last fiscal year with the introduction of MAPSANDSTM, we shifted our primary
        market and licensing efforts to autonomous wide area security systems worldwide. We
        believe that MAPSANDSTM represents a new and innovative approach to wide area
        perimeter security. In
        MAPSANDS TM
        w e
        have
        developed, integrated and commercialized
        an advanced set of technologies which we believe will change
        the landscape and economics of the border and perimeter security market.  The
        integration of advanced technologies into an autonomous security system should
        generate both significant economic
        advantages and superior mission effectiveness, thereby helping our customers
        to
        effectively secure critical infrastructure and take control of
        borders.
 
 We
        generated operating revenues in the amount of $259,969 for the year ended
        March
        31, 2006, primarily from the sales of radomes. We do not manufacture or
        distribute our products on a commercial scale. We are in the process of
        negotiating licensing, manufacturing or distribution arrangements with other
        international companies or independent contractors that have the infrastructure
        to manufacture, distribute or sell our products on a commercial scale worldwide.
        We are also in the process of negotiating directly with government agencies
        and
        private sector companies for the sale or licensing of our products.
 
 Our
        capital requirements, particularly as they relate to product research and
        development, have been and will continue to be significant. Our future cash
        requirements and the adequacy of available funds will depend on many factors,
        including the pace at which we are able to launch our products, whether or
        not a
        market develops for our products and, if a market develops, the pace at which
        it
        develops, and the pace at which the technology involved in making our products
        changes.
  To
        date,
        we have funded our operations from inception through loans in the amount
        of
        $1,650,000 from a bank, loans in the amount of $3,241,818 from unrelated
        third
        parties, existing shareholders and directors, and revenues totaling $1,116,519.
        Furthermore, in an effort to conserve cash, our officers have deferred their
        salaries or have accepted shares of our common stock in lieu of cash for
        their
        compensation. During the next 12 months, if we fail to earn revenues in an
        amount sufficient to fund our operations, we intend to raise capital through
        an
        offering of our securities or from additional loans. We cannot guarantee
        that
        financing will be available to us, on acceptable terms or at all. If we do
        not
        earn revenues sufficient to support our business and we fail to obtain other
        financing, either through an offering of our securities or by obtaining
        additional loans, we may be unable to maintain our
        operations.




F-10


**NOTE
      4. INTELLECTUAL PROPERTY ASSIGNMENT AND ROYALTY AGREEMENT**




On
      May
      14, 2002, USDR Aerospace, Ltd. (“Aerospace”), a related party, entered into an
      agreement with the Company to assign certain of its intellectual property to
      the
      Company for consideration of $10, and a promise to pay a royalty of 3.5% on
      all
      of the Company’s sales until Aerospace has received a total of $15 million and a
      royalty of 1% of all of the Company’s sales thereafter until all patent rights
      of the intellectual property have expired. On
      December 8, 2005, the Board of Directors of the Company ratified an Amendment
      to
      Intellectual Property Assignment and Royalty Agreement dated November 28, 2005
      (the "Amendment"), which amends the Intellectual Property Assignment and Royalty
      Agreement dated as of May 14, 2002 (the "Royalty Agreement"), between USDR
      Aerospace, Ltd. and the Company. The purpose of the Amendment is to clarify
      the
      original intent of the parties to the Royalty Agreement, which is that the
      term
      "sales" as used in the Royalty Agreement shall include all net revenues received
      by the Company from any and all sales and/or licensing of products and/or
      services of the Company, subject to and in accordance with the terms and
      conditions of the Royalty Agreement. The
      Company has incurred royalty expenses and recorded liabilities of $7,545 and
      $27,146 under this agreement as of and for the years ended March 31, 2006 and
      March 31, 2005, respectively. At March 31, 2006 the accrued liability was
      $39,108.




**NOTE
      5. RELATED PARTY PAYABLE**




The
      Company’s former Chairman and CEO also controls Aerospace, which has licensed
      the intellectual property to the Company as described in Note 4, under which
      we
      owe Aerospace $39,108 in royalties as of March 31, 2006.




Aerospace
      has provided employees and product development services to the Company. Since
      inception (March 20, 2002), Aerospace has provided such services, based on
      actual costs, totaling approximately $2.9 million for which the Company owed
      Aerospace $300,720. Aerospace has also provided manufacturing and office
      equipment to support operations. As of January 1, 2003, Aerospace substantially
      discontinued its operations and the Company hired certain individuals previously
      employed by Aerospace. On November 7, 2005, the Company paid the balance of
      $300,720 with 4,009,660 shares of restricted common stock for full settlement
      of
      such services.




**NOTE
      6. LOANS PAYABLE**




On
        April
        18, 2003, the Company entered into a loan agreement with Aerospace for amounts
        up to $100,000. The loan bears interest at 10% per annum and matured on June
        30,
        2004. On June 30, 2004, the loan was amended to include amounts up to $200,000,
        and to extend the maturity date to December 31, 2004. On December 30, 2004,
        the
        maturity date was extended to February 28, 2005. On May 11, 2005, the Company
        paid principal and accrued interest of $112,869 with 1,763,572 shares of
        restricted common stock.


The
      former Chairman and CEO of the Company controls USDR, Inc. (“USDR”). On June 6,
      2003, the Company entered into a loan agreement with USDR for amounts up to
      $125,000. On June 11, 2004, the loan was amended to include amounts up to
      $500,000. The loan bears interest at 10% per annum and matured on December
      31,
      2004. On December 31, 2005, the loan was amended to extend the maturity date
      to
      March 31, 2006. On May 11, 2005, the Company paid principal and accrued interest
      of $190,152 with 2,971,132 shares of restricted common stock. On November 8,
      2005, the Company paid principal and interest of $173, 853 with 2,414,622 shares
      of restricted common stock. The Company owes USDR $127,995, including accrued
      interest, as of March 31, 2006 under this agreement.




On
      May
      13, 2005, the Company entered into a loan agreement with USDR for amounts up
      to
      $350,000. The loan bears interest at 10% per annum and matured on August 13,
      2005. On November 8, 2005, the Company paid principal and interest of $173,853
      with 2,414,622 shares of restricted common stock and extended the maturity
      date
      to March 31, 2006. The Company owes USDR $127,995, including accrued interest
      as
      of March 31, 2006, under this agreement.




On
      April
      29, 2003, April 30, 2003 and May 9, 2003, the Company entered into three loans
      totaling $35,000 from Directors. The loans bear interest at 10% per annum and
      matured on June 30, 2004. On August 3, 2004, the Directors accepted restricted
      common stock in exchange for these loans. On August 7, 2003, the Company entered
      into a loan agreement with a Director for amounts up to $150,000, and on
      December 19, 2003, the loan was amended to include amounts up to $500,000.
      The
      loan bears interest at 10% per annum and matured on June 30, 2004. The Company
      owed the Director $563,944, including accrued interest, under this loan
      agreement and on August 3, 2004, the Director accepted restricted common stock
      in exchange for this loan.




On
      October 3, 2003, the Company entered into a loan agreement with a Director
      for
      amounts up to $100,000. The loan bears interest at 10% per annum and matured
      on
      June 30, 2004. The Company owed the Director $133,998, including accrued
      interest, under this agreement and on August 3, 2004, the Director accepted
      restricted common stock in exchange for this loan.




On
      April
      11, 2003 and April 18, 2003, the Company entered into two loans totaling $16,000
      from an existing shareholder. The loans bear interest at 10% per annum and
      matured on April 30, 2004. The Company owes the shareholder $20,749, including
      accrued interest, as of March 31, 2006. The shareholder has agreed to extend
      the
      loans to a date in the future yet to be determined.




F-11


**NOTE
      7. BANK NOTE PAYABLE**





The
      Company previously had lines of credit with a bank for amounts up to $1,650,000.
      The lines of credit have been consolidated into one loan, which bears interest
      at 10% per annum and matures on May 15, 2008. The terms require principal and
      interest payments of $25,400 due monthly, beginning October 15, 2004, and one
      final principal and interest payment of $11,779 due on May 15, 2008. The bank
      is
      a subsidiary of a holding company, Western Security Holding Co. Ltd., which
      is a
      shareholder of the Company. The loan is secured by the assets of the Company
      and
      guaranteed by the Company’s former Chairman and CEO. As of March 31, 2006, the
      Company had an outstanding principal balance of $710,114 and accrued interest
      and fees totaled $91,776.. On August 9, 2006 we learned that Western Security
      Bank (the “Bank”), an Arizona corporation, filed a suit against us for default
      of the balance owed of the $1,650,000 promissory note signed on June 30, 2003.
      The suit seeks the accelerated payment of $880,708 in
      principal, accrued interest, and penalties owed the Bank through July 7, 2006
      due to our failure to make all required monthly amounts, plus $375 per day
      from
      July 8, 2006 until paid plus attorney's fees. The promissory note calls for
      payments of $25,400 per month, some of which have not been paid. The suit also
      names John D. Robinson, our former Chairman and CEO, and United States Defense
      Research, Ltd., a Nevada limited liability company, as defendants in their
      capacities as personal guarantors. We have been in frequent contact with the
      Bank and we continue to seek an amicable resolution of the matter.




**NOTE
      8. COMMITMENTS AND CONTINGENCIES**




On
      January 11, 2006, we learned that Everest International, Inc. (“Everest”), the
      owner of our business facility in Arlington, Texas, filed a suit against us
      for
      breach of the Gross Lease Agreement dated April 28, 2003 (the “Lease”) between
      West Harris Property, Inc. and us. The suit sought damages for unpaid rent
      and
      late fees totaling $52,900. Additionally, the suit sought payment of the rent
      specified in the Lease for the remainder of the Lease term, reduced to present
      worth, beginning from January 1, 2005 through the end of the lease term on
      May
      31, 2006, plus interest, attorneys’ fees and costs. The monthly rent due under
      the lease was $11,000. Since Everest filed the suit, Everest has received
      $12,500 against the balance owed. Everest was also in possession of an $11,000
      security deposit paid by us upon execution of the Lease, which Everest applied
      to charges in default. The suit also named Julie Seaman, one of our directors,
      as a defendant in her capacity as a personal guarantor of the Lease. On June
      15,
      2006 we and Ms. Seaman, entered into a Settlement Agreement and Mutual Release
      (the “Settlement Agreement”) with Everest. The Settlement Agreement was modified
      on June 21, 2006. Pursuant to the Modified Settlement Agreement, we agreed
      to
      convey certain tangible assets located in the Arlington facility to Everest
      by
      June 21, 2006, and we (i) agreed to issue to Everest 893,617 unregistered shares
      of common stock within 10 calendar days of June 21, 2006, (ii) agreed to pay
      Everest $10,000 in cash by June 21, 2006, (iii) forfeited all claims to the
      $11,000 security deposit, and (iv) agreed to tender to Everest a cash payment
      of
      $32,000 at 10% per year via monthly installments of $1,464 commencing on October
      1, 2006 with no prepayment penalty, all in consideration of a full release
      and
      dismissal of the lawsuit previously filed by Everest. As all requirements of
      the
      Settlement Agreement have been met, the action has been dismissed without
      prejudice. Total expenses for operating leases for the year ended March 31,
      2006
      amounted to $178,781.





During
      fiscal 2006 the company hired certain subcontractors for certain projects.
      These
      subcontractors were paid with common stock for their services. The company
      believes that these individuals were independent contractors and not employees,
      as such terms are defined by I.R.C. rules and regulations. Certain corporate
      payroll taxes do not apply to services from independent contractors, and
      accordingly, the Company has not paid such taxes for these services. The
      determination as to whether an individual service provider is an independent
      contractor or an employee is a matter of subjective interpretation of the
      applicable rules and regulations. The Company’s position is subject to challenge
      by certain governmental and regulatory agencies. The Company has accrued $65,963
      related to this contingency.





**NOTE
      9. INCOME TAXES**




The
      Company accounts for income taxes using an asset and liability method as
      prescribed by SFAS No. 109, “Accounting for Income Taxes”. The income tax
      benefit reconciled to the tax provision (benefit) computed by applying statutory
      tax rates to pre-tax income was as follows for the years ended March
      31:




**2006**
              
              **2005**Tax
                  benefit computed at federal statutory rate
              
              $
              (1,665,000
              )
              $
              (1,306,000
              )Increase
                  in valuation allowance
              
              
              1,682,000
              
              
              1,441,000State
                  taxes - net of federal income tax benefit
              
              
              (2,000
              )
              
              (106,000
              )Research
                  and development tax credit
              
              
              (15,000
              )
              
              (29,000
              )$
              0
              
              $
              0


Deferred
      income taxes reflect the net tax effects of temporary differences between the
      carrying amounts of assets and liabilities for financial reporting purposes
      and
      the amounts reported for income tax purposes. Significant components of the
      Company’s net deferred tax assets are as follows at March 31, 2006:




NOL
                  carryforwards
              
              $
              10,759,000Deferred
                  stock compensation
              
              
              215,000Research
                  and development tax credits
              
              
              132,000Accrued
                  wages
              
              
              408,000Other
              
              
              29,00011,543,000Less
                  valuation allowance
              
              
              (11,543,000
              )$
              0


F-12


The
      Company has established a valuation allowance of $11,543,000 to offset the
      deferred tax asset, due to the uncertainty of future utilization. The Company
      has approximately $30.2 million and $15.7 million of federal and state NOL
      carryovers as of March 31, 2006. These carryovers may be limited in their usage
      to offset against future taxable income since it is likely that the Company
      had
      gone through a Section 382 ownership change (a greater than 50% ownership
      change). As such, the NOL carryovers may not be fully utilized.




**NOTE
      10. LICENSE AND TECHNOLOGY AGREEMENTS**




Under
      the
      Development and License Agreement between us and Kidde Fire Fighting, Inc.
      dated
      as of August 13, 2004, we agreed with Kidde to develop, produce, market and
      commercialize decontaminant foam products. This agreement required Kidde to
      pay
      us a license fee in the amount of $100,000 and a fee in the amount of $100,000
      in consideration for the assignment of the trademark, All-ClearTM. These fees
      were paid in two equal installments. As required by the agreement, the first
      installment was paid in August 2004 and the second installment was paid in
      November 2004. Pursuant to the agreement, we are responsible for formulating
      existing products and Kidde is responsible for developing manufacturing
      processes relating to the existing products. The term of the agreement began
      on
      August 13, 2004 and will continue until the later of 10 years or the date on
      which the manufacture, use or sale of any product developed pursuant to the
      agreement would no longer infringe a valid claim of patent rights (if any exist)
      held by us, alone, or with Kidde. If a competitor develops a similar product
      that eliminates the possibility that the product we developed can compete with
      such product, the agreement would be mutually terminated over a six month
      period. The All-ClearTM product has been developed and tested and is being
      marketed internationally to foreign governments, militaries and companies and
      has been presented to the U.S. Department of Homeland Security and the U.S.
      Department of Defense. Before it can be marketed and sold in the United States
      other than to the U.S. Department of Defense, an application for registration
      of
      the product must be submitted to the EPA specifically necessitating registration
      either as a sterilant or as a newly proposed anthrax inactivation formula.
      All
      efficacy and toxicity testing has been completed and the application was
      submitted to the EPA in late 2005. We anticipate final EPA registration in
      late
      2006. All-ClearTM has successfully passed the Boeing Series D6-17487, Revision P,
      corrosion test for use of foam on aircraft exteriors. This proves non-corrosive
      capability which is a requirement for use by Air Forces and commercial airlines
      worldwide. Internationally, All-ClearTM has been evaluated by the Canadian DOD
      and several European, Asian and Middle Eastern countries. If Kidde is able
      to
      successfully market the product, we would earn royalties on the number of
      products sold in a Kidde fiscal year, as defined in the agreement. The royalties
      are computed on the number of products sold and do not include reductions for
      expenses associated with the production, marketing and sale of the
      product.





F-13


**NOTE
      11. STOCK-BASED COMPENSATION**




On
      April
      10, 2003, the Company adopted its 2002 Amended and Restated Stock Plan. The
      purpose of the 2002 Plan is to enable the Company to attract, retain and
      motivate key employees, officers, directors, consultants, independent
      contractors and advisors by allowing them to share in the Company’s growth
      through ownership of our securities. Stock options granted under the 2002 Plan
      may be either incentive stock options, as defined in Section 422A of the
      Internal Revenue Code of 1986, or non-qualified stock options. There
      are
      currently 6,500,000 shares reserved for the stock options granted to our
      officers on January 31, 2006. The
      Company granted 6,500,000 stock options during the year ended March 31, 2006,
      all of which were issued in connection with employment agreements with our
      Chief
      Executive Officer and Chief Financial Officer. These shares vest based on
      certain milestones as noted in their Employment Agreements. In
      December 2004, the FASB issued SFAS No. 123R, which eliminates the ability
      to
      account for share-based compensation transactions using the intrinsic value
      method under APB Opinion No. 25 and requires instead that such transactions
      be
      accounted for using a fair-value-based method. The Company adopted Statement
      of
      Financial Accounting Standards No. 123R, Share-Based Payment, at the beginning
      of the second quarter of fiscal 2006.


On
        August
        25, 2005, our Board of Directors approved and adopted the US Global Nanospace,
        Inc. 2005 Stock Plan (the “2005 Plan”). Pursuant to the 2005 Plan, we may issue
        up to 25,000,000 shares of our common stock (the “Plan Shares”) to employees,
        officers, directors, consultants, independent contractors and advisors who
        provide services to us that do not relate to capital raising or stock support
        activities. Awards under the 2005 Plan may be in the form of stock options,
        stock awards subject to payment of consideration, or stock bonuses, and may
        be
        subject to vesting conditions. Incentive stock options (“ISOs”) may be granted
        to employees only. The Board of Directors administers and interprets the
        2005
        Plan in the absence of a committee of the Board formed for such purpose.
        The
        term of the 2005 Plan is 10 years. As of March 31, 2006, no options, warrants
        or
        rights were granted under the US Global Nanospace, Inc. 2005 Stock Plan,
        however, we have awarded 19,850,000 shares of common stock to our former
        Chief
        Financial Officer and various consultants in exchange for services rendered
        to
        us. Therefore, as of March 31, 2006 there was available for future issuance
        under the US Global Nanospace, Inc. 2005 Stock Plan 5,150,000 shares of common
        stock.





**Option/SAR
                Grants for Last**
              **Fiscal
                Year-Individual Grants**Name
            Number
                of
              Securities
              Underlying
              Options/SARs
              Granted
                (#)
            %
                of Total
              Options/SARs
              Granted
                to
              Employees
                in Fiscal
              Year
            Exercise
                Price
              ($/sh)
            Expiration
                DateCarl
                Gruenler
            4,000,000(1)
            61.5%
            $0.06/share
            January
                20, 2013Kevin
                Cronin
            2,500,000(2)
            38.5%
            $0.06/share
            January
                30, 2013


(1)
      This
      option is performance based. Thus far, 1,000,000 shares vested in May
      2006.


(2)
      This
      option is performance based and has not yet vested.





No
      officer exercised any option during the fiscal year ended March 31,
      2006.




F-14




**NOTE
      12. CONTINGENT LIABILITIES**




**Pending
      or Threatened Legal Proceedings**




From
      time
      to time, claims are made against the Company in the ordinary course of its
      business, which could result in litigation. Claims and associated litigation
      are
      subject to inherent uncertainties and unfavorable outcomes could occur, such
      as
      monetary damages, fines, penalties or injunctions prohibiting the Company from
      selling one or more products or engaging in other activities. The occurrence
      of
      an unfavorable outcome in any specific period could have a material adverse
      affect on the Company’s results of operations for that period or future
      periods.





On
      January 3, 2005, we first received a Wells Notice from the U.S. Securities
      and
      Exchange Commission. The Wells Notice notified us that the SEC staff intended
      to
      recommend that the SEC bring a civil action against us and our officers and
      directors for alleged violations of U.S. securities laws. The SEC’s concerns
      principally regard certain prior public statements made by us regarding the
      marketability of our products. We have been in ongoing dialogue with the SEC,
      and prepared and submitted initial and supplemental Wells Submissions in
      response to the original Wells Notice. Notwithstanding receipt of the Wells
      Notice, we have cooperated and continue to cooperate with the SEC. On
      January 20, 2006, the SEC staff re-issued a Wells Notice to us, Julie Seaman,
      who is one of our current directors, and John Robinson, who is our former
      Chairman and Chief Executive Officer, in connection with the previously
      announced SEC inquiry. The re-issued Wells Notices against us and Mr. Robinson
      alleged the same violations of U.S. securities laws as those violations that
      the
      SEC alleged in its prior Wells Notices. The January 20, 2006 Wells Notice
      against Ms. Seaman alleged substantially fewer violations than the Wells Notice
      issued to her on January 3, 2005. On
      July
      20, 2006 we, separate from the other parties identified in the previously issued
      Wells Notice, agreed to a settlement with the SEC staff. The settlement is
      subject to the final approval of the SEC Commissioners.





We
      previously entered into a license agreement with TIAX, LLC on an exclusive
      basis
      for technology related to a decontamination system we hoped would be usable
      for
      our All-ClearTM product. By letter dated May 27, 2005, TIAX LLC notified us that
      TIAX believed that we were in default under the Patent and Technology License
      Agreement dated July 24, 2003 (the “Agreement”), as amended, between TIAX and us
      for failure to pay $192,914 TIAX alleged was due under the agreement. Under
      the
      terms of the Agreement, the Agreement terminates upon 30 days written notice
      of
      default if the default is not cured to the satisfaction of TIAX within the
      30-day notice period. On June 27, 2005, we responded to TIAX stating that we
      disagreed with TIAX’s assessment of the amounts due TIAX under this agreement.
      We also informed TIAX that the decontaminant product being marketed by Kidde
      had
      been jointly developed by us and Kidde, and that we did not believe that this
      new product was subject to our agreement with TIAX. We had made a
      counter-proposal to TIAX, offering to pay TIAX 25% of royalties received by
      us
      from Kidde. On July 19, 2005, TIAX rejected our counter-proposal to modify
      the
      payment terms of the Agreement and notified us that TIAX would exercise its
      right to terminate the agreement unless the Company paid $196,344 in full by
      August 18, 2005. Of this $196,344, the Company has received invoices from TIAX
      in an aggregate amount of approximately $165,000 that it has reflected as
      accounts payable in its financial statements as of June 30, 2005, although
      the
      Company disputes this amount. Upon receipt of this notice from TIAX that the
      alleged default had not been cured, we took the position that the Agreement
      had
      already terminated as of June 28, 2005. While collaborating on development
      of
      the All-ClearTM product, we and Kidde discovered that the formulation developed
      by TIAX did not meet the requirements for a commercial product. Accordingly,
      we
      and Kidde developed an alternative formulation that is more effective against
      chemical and biological pathogens than the TIAX formulation, and that, in
      addition, is non-toxic and non-corrosive. We terminated our license agreement
      with TIAX because we are not using the TIAX licensed technology. On
      January 2, 2006, we learned
      that TIAX LLC filed a complaint for breach of contract in Middlesex Superior
      Court in Massachusetts (the “Court”).  The complaint seeks payment of
      $226,344 that TIAX alleges remains payable by us under the Agreement.  Our
      position is that the Agreement terminated on June 28, 2005, and that TIAX’s
      claims are without merit.  On February 6, 2005, we filed an answer to the
      complaint and a counterclaim against TIAX for fraudulent misrepresentation
      and
      breach of covenant of good faith and fair dealing. On June 30, 2006, the Court
      granted TIAX’s motion for dismissal of our counterclaim for breach of the
      covenant of good faith and fair dealing, but upheld our counterclaim of
      fraudulent misrepresentation which stands pending trial. We received a request
      from TIAX to meet and discuss a settlement to preclude the costs of trial.
      We
      are working towards a negotiated settlement.





F-15




On
      August
      9, 2006 we learned that Western Security Bank (the “Bank”), an Arizona
      corporation, filed a suit against us for default of the balance owed of the
      $1,650,000 promissory note signed on June 30, 2003. The suit seeks the
      accelerated payment of $710,114 in principal, accrued interest, and penalties
      owed the Bank through July 7, 2006 due to our failure to make all required
      monthly amounts which amount is alleged to have totaled $880,708 on that date,
      plus $375 per day from July 8, 2006 until paid and attorney’s fees. The
      promissory note calls for payments of $25,400 per month, some of which have
      not
      been paid. The suit also names John D. Robinson, our former officer and
      director, and United States Defense Research, Ltd., a Nevada limited liability
      company, as defendants in their capacities as personal guarantors. We have
      been
      in frequent contact with the Bank and we continue to seek an amicable resolution
      of the matter.





**NOTE
      13. RECENTLY ISSUED ACCOUNTING STANDARDS**




In
      November 2004, the Financial Accounting Standards Board (FASB) issued SFAS
      No.
      151, “Inventory Costs”, which clarifies the accounting for abnormal amounts of
      idle facility expense, freight, handling costs, and wasted material. SFAS No.
      151 will be effective for inventory costs incurred during fiscal years beginning
      after June 15, 2005. We do not believe the adoption of SFAS No. 151 will have
      a
      material impact on our financial statements.




In
      December 2004, the Financial Accounting Standards Board (FASB) issued SFAS
      No.
      153, “Exchanges of “Nonmonetary Assets”, which
      eliminates
      the exception for nonmonetary exchanges of similar productive assets and
      replaces it with a general exception for exchanges of nonmonetary assets that
      do
      not have commercial substance. SFAS No. 153 will be effective for nonmonetary
      asset exchanges occurring in fiscal periods beginning after June 15, 2005.
      We do
      not believe the adoption of SFAS No. 153 will have a material impact on our
      financial statements.




In
      December 2004, the Financial Accounting Standards Board (FASB) issued SFAS
      No.
      123R, which eliminates the ability to account for share-based compensation
      transactions using the intrinsic value method under Accounting Principles Board
      (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and generally
      will require instead that such transactions be accounted for using a
      fair-value-based method. This statement is effective for the Company as of
      the
      first interim period or fiscal year beginning after December 15, 2005.
      Management has adopted this statement as of July 1, 2005.




In
      May
      2005, the Financial Accounting Standards Board (FASB) issued SFAS No. 154,
      “Accounting Changes and Error Corrections, A Replacement of APB Opinion No.
      20
      and FASB Statement No. 3.” SFAS 154 requires retrospective application to prior
      periods’ financial statements for changes in accounting principles, unless it is
      impracticable to determine either the period-specific effects or the cumulative
      effect of the change. SFAS 154 also requires that retrospective application
      of a
      change in accounting principle be limited to the direct effects of the change.
      Indirect effects of a change in accounting principle, such as a change in
      non-discretionary profit-sharing payments resulting from an accounting change,
      should be recognized in the period of the accounting change. SFAS 154 also
      requires that a change in depreciation, amortization, or depletion method for
      long-lived, non-financial assets be accounted for as a change in accounting
      estimate affected by a change in accounting principle. SFAS 154 is effective
      for
      accounting changes and corrections of errors made in fiscal years beginning
      after December 15, 2005. Early adoption is permitted for accounting changes
      and
      corrections of errors made in fiscal years beginning after the date this
      Statement is issued. The Company does not anticipate a material impact on the
      financial statements from the adoption of this consensus.




F-16




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




Grant
      Thornton LLP, the independent accountants who had been engaged by us as the
      principal accountants to audit our consolidated financial statements, resigned
      effective April 14, 2004.





The
      report of Grant Thornton LLP on our financial statements as of and for the
      years
      ended March 31, 2003 and period ended March 31, 2002 did not contain an adverse
      opinion, or a disclaimer of opinion, however the report was modified as to
      our
      ability to continue as a going concern. The report was not qualified or modified
      as to audit scope or accounting principles. During the fiscal years ended March
      31, 2003 and period ended March 31, 2002 and the interim period from April
      1,
      2003 through the date of resignation, we did not have any disagreements with
      Grant Thornton LLP on any matter of accounting principles or practices,
      financial statement disclosure, or auditing scope or procedure, which
      disagreements, if not resolved to the satisfaction of Grant Thornton LLP, would
      have caused it to make a reference to the subject matter of the disagreements
      in
      connection with its reports.





On
      April
      21, 2004, we engaged the firm of Grobstein, Horwath & Company LLP as our new
      auditor. The decision to retain the services of Grobstein, Horwath & Company
      LLP was approved by our Board of Directors.





Prior
      to
      engaging Grobstein, Horwath & Company LLP, we had not consulted Grobstein,
      Horwath & Company LLP regarding the application of accounting principles to
      a specified transaction, completed or proposed, the type of audit opinion that
      might be rendered on our financial statements or a reportable event, nor did
      we
      consult with Grobstein, Horwath & Company LLP regarding any disagreements
      with our prior auditor on any matter of accounting principles or practices,
      financial statement disclosure, or auditing scope or procedure, which
      disagreements, if not resolved to the satisfaction of the prior auditor, would
      have caused it to make a reference to the subject matter of the disagreements
      in
      connection with its reports.





**ITEM
      8A. CONTROLS AND PROCEDURES**





We
      carried out an evaluation, under the supervision and with the participation
      of
      our management, including our Chief Executive Officer and Chief Financial
      Officer, of the effectiveness of the design and operation of our disclosure
      controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under
      the
      Securities Exchange Act of 1934, as amended, as of the year ended March 31,
      2006. The conclusion of management is that, due to our lack of cash, we are
      unable to ensure that information required to be disclosed by the Company in
      the
      reports that we file or submit under the Securities Exchange Act of 1934 is
      recorded, processed, summarized and reported within the time periods specified
      in Securities and Exchange Commission rules and forms. For example, until
      recently, we did not have the funds to have our financial statements audited.
      As
      a result, our audit was not completed until immediately prior to the date this
      Annual Report on Form 10-KSB was filed. Our lack of capital has also left us
      without sufficient staff to assist our officers. As a result, while management
      is aware of the information that is to be disclosed in the reports that we
      file
      or submit under the Securities Exchange Act of 1934, our officers may be unable
      to review and report it on a timely basis. Until our cash situation improves,
      we
      will not be able to make significant changes to improve our internal controls
      and procedures. There were no significant changes in our internal controls
      or in
      other factors that could significantly affect internal controls subsequent
      to
      the date of the evaluation.




27


**ITEM
      8B. OTHER INFORMATION**





None.





**PART
      III**





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




**Directors
      and Officers**





As
      of
      March 31, 2006, our officers and directors were:





**Name**
            **Age**
            **Title**Carl
                Gruenler
            53
            Chief
                Executive Officer, DirectorKevin
                Cronin
            42
            Chief
                Financial Officer, Treasurer, and SecretaryPat
                Scorzelli
            50
            Chairman
                of the Board of DirectorsJulie
                Seaman
            46
            Director




The
      size
      of our board of directors is currently fixed at three members. Members of the
      board serve until the next annual meeting of stockholders and until their
      successors are elected and qualified. Meetings of the board are held when and
      as
      deemed necessary or appropriate. Officers are appointed by and serve at the
      discretion of the board.





**Carl
      Gruenler** joined
      us on August 3, 2005 as our Chief Executive Officer and President and on
      December 21, 2005 became a director. From 2003 to 2005, Mr. Gruenler served
      as
      Vice President, Government & Force Protection Systems for American
      Technology Corporation, a public company, and assumed additional
      responsibilities as its Interim Chief Financial Officer from November 2003
      through June 2004. From 1999 to 2003, Mr. Gruenler, a Naval Reservist, was
      recalled to active duty as Smart Wing Program Manager for the Combat Patrol
      and
      Reconnaissance Wing Five (CPRW-5) of the United States Navy. Prior to the
      recall, Mr. Gruenler held business leadership positions as president, chief
      financial officer, and chief operating officer; served as chairman of the board
      of a large arts organization; and completed six naval reserve unit command
      tours. Mr. Gruenler received a Bachelor of Science degree in business
      administration from Oral Roberts University and a Master of Business
      Administration from the University of Nebraska - Lincoln.





28


**Kevin
      Cronin** joined
      us
      on January 7, 2006 as our Chief Financial Officer, Secretary and Treasurer.
      From
      April 2005 until January 2006, Mr. Cronin, who is a certified public accountant,
      was a consultant with chief financial leadership, merger and acquisition and
      fund raising responsibilities for CEPA Technologies, a development stage company
      developing voice-activated software. Prior to his engagement with CEPA
      Technologies, from April 2000 until April 2005, Mr. Cronin was the Controller
      of
      Silverback Technologies, Inc., a software business. From March 1999 to April
      2000, Mr. Cronin was a Controller of Spike Technologies, Inc., a wireless
      communications company. Mr. Cronin started his career with Ernst & Young
      LLP, where he worked from June 1989 to October 1994. From October 1994 to
      February 1996, Mr. Cronin was a financial analyst for The Learning Company
      (formerly known as Softkey), a public corporation and from March 1997 to March
      1999 Mr. Cronin was the Controller of Vivid Technologies, Inc., also a public
      corporation. Mr. Cronin received a Bachelor of Arts degree in business
      management from Hartwick College and a combined Master of Science in Accounting
      and Master of Business Administration degree from Northeastern
      University.





**Julie
      Seaman,** became a
      director and officer on June 17, 2002. Prior to joining USGN, Ms. Seaman served
      as Treasurer and Director of Administration to USDR, Inc. from March 1997,
      and
      held the same positions for each of USDR, Inc.’s affiliates, including USDR
      Aerospace, Ltd., since October 2001. From 1993 to 1996, Ms. Seaman was Treasurer
      and Director of Administration to United States Defense Research, Inc., a U.S.
      Government contractor that manufactured precision parts for military
      equipment.





**Pat
      Scorzelli** joined
      us
      as Chairman of the Board of Directors on May 24, 2006. From 2005 to May 2006,
      Mr. Scorzelli served as President of First Union Venture Group of Westport,
      Connecticut, a business consulting firm. From 2003 to 2005, Mr. Scorzelli served
      as President of Scanbury Inc. of New York, New York, a wireless technology
      company. From 2000 to 2003, Mr. Scorzelli served as President of International
      Wireless Communications, Inc. of Woburn, Massachusetts, a wireless
      infrastructure company.





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





Section
      16(a) of the Exchange Act requires our executive officers and directors, and
      persons who own more than ten percent of our common stock to file reports of
      ownership and change in ownership with the Securities and Exchange Commission
      and the exchange on which the common stock is listed for trading. Executive
      officers, directors and more than ten percent stockholders are required by
      regulations promulgated under the Exchange Act to furnish us with copies of
      all
      Section 16(a) reports filed. Based solely on our review of copies of the Section
      16(a) reports filed for the fiscal year ended March 31, 2006, we believe that
      all reporting requirements applicable to our executive officers, directors
      and
      more than ten percent stockholders were complied with for the fiscal year ended
      March 31, 2006, except as follows:





Name
                of Filer
            Form
            DescriptionCarl
                Gruenler
            4
            On
                April 25, 2006 Mr. Gruenler filed a Form 4 covering the following
                transactions: (i) the granting, on January 30, 2006, of an option
                to
                purchase 4,000,000 shares of our common stock at a price of $0.06
                per
                share; (ii) the acquisition, on March 28, 2006, of 2,687,075 shares
                of our
                common stock having a per share value of $0.049; and sales of our
                common
                stock made between April 21 and April 25, 2006 for total gross proceeds
                of
                $69,457.4
            On
                August 3, 2005 Mr. Gruenler received a grant of 2,000,0000 shares
                of our
                common stock. The grant was subject to a monthly vesting condition,
                and
                all shares vested on July 31, 2006. Mr. Gruenler filed a Form 4 disclosing
                this transaction on August 15, 2005 rather than by August 5,
                2005.Kevin
                Cronin
            3
            Mr.
                Cronin Form 3 was filed on March 30, 2006 rather than on or before
                January
                17, 2006.4
            On
                April 24, 2006 Mr. Cronin filed a Form 4 covering the following
                transactions; (i) the granting, on January 30, 2006, of an option
                to
                purchase 2,500,000 shares of common stock at a price of $0.06 per
                share;
                (ii) the acquisition, on January 7, 2006, of 1,000,000 shares of
                common
                stock having a per share value of $0.074; (iii) the granting, on
                March 28,
                2006, of 425,170 shares of common stock having a per share value
                of
                $0.049; and sales of our common stock made between April 5 and April
                24,
                2006 for total gross proceeds of $17,970.4
            On
                June 9, 2006 Mr. Cronin acquired 443,263 shares of our common stock
                having
                a value of $0.047 per share. This acquisition was reported on June
                14,
                2006 rather than on June 13, 2006.4
            On
                July 17, 2006 Mr. Cronin reported a series of sales of our common
                stock
                that he made between June 27 and July 6, 2006 for total gross proceeds
                of
                $13,826.Pat
                Scorzelli
            3
            Mr.
                Scorzelli joined the Board of Directors on May 24, 2006 and was required
                to file a Form 3 no later than June 5, 2006, however, the Form 3
                has not
                yet been filed.




29




**Code
      of Ethics**





We
      adopted a code of ethics that applies to our Chief Executive Officer, Chief
      Financial Officer and our employees on January 21, 2004. We will provide to
      any
      person without charge, upon request, a copy of our code of ethics. A request
      for
      a copy should be made in writing to US Global Nanospace, Inc., Attn.: Secretary,
      2533 N. Carson St., Suite 5107, Carson City, Nevada 89706.





**ITEM
      10. EXECUTIVE COMPENSATION**





The
      following tables and discussion set forth information with respect to all
      compensation awarded to, earned by or paid to our Chief Executive Officer and
      our Chief Financial Officer for all services rendered in all capacities to
      us
      for each of our last three completed fiscal years.





**SUMMARY
      COMPENSATION TABLE**










**LONG
                TERM
                COMPENSATION****ANNUAL
                COMPENSATION**
            
            **AWARDS**
            
            **PAYOUTS****Name
                and Principal Position**
            
            **Year**
            
            **Salary**
              **($)**
            
            **Bonus**
              **($)**
            
            **Other**
              **Annual**
              **Compensation**
              **($****)**
            
            **Restricted**
              **Stock
                Awards**
              **($)**
            
            **Securities**
              **Underlying**
              **Options/**
              **SAR****s**
            
            **LTIP**
              **Payout**
              **($)**
            
            **All
                Other**
              **Compensation**
              **($)**Carl
                Gruenler
            
            
            2006
            
            $
            131,667(1
            )
            
            
            
            
            
            
            $
            100,000(13
            )
            
            4,000,000(12
            )CEO
                and President
            
            
            20052004John
                Robinson,
            
            
            2006
            
            $
            134,500(2
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            76,144(3
            )CEO,
                President and
            
            
            2005
            
            $
            401,539(4
            )Chairman
            
            
            2004
            
            $
            472,561(5
            )
            $
            400,000(5
            )Kevin
                Cronin,
            
            
            2006
            
            $
            20,833(6
            )
            
            
            
            
            
            
            $
            50,000(14
            )
            
            2,500,000(12
            )CFO,
                Secretary
            
            
            2005and
                Treasurer
            
            
            2004Julie
                Seaman
            
            
            2006
            
            $
            162,335(7
            )
            
            
            
            
            
            
            $
            175,000(8
            )
            
            
            
            
            
            
            $
            42,321(9
            )CFO
                and Secretary
            
            
            2005
            
            $
            210,807(10
            )2004
            
            $
            135,715(11
            )
            $
            125,000(11
            )




(1)
      Mr.
      Gruenler received no cash compensation during the year ended March 31, 2006.
      Instead, he received a total of 2,687,075 shares of the Company’s common stock
      as compensation for ordinary services rendered to us during the period beginning
      on October 1, 2005 and ending on March 31, 2006. The stock had a total fair
      market value on the date of grant of $131,667. This is based on an annual salary
      of $395,000.


(2)
      Mr.
      Robinson’s salary was accrued but unpaid as of March 31, 2006. This amount is
      based on an annual salary of $400,000, through the termination of Mr. Robinson’s
      service on August 3, 2005.


(3)
      Mr.
      Robinson was paid as a consultant for the period of August 4, 2005 through
      December 8, 2005 in the amount of $70,312. This amount was accrued but unpaid
      as
      of March 31, 2006. Mr. Robinson has been paid compensation in the amount of
      $5,832 for his loan guarantee. Please see the discussion in the section of
      this
      Annual Report titled “Certain Relationships and Related Party Transactions” at
      Item 12.


(4)
      Mr.
      Robinson’s salary was accrued but unpaid as of March 31, 2006.


(5)
      Mr.
      Robinson received no cash compensation during the year ended March 31, 2004.
      Instead, he received a total of 2,523,313 shares of the Company’s common stock
      as compensation (i) for ordinary services rendered to us during that period,
      (ii) as a bonus for extraordinary services rendered to us during that period,
      and (iii) in payment of compensation totaling $125,000 accrued but unpaid during
      the year ended March 31, 2003. The stock had a total fair market value of
      $872,561.




30




(6)
      Mr.
      Cronin joined us in January 2006 and received no cash compensation during the
      year ended March 31, 2006. Instead, he received a total of 425,170 shares of
      the
      Company’s common stock as compensation for ordinary services rendered to us
      during the period that began on January 11, 2006 and ended on March 31, 2006.
      The stock had a total fair market value on the date of grant of $20,833. This
      is
      based on an annual salary of $250,000.


(7)
      Ms.
      Seaman’s salary was accrued but unpaid as of March 31, 2006. This amount is
      based on an annual salary of $210,000, through the termination of Ms. Seaman’s
      service on January 8, 2006.


(8)
      Ms.
      Seaman received 3,500,000 shares of our common stock in August 2005. The closing
      price of the Company’s stock at March 31, 2006 was $.05 per share.


(9) Ms.
      Seaman was paid as a consultant for the period of January 8, 2006 through March
      31, 2006 in the amount of $38,839. This amount was accrued but unpaid as of
      March 31, 2006. Ms. Seaman has also been paid compensation in the amount of
      $3,482 for her lease guarantee. Please
      see the discussion in the section of this Annual Report titled “Certain
      Relationships and Related Party Transactions” at Item 12.


(10)
      Ms.
      Seaman’s salary was accrued but unpaid as of March 31, 2006.


(11)
      Ms.
      Seaman received no cash compensation during the fiscal year ended March 31,
      2004. Instead, she received a total of 770,338 shares of the Company’s common
      stock as compensation for ordinary services rendered during the fiscal year
      ended March 31, 2004 and for extraordinary services rendered during the same
      period. The stock had a total fair market value of $260,715.


(12)
      This
      option is a performance option and will not vest until designated milestones
      are
      achieved.


(13)
      Mr.
      Gruenler received 2,000,000 shares which are subject
      to vesting conditions as
      follows: 400,000
      of the shares vested immediately; 133,333 of the shares vested on the last
      day
      of each month for 11 months commencing August 31, 2005; and the remaining
      133,337 of the shares vested on July 31, 2006.  The
      closing price of the Company’s stock at March 31, 2006 was $.05 per
      share.


(14)
      Mr.
      Cronin received 1,000,000 shares which are subject to vest in equal increments
      on the last day of the month from January 31, 2006 through December 31, 2006.
      The closing price of the Company’s stock at March 31, 2006 was $.05 per
      share.




**Option/SAR
                  Grants for Last**
                **Fiscal
                  Year-Individual Grants**Name
              Number
                  of
                Securities
                Underlying
                Options/SARs
                Granted
                  (#)
              %
                  of Total
                Options/SARs
                Granted
                  to
                Employees
                  in Fiscal
                Year
              Exercise
                  Price
                ($/sh)
              Expiration
                  DateCarl
                  Gruenler
              4,000,000(1)
              61.5%
              $0.06/share
              January
                  20, 2013Kevin
                  Cronin
              2,500,000(2)
              38.5%
              $0.06/share
              January
                  30, 2013
 (1)
        This
        option is performance based. Thus far, 1,000,000 shares vested in May
        2006.
 (2)
        This
        option is performance based and has not yet vested.


No
      officer exercised any option during the fiscal year ended March 31,
      2006.





**Director
      Compensation**





There
      is
      no standard or individual compensation package for any of the
      directors.





31


**Employment
      Contracts**





**Employment
      Agreement with Carl Gruenler**





On
      August
      3, 2005, the Company entered into a letter agreement with Mr. Carl Gruenler
      pursuant to which Mr. Gruenler became the Company’s new President and Chief
      Executive Officer on an at-will employment basis.





According
      to the letter agreement, the Company was not be obligated to pay a cash salary
      to Mr. Gruenler until the Company received and accepted a firm commitment that
      would require payment to the Company of no less than $10,000,000 or if the
      Company commenced paying a cash salary to any of the Company’s other officers on
      a going forward basis. Mr. Gruenler received as initial compensation 2,000,000
      restricted shares of common stock subject to vesting conditions as follows:
      400,000 of the shares vested immediately; 133,333 of the shares vested on the
      last day of each month for 11 months commencing August 31, 2005; and the
      remaining 133,337 of the shares vested on July 31, 2006. All unvested shares
      were to be cancelled in the event of Mr. Gruenler’s termination for any reason
      prior to July 31, 2006. In the event of a merger or consolidation of the Company
      with or into another company, or the sale of substantially all of the Company’s
      assets, all unvested shares would have vested immediately prior to the
      consummation of such transaction. From and after the date the Company received
      and accepted a firm commitment that would require payment to the Company of
      no
      less than $10,000,000, or the Company commenced paying a cash salary to any
      of
      the Company’s other officers on a going forward basis, Mr. Gruenler’s starting
      cash salary was to be $16,667 per month. Provided that Mr. Gruenler’s employment
      with the Company continued, Mr. Gruenler’s cash salary was to be increased after
      six months to $20,833 per month.





On
      December 21, 2005, the Company entered into an Employment Agreement (the
“Agreement”) with Mr. Gruenler that superseded and replaced, to the extent
      described below, the letter agreement. Pursuant to the Agreement, Mr. Gruenler
      continues to serve as President and Chief Executive Officer for an initial
      term
      commencing on the date of the Agreement and ending on December 31, 2006. The
      Employment Agreement will be automatically renewed for successive periods of
      one
      year after December 31, 2006, unless Mr. Gruenler is otherwise notified in
      writing during the term.





Pursuant
      to the Agreement, Mr. Gruenler will receive a salary at the rate of $395,000
      per
      year (the “Salary”), commencing as of October 1, 2005. Until the Company enters
      into a contract (or contracts) for the sale or licensing of its products or
      provision of its services, which contract(s) must have a total value of at
      least
      $10 million, or in the event the Company is sufficiently capitalized as
      determined by the Board of Directors, the Salary will be paid in registered
      shares of the Company’s common stock, issued from the Company’s Amended and
      Restated 2002 Stock Plan (the “Plan”) or any other employee equity incentive
      plan the securities of which are registered on a Form S-8 registration statement
      filed with the SEC. Once the Company has received an executed, legally binding
      contract or contracts having a total value of at least $10 million, the Company
      will pay the salary in cash. On January 2, 2006, the Company also granted to
      Mr.
      Gruenler, pursuant to the terms of the Agreement, a stock bonus under Section
      8
      of the Plan of 1,000,000 shares of common stock.




The
      Company agreed that it would increase the number of shares in the Plan, or
      alternatively adopt a new plan that will include at least 4,000,000 shares
      of
      common stock, and that it would register such shares on a Form S-8 registration
      statement filed with the SEC as soon as commercially practicable after the
      date
      of the Agreement. Pursuant to the Agreement, the Company granted to Mr. Gruenler
      an option to purchase 4,000,000 shares of its common stock. The per share
      exercise price was $0.06. The option has a term of seven years. The option
      vests
      as follows: (i) upon completion of the MAPSANDS technology and a government
      sponsored demonstration completed in any country (which took place in May 2006),
      1,000,000 of the option shares vested; (ii) upon receipt of a purchase order
      accepted by the Company, or the execution by the Company of an agreement, for
      the MAPSANDS technology or other products, which purchase order or agreement
      has
      a value to the Company of no less than $1 million, 500,000 of the option shares
      will vest; (iii) upon receipt of a purchase order accepted by the Company,
      or
      the execution by the Company of an agreement, for the MAPSANDS technology or
      other products, which purchase order or agreement has a value to the Company
      of
      no less than $5 million, 500,000 of the option shares will vest; (iv) upon
      receipt of a purchase order accepted by the Company, or the execution by the
      Company of an agreement, for the MAPSANDS technology or other products, which
      purchase order or agreement has a value to the Company of no less than $10
      million, 1,000,000 of the option shares will vest; (v) if, for two consecutive
      quarters, the Company shows positive cash flow in its quarterly filings with
      the
      SEC without further dilution of its common stock (with the exception of shares
      issued from the Plan or a newly adopted equity incentive plan), 500,000 of
      the
      option shares will vest; and (vi) if, for two consecutive quarters, the Company
      reports profitability in its quarterly filings with the SEC, 500,000 of the
      option shares will vest. However, in the event of a corporate transaction such
      as a merger or acquisition of the Company, as described in Section 19.1 of
      the
      Plan, any portion of the option that is unvested shall immediately
      vest.




32


If
      the
      Company terminates Mr. Gruenler’s employment without cause, or in the event of a
      corporate transaction as described in Section 19.1 of the Plan, prior to the
      expiration of the term of the Agreement, the Company will be obligated to pay
      to
      Mr. Gruenler the Salary for the remainder of the term.





The
      Agreement prohibits Mr. Gruenler from competing with the Company during the
      term
      of the Agreement, and for a period of one year thereafter, in the United States,
      Saudi Arabia or any member nation of the Gulf Cooperation Council.





The
      Agreement supersedes and replaces all prior agreements between Mr. Gruenler
      and
      the Company with regard to Mr. Gruenler’s employment, including the letter
      agreement provided, however, that Mr. Gruenler continued to receive the
      restricted shares of common stock, vesting on a monthly basis, as set forth
      in
      the letter agreement.





**Employment
      Agreement with Kevin Cronin**





The
      Company entered into an Employment Agreement dated January 7, 2006 with Kevin
      Cronin pursuant to which Mr. Cronin serves as our Chief Financial Officer,
      Secretary and Treasurer for an initial term commencing on the date of the
      Agreement and ending on December 31, 2006. The Agreement will be automatically
      renewed for successive periods of one year after December 31, 2006, unless
      Mr.
      Cronin is otherwise notified in writing during the term.





Pursuant
      to the Agreement, Mr. Cronin will receive a salary of $250,000 per year (the
      “Salary”), commencing as of the date of the Agreement. Until the Company enters
      into a contract (or contracts) for the sale or licensing of its products or
      provision of its services, which contract(s) must have a total value of at
      least
      $10 million, the Salary will be paid in registered shares of the Company’s
      common stock, issued from the Company’s Amended and Restated 2002 Stock Plan
      (the “Plan”) or any other employee equity incentive plan the securities of which
      are registered on a Form S-8 registration statement filed with the SEC. Once
      the
      Company has received an executed, legally binding contract or contracts having
      a
      total value of at least $10 million or the Company is sufficiently capitalized
      as determined by the Company’s Board of Directors, the Company will pay the
      salary in cash. As an incentive to enter into the Agreement, the Company agreed
      to grant to Mr. Cronin 1,000,000 shares of restricted common stock which vests
      in equal increments on the last day of each month of the initial
      term.





In
      accordance with the terms of the Agreement, the Company granted to Mr. Cronin
      an
      option to purchase 2,500,000 shares of common stock. The per share exercise
      price is $0.06, which was no less than 85% of the last trading price of the
      common stock on the date that the grant was made, which was January 30, 2006.
      The option has a term of seven years. The option vests as follows: (i) upon
      the
      completion of an equity financing from which the Company receives at least
      $2,000,000 in gross proceeds, 1,000,000 of the option shares will vest; (ii)
      upon receipt of a purchase order accepted by the Company, or the execution
      by
      the Company of an agreement, for the MAPSANDS technology and other products,
      which purchase order or agreement has a value to the Company of no less than
      $1
      million, 500,000 of the option shares will vest; (iii) upon receipt of a
      purchase order accepted by the Company, or the execution by the Company of
      an
      agreement, for the MAPSANDS technology and other products, which purchase order
      or agreement has a value to the Company of no less than $5 million, 500,000
      of
      the option shares will vest; and (iv) if, for two consecutive quarters, the
      Company shows positive cash flow in its quarterly filings with the SEC without
      further dilution of its common stock (with the exception of shares issued from
      the Plan or a newly adopted equity incentive plan), 500,000 of the option shares
      will vest.





If
      the
      Company terminates Mr. Cronin’s employment without cause, or in the event of
      certain designated corporate transactions, prior to the expiration of the term
      of the Agreement, the Company will be obligated to pay to Mr. Cronin the Salary
      for the remainder of the term.




33




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





The
      following table sets forth information as of August 11, 2006 as to each person
      who is known to us to be the beneficial owner of more than 5% of our outstanding
      common stock and as to the security and percentage ownership of each executive
      officer and director of USGN and all of our officers and directors as a group.
      Except where specifically noted, each person listed in the table has sole voting
      and investment power with respect to the shares listed.




Title
                  of Class of
                Security
              
              Name
                  and Address(1)
              
              Number
                  of
                Shares
                  of
                Common
                  Stock
                Beneficially
                Owned(2)
              
              Percentage
                  of
                Common
                  StockCommon
                  Stock
              
              
              John
                  Robinson, P. O. Box 1314, Mansfield, Texas 76063(5)
              
              
              57,945,098
              
              
              30.0%Common
                  Stock
              
              
              Julie
                  Seaman(4)
              
              
              5,467,211
              
              
              2.8%Common
                  Stock
              
              
              Carl
                  Gruenler(3)(4)
              
              
              4,058,938
              (6)
              
              2.1%Common
                  Stock
              
              
              Kevin
                  Cronin(3)
              
              
              1,105,600
              
              
              .6%All
                  officers and directors as a group
              
              
              10,631,749
              
              
              5.5%
              (7)





(1)
      Unless otherwise indicated, the address of the persons named in this column
      is
      c/o US Global Nanospace, Inc., 2533 North Carson Street, Suite 5107, Carson
      City, Nevada 89706.


(2)
      Included in this calculation are shares deemed beneficially owned by virtue
      of
      the individual’s right to acquire them within 60 days of the date of this report
      that would be required to be reported pursuant to Rule 13d-3 of the Securities
      Exchange Act of 1934.


(3)
      Executive Officer.


(4)
      Director.


(5)
      5%
      shareholder.


(6)
      Includes the right to purchase 1,000,000 shares of common stock at an exercise
      price of $0.06 per share based on an option granted on January 30,
      2006.


(7)
      Based
      on 193,292,856 shares outstanding.





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





On
      January 3, 2006 we entered into a consulting agreement with Julie Seaman, our
      former Chief Financial Officer, Secretary and Treasurer and a current director.
      Ms. Seaman agreed to provide consulting services during the period following
      the
      termination of her employment. Ms. Seaman provided these services for the period
      beginning on January 8, 2006 and ending on April 7, 2006. For the period ended
      March 31, 2006, we have accrued compensation owed to her in the amount of
      $38,839.





On
      August
      3, 2005 we entered into a consulting agreement with John Robinson, our former
      Chief Executive Officer, President and director. Mr. Robinson agreed to provide
      consulting services during the period following the termination of his
      employment. Mr. Robinson provided these services for the period beginning on
      August 3, 2005 and ending on December 8, 2005 and we have accrued compensation
      owed to him in the amount of $70,312.





On
      May
      11, 2005, we entered into an agreement resulting in the issuance of 1,763,572
      shares of restricted common stock for the repayment of $112,869 in principal
      and
      interest related to loans advanced to us by USDR Aerospace Ltd., an entity
      controlled by John Robinson.





34


John
      Robinson also controls USDR, Inc. On May 11, 2005, we entered into an agreement
      resulting in the issuance of 2,971,132 shares of restricted common stock for
      the
      repayment of $190,152 in principal and interest related to loans advanced to
      us
      by USDR, Inc.





As
      of
      March 31, 2005, John Robinson guaranteed the Company’s bank loan in the amount
      of $1,225,000. The loan is due to be repaid on May 15, 2008, although the
      Company has been notified by the bank that the loan is currently in default.
      As
      of March 31, 2005, the Company had an outstanding principal balance of $710,114
      and accrued interest and fees totaled $91,776.





On
      May 1,
      2003, Julie Seaman, our former Chief Financial Officer and currently a director,
      guaranteed our payment and performance of a lease entered into for our research
      division. On December 19, 2005 Everest International Inc., the lessor, filed
      an
      action against us and Ms. Seaman, as guarantor of the lease, in Tarrant County
      District Court, Texas alleging non-payment. On June 15, 2006 we and Julie Seaman
      entered into a Settlement Agreement and Mutual Release with Everest
      International Inc. As
      all
      requirements of the Settlement Agreement have been met, the action has been
      dismissed without prejudice.





On
      April
      23, 2004 we entered into agreements resulting in the issuance of 1,147,950
      shares of restricted common stock for the repayment of $378,823 in principal
      related to loans advanced to us by John Robinson and Julie Seaman.





On
      August
      8, 2004 we entered into agreements resulting in the issuance of 2,560,052 shares
      of restricted common stock for the repayment of $742,416 in principal and
      interest related to loans and expenses advanced to us by John Robinson and
      Julie
      Seaman.





On
      May
      11, 2005 we entered into agreements with USDR Aerospace, Ltd. and USDR, Inc.
      Pursuant to the agreements, USDR Aerospace, Ltd. and USDR, Inc. agreed to accept
      shares of our common stock as full and final payment for loans made to
      us.





The
      principal amount of the loan from USDR Aerospace, Ltd., plus accrued interest
      totaled $112,869 and was due to be paid on February 28, 2005. USDR Aerospace,
      Ltd. accepted 1,763,572 shares of our common stock, having a value of $0.064
      per
      share, which was the closing price of the common stock on May 11,
      2005.





The
      principal amount of the loan from USDR, Inc., plus accrued interest, totaled
      $190,152 and was due to be paid on February 28, 2005. USDR, Inc. accepted
      2,971,132 shares of our common stock, having a value of $0.064 per share, which
      was the closing price of the common stock on May 11, 2005.





On
      November 7, 2005, we entered into an agreement pursuant to which we issued
      4,009,660 shares of our common stock, at a value per share of $0.075, to USDR
      Aerospace, Ltd. as full and final payment of employee and product development
      services in the amount of $300,720 previously provided by USDR Aerospace, Ltd.
      to us.





On
      November 8, 2005, we entered into an agreement pursuant to which we issued
      2,414,622 shares of our common stock, at a value per share of $0.072, to USDR,
      Inc. as full and final payment of a loan received from USDR, Inc. in the amount
      of $173,853, including interest accrued through November 8, 2005.





On
      December 8, 2005, we entered into a Director and Officer Indemnification
      Agreement with each of Carl Gruenler, the Company’s Chief Executive Officer,
      Julie Seaman, the Company’s former Chief Financial Officer and currently a
      director, and John Robinson, the former Chief Executive Officer and Chairman
      of
      the Board of Directors. Each agreement provides for indemnification of these
      individuals to the extent they become a party to, or are threatened to be made
      a
      party to, any legal proceeding by reason of their status as an officer or
      director of the Company, or by reason of any personal guarantee provided for
      the
      benefit of the Company, against any expenses incurred as a result of such
      proceeding or personal guarantee, as and when such expenses are incurred. Before
      any claim for indemnification is approved by us, we will determine by any of
      the
      methods set forth in the Delaware General Corporation Law that the indemnified
      person has met the applicable standards of conduct which make it permissible
      to
      indemnify the person.





35


On
      December 8, 2005, John Robinson and the Company executed a letter agreement
      confirming that we will issue to Mr. Robinson, on a monthly basis for thirty
      consecutive calendar months, $5,832 payable in restricted common stock valued
      at
      the closing price of the common stock on the last trading day of the calendar
      month for which the shares are issued, in consideration of Mr. Robinson’s
      continuing personal guarantee of an outstanding loan from Western Security
      Bank.
      We based our determination of this amount on a written fairness opinion by
      an
      independent advisory firm. The payment amount is subject to downward adjustment
      in the event we pre-pay any of the outstanding balance of the Western Security
      Bank loan, in accordance with the methodology provided in the fairness
      opinion.





In
      addition, based on the same fairness opinion, on December 7, 2005 we authorized
      a payment to Julie Seaman of one lump sum amount of $3,482, payable in 44,076
      shares of restricted common stock, in consideration of Ms. Seaman’s continued
      lease guarantee for our facility in Arlington, Texas.





On
      December 8, 2005, our Board of Directors ratified an Amendment to Intellectual
      Property Assignment and Royalty Agreement dated November 28, 2005 (the
“Amendment”), which amends the Intellectual Property Assignment and Royalty
      Agreement dated as of May 14, 2002 (the “Royalty Agreement”), between USDR
      Aerospace, Ltd. The purpose of the Amendment is to clarify the original intent
      of the parties to the Royalty Agreement, which is that the term “sales” as used
      in the Royalty Agreement shall include all net revenues received by us from
      any
      and all sales and/or licensing of our products and/or services, subject to
      and
      in accordance with the terms and conditions of the Royalty
      Agreement.





On
      January 7, 2006, we entered into a Director and Officer Indemnification
      Agreement with Kevin Cronin, our Chief Financial Officer, Secretary and
      Treasurer. The agreement provides for indemnification of Mr. Cronin to the
      extent he becomes a party to, or is threatened to be made a party to, any legal
      proceeding by reason of his status as an officer or director of the Company,
      or
      by reason of any personal guarantee provided for the benefit of the Company,
      against any expenses incurred as a result of such proceeding or personal
      guarantee, as and when such expenses are incurred. Before any claim for
      indemnification is approved by us, we will determine by any of the methods
      set
      forth in the Delaware General Corporation Law that Mr. Cronin has met the
      applicable standards of conduct which make it permissible to indemnify
      him.





On
      June
      20, 2006, we entered into a Purchase Agreement with USDR, Inc. in connection
      with the settlement with Everest International Inc. of the legal action relating
      to the lease of our former premises. Pursuant to the Purchase Agreement, USDR,
      Inc. transferred to us all of its right, title and interest in and to certain
      assets in exchange for the issuance to USDR of 731,707 unregistered shares
      of
      our common stock.





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




Exhibit
              No.
            Description
              of
              Exhibit2
            Agreement
                and Plan of Share Exchange between Caring Products International,
                Inc. and
                USDR Global Aerospace, Ltd. and the stockholders of US Global Aerospace,
                Ltd. dated as of May 15, 2002 (1)3.1.1
            Amended
                and Restated Certificate of Incorporation (2)3.1.2
            First
                Amendment to Amended and Restated Certificate of Incorporation
                (2)3.1.3
            Second
                Amendment to Amended and Restated Certificate of Incorporation
                (2)3.2
            Bylaws(3)10.1
            Intellectual
                Property Assignment and Royalty Agreement dated May 14, 2002 between
                USDR
                Aerospace, Ltd. and USDR Global Aerospace, Ltd. (4)10.2
            Promissory
                Note in the amount of $100,000 dated April 18, 2003 in
              favor
                of USDR Aerospace, Ltd. (5)10.3
            Gross
                Lease Agreement dated April 28, 2003 between the Company and West
                Harris
                Property, Inc. (4)10.4
            Addendum
                E to Lease/Guarantee executed by Julie Seaman (4)10.5
            US
                Global Nanospace, Inc. Amended and Restated 2002 Stock Plan
                (7)10.6
            Commercial
                Guaranty between John D. Robinson and Western Security Bank
                (4)




36




10.7
            Master
                Agreement by and between Y2-Ultra-Filter, Inc. and the Company dated
                June
                19, 2003 (6)10.8
            Promissory
                Note and Commercial Security Agreement between the Company and Western
                Security Bank dated June 30, 2003 (4)10.9
            Patent
                and Technology License Agreement dated July 24, 2003 between the
                Company
                and TIAX, LLC (11)10.10
            Amendment
                No. 1 dated October 3, 2003 to Patent and Technology License Agreement
                between the Company and TIAX LLC (11)10.11
            Distribution
                Agreement between the Company and Vitusa Products, Inc. dated as
                of June
                25, 2004 (10)10.12
            Change
                in Terms Agreement dated June 11, 2004 to Promissory Note in the
                amount of
                $500,000 in favor of U.S.D.R. (NV), Inc. (9)10.13
            Change
                in Terms Agreement dated June 30, 2004 to Promissory Note in the
                amount of
                $200,000 in favor of USDR Aerospace, Ltd. (9)10.14
            +Development
                and License Agreement between the Company and Kidde Fire Fighting
                Inc.
                dated August 13, 2004 (8)10.15
            Change
                in Terms Agreement between the Company and Western Security Bank
                dated
                September 30, 2004 (9)10.16
            Change
                in Terms Agreement dated October 30, 2004 to Promissory Note in the
                amount
                of $500,000 in favor of USDR(NV) (9)10.17
            Change
                in Terms Agreement dated December 30, 2004 to Promissory Note in
                the
                amount of $500,000 in favor of USDR(NV).(12)10.18
            Change
                in Terms Agreement dated December 30, 2004 to Promissory Note in
                the
                amount of $200,000 in favor of USDR Aerospace, Ltd.(12)10.19
            Agreement
                to Convert Debt dated May 11, 2005 between the Company and USDR Aerospace,
                Ltd.(13)10.20
            Agreement
                to Convert Debt dated May 11, 2005 between the Company and USDR,
                Inc.(13)10.21
            Employment
                Agreement dated August 3, 2005 with Carl Gruenler(14)10.22
            Employment
                Agreement dated January 7, 2006 with Kevin Cronin(15)10.23
            Employment
                Agreement dated December 21, 2005 with Carl
                Gruenler(16)10.24
            Settlement
                Agreement and Mutual Release with Everest International, Inc. dated
                December 19, 2005 and Modification to same dated June 21,
                2006(17)10.25
            US
                Global Nanospace, Inc. 2005 Stock Plan(18)10.26
            Change
                in Terms Agreement dated October 31, 2005 to Promissory Note in the
                amount
                of $350,000 in favor of USDR, Inc.(19)10.27
            Change
                in Terms Agreement dated December 31, 2005 to Promissory Note in
                the
                amount of $350,000 in favor of USDR, Inc.(20)10.28
            Agreement
                to Convert Debt dated November 7, 2005 between USDR Aerospace, Ltd.
                and
                the Company(19)10.29
            Agreement
                to Convert Debt dated November 8, 2005 between USDR, Inc. and the
                Company(19)10.30
            Director
                and Officer Indemnification Agreement dated December 8, 2005 between
                the
                Company and Carl Gruenler(21)10.31
            Director
                and Officer Indemnification Agreement dated December 8, 2005 between
                the
                Company and Julie Seaman(21)10.32
            Director
                and Officer Indemnification Agreement dated December 8, 2005 between
                the
                Company and John D. Robinson(21)10.33
            Director
                and Officer Indemnification Agreement dated January 7, 2006 between
                the
                Company and Kevin Cronin(15)10.34
            Amendment
                to Intellectual Property Assignment and Royalty Agreement between
                the
                Company and USDR Global Aerospace, Ltd.(21)10.35
            Letter
                Agreement dated December 8, 2005 to John D. Robinson regarding continuing
                loan guaranty(21)10.36
            Amended
                and Restated Consulting Agreement dated May 24, 2006 with Pat
                Scorzelli(22)10.37
            Line
                of Credit Promissory Noted dated May 8, 2006 from Ghassan
                Alamdar(23)10.38
            Purchase
                Agreement dated June 20, 2006 between the Company and USDR,
                Inc.(17)23.1
            Consent
                of Grobstein, Horwath & Company LLP*31.1.
            Certification
                pursuant to Rule 13a-14(a) and 15d-14(a)*31.2
            Certificate
                pursuant to Rule 13a-14(a) and 15d-14(a)*32
            Certification
                pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
                the Sarbanes-Oxley Act of 2002*







+
              Confidential
                  treatment requested as to certain portions, which portionswere
                  omitted and filed separately with the Securities and ExchangeCommission.
 (1)
            Incorporated
                by reference from a Form 8-K filed with the Securities andExchange
                Commission on May 30, 2002.


(2)
            Incorporated
                by reference from a Form 10-QSB filed with the Securities andExchange
                Commission on November 15, 2004.




37




(3)
            Incorporated
                by reference from the Registration Statement on Form SB-2filed
                with the Securities and Exchange Commission on September 12,
                1995.


(4)
            Incorporated
                by reference from a Form 10-KSB filed with the Securities andExchange
                Commission on July 11, 2003, as
                amended.


(5)
            Incorporated
                by reference from a Form 10-QSB filed with the Securities andExchange
                Commission on September 10, 2003.


(6)
            Incorporated
                by reference from a Form 10-QSB filed with the Securities andExchange
                Commission on November 14, 2003.


(7)
            Incorporated
                by reference from a Form 10-KSB filed with the Securities andExchange
                Commission on July 14, 2004.


(8)
            Incorporated
                by reference from a Form 8-K/A filed with the Securities andExchange
                Commission on June 1, 2005.


(10)
            Incorporated
                by reference from a Form 10-QSB/A filed with the Securitiesand
                Exchange Commission on November 16,
                2004.


(11)
            Incorporated
                by reference from a Form 10-QSB/A filed with the Securitiesand
                Exchange Commission on February 9,
                2005.


(12)
            Incorporated
                by reference from a Form 10-QSB filed with the Securities andExchange
                Commission on February 25, 2005.


(13)
            Incorporated
                by reference from a Form 8-K filed with the Securities andExchange
                Commission on May 16, 2005.


(14)
            Incorporated
                by reference from a Form 10-QSB filed with the Securities andExchange
                Commission on August 15, 2005.


(15)
            Incorporated
                by reference from a Form 8-K filed with the Securities andExchange
                Commission on January 11, 2006.


(16)
            Incorporated
                by reference from a Form 8-K filed with the Securities andExchange
                Commission on December 22, 2005.


(17)
            Incorporated
                by reference from a Form 8-K filed with the Securities andExchange
                Commission on June 27, 2006.


(18)
            Incorporated
                by reference from a Form 8-K filed with the Securities andExchange
                Commission on August 30, 2005.


(19)
            Incorporated
                by reference from a Form 10-QSB filed with the Securities andExchange
                Commission on November 23, 2005.


(20)
            Incorporated
                by reference from a Form 10-QSB filed with the Securities andExchange
                Commission on February 21, 2006.


(21)
            Incorporated
                by reference from a Form 8-K filed with the Securities andExchange
                Commission on December 13, 2005.


(22)
            Incorporated
                by reference from a Form 8-K filed with the Securities andExchange
                Commission on May 26, 2006.


(23)
            Incorporated
                by reference from a Form 8-K filed with the Securities andExchange
                Commission on May 30, 2006.


*Filed
      herewith.





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





**(1)
      Audit Fees**





The
      aggregate fees billed by the Company’s principal accountant, Grobstein, Horwath,
& Company LLP for the audit and review of the Company’s annual financial
      statements at March 31, 2006 and 2005, and for review of the Company’s quarterly
      10-QSBs and services provided for regulatory filings during the period April
      1,
      2005 through March 31, 2006 were $135,193 as of this filing date.





**(2)
      Audit-Related Fees**





None





**(3)
      Tax Fees**





The
      aggregate fees billed by the Company’s principal accountant, Grobstein, Horwath,
& Company LLP for tax preparation and advice for year ended March 31, 2005
      was $6,000.




38





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




Date: September
      6, 2006


US
              GLOBAL
              NANOSPACE, INC.By:
            /s/ Carl
              GruenlerCarl
              Gruenler, Chief ExecutiveOfficer
              and President  By:
            /s/ Kevin
              CroninKevin
              Cronin, Secretary and Chief FinancialOfficer




In
      accordance with the requirements of the Exchange Act, this report has been
      signed by the following persons on behalf of the registrant and in the
      capacities and on the dates indicated:




Name
            
            Title
            
            Date/s/
              Carl Gruenler
            
            CEO,
              President and director
            
            September
                6, 2006Carl Gruenler/s/
              Kevin Cronin
            
            CFO
            
            September
                  6, 2006Kevin Cronin/s/
              Julie Seaman
            
            Director
            
            September
                  6, 2006Julie Seaman/s/
              Pat Scorzelli
            
            Director
            
            September
                  6, 2006Pat Scorzelli







39